Norway: Risk Assessment
Country Risk Rating
Business Climate Rating
- Current accounts and public finances sustained by oil and gas despite fall in world prices
- Discovery of new oil fields
- Broad political consensus
- Well-capitalized banking system
- Large sovereign fund
- Budget deficit excluding oil and gas revenues
- High household debt and high housing prices
- Significant wage costs
- Shortage of skilled labor in certain sectors
Growth Supported by Local Demand
In 2018, activity would be boosted by private consumption and investment. Private consumption will benefit from the gradual decline in unemployment (4% in October 2017). Household disposable income is expected to increase due to higher wages, combined with lower income taxes and low inflation. The slight appreciation of the Norwegian krone in 2017 will help contain it, thanks to the drop in the price of imported goods. In addition, residential investment will be negatively affected by the significant indebtedness of households (221% of disposable income) and the stabilization of real estate prices, due to the rapid increase in the housing supply and the rising rates on property loans (change of legislation). Investment outside the oil and real estate sectors should be particularly dynamic due to a higher utilization rate of production capacity, as well as loan conditions which are still very favorable (rate of interest at 0.5%). The industrial sectors will benefit greatly from this improvement, especially the pharmaceutical sector, fisheries, metallurgy, and forestry. The energy sector (mainly oil and gas), which accounts for 20% of GDP, 30% of investments and 55% of total exports, will improve in 2018. The moderate rise in oil prices will encourage investment in the development of oil fields that have already been discovered, such as Johan Sverdrup, whose entry into production is planned for early 2019. On the other hand, low hydrocarbon prices would still weigh on investments in the exploration of new deposits. The dynamism of external demand, especially from the eurozone, will lead to trade having a positive contribution to growth. However, the slowdown in UK activity (23% of exports) could limit this contribution.
A Very Comfortable Budget and External Situation
Fiscal policy will remain focused on improving competitiveness and diversifying the economy, in order to reduce the country’s dependence on the energy sector. Nevertheless, the 2018 budget will be less expansionary than the previous ones, making it possible to clear a very comfortable surplus. In fact, most of the exceptional measures taken in 2016, aimed at redirecting the jobs destroyed in the oil industry towards construction, will be abolished due to the low unemployment level. In addition, public investment will be limited to transportation infrastructure (roads, public transportation, and rail networks). However, the government will maintain its investment attraction policy by pursuing the reduction of corporate tax (from 27% to 24% between 2015 and 2018). Remaining tax measures, including lower income tax, will be financed by an increase in VAT on transport and tourism-related activities (from 10% to 12%). The fiscal rule limiting withdrawals from the sovereign fund to 3% of its value again will be respected. Nevertheless, the non-oil deficit will amount to 7.8% of GDP in 2018, illustrating the country’s dependence on oil revenues and dividends from its sovereign fund. The public debt should increase slightly while remaining very sustainable insofar as the country has one of the largest sovereign funds in the world in terms of assets (nearly $1 trillion under management).
The current account surplus is expected to remain strong in 2018, reflecting the improvement in the balance of goods and income. The dynamism of exports will offset that of imports. The surplus of the primary revenue balance, thanks to the increase of the interest collected in connection with foreign investments, will be offset by the deficit of the transfer balance, related to the contribution of the country to the European budget, as well as to the aid granted to developing countries.
Government Renewed but Weakened by Dissension Within the Coalition
After the parliamentary elections of September 2017, the center-right coalition, in power since 2013 and composed of the Conservative Party, the Progress Party, the Christian Democrats (KrF) and the Liberals, has a sufficient number of seats to maintain a majority in Parliament (88 seats out of 169). Although the center-left parties won the popular vote, they do not have a majority in Parliament, as the electoral system gives rural areas proportionally more seats than densely populated regions. Nevertheless, the formation of the new government was made difficult by the reluctance of the KrF and the Liberals to renew their support for the government, even though they did not already have any posts. Negotiations have therefore been postponed until early 2018, after the vote on the budget. It therefore seems likely that Erna Solberg's government will include members of both parties in order to avoid any potential political deadlock.