By Ian Fraser
Few countries have been as well-cushioned from the global economic crisis as Norway.
The country’s economy is on track to grow by 3% this year and 3.75% next year, according to central bank forecasts. Alongside Switzerland, Norway has the lowest level of unemployment in Europe, at 2.8%, while underlying inflation rose to 1.2% in July from 0.7% in June.
The country has very low public debt and had a 10.5% budget surplus – the widest of any AAA-rated sovereign – in 2010, something the OECD expects to rise to 12.5% in 2011. It also benefits from having built up a $550 billion sovereign wealth fund, whose proceeds are rarely squandered on current expenditure. These are the sort of figures that countries like Spain, Italy, France or the UK would die for.
The comparative strength of Norway's economy owes much to oil and gas exports. The country has been extracting "black gold" from the North Sea since 1971, and produced an average of 2.14 million barrels per day in 2010, which generated reported revenues of $40bn, a tidy sum for a country with only 4.8 million inhabitants. Norway also benefits from the painful lessons of its banking crisis of 1988-92, which above all else taught policymakers to be wary of letting banks off the leash during economic booms.
However the flapping of a butterfly's wings in Switzerland may yet create a tornado in Norway (where, it has to be remembered, people are still coming to terms with the 78 murders committed by deranged Christian fundamentalist gunman Anders Behring Breivik on July 22).
On Tuesday September 6, in a bid to weaken the Swiss franc, the Swiss National Bank effectively sought to peg it at CHF1.20 to the euro. The SNB said it was prepared to sell "unlimited quantities" of Swiss francs to resist future appreciation and that it was “aiming for a substantial and sustained weakening of the franc”. The move caught many foreign exchange investor unawares. Many had been expecting the Swiss franc to continue to appreciate.
The move left investors with an even more rarefied collection of “safe havens” or proxy safe havens in which to park their cash. These were narrowed down to the Japanese yen, the Singaporean dollar, the Chinese yuan – and Norwegian krone (“crown”).
Immediately after Switzerland’s move. the krone, having already surged by 12.47% against the US dollar this year, surged in value. The Wall Street Journal reported it was trading at NOK 7.5427 to the euro soon after midday on September 6, having strengthened from NOK 7.6773 earlier that day. This was the Norwegian currency’s highest level against the euro since February 2003. The newspaper quoted Kari Due-Andresen of Handelsbanken in Norway, saying:
There is a lack of safe havens and people are turning their eyes to Norway with its rock solid finances and good growth.
It doesn't help that the relationship between the krone and oil, priced in dollars, appears to have broken down, according to Paul Mackel senior currency analyst with HSBC in London. He said:
The Krone should remain relatively resilient because it’s a sound sovereign story compared to some of the ugly stories out there at present.
The surge in the value of krone has lots of downside for Norway. These include that it will force the central bank to keep interest rates articifially low, harm the tourism trade, and hurt exporters including aluminium smelter Norsk Hydro. However this is not the only cloud on Norwegian policymakers' horizon.
Norwegian policymakers are also concerned about house price inflation. If the country's 'safe haven' status prevents its central bank from raising interest rates from their current level of 2.25%, the worry is that house price growth will get out of hand. Policymakers also fear that, in the event that rates can/do rise, many Norwegian households will struggle to service their borrowings, which average 204% of disposable income, their highest level since 1988.
Finance minister Sigbjoern Johnsen sought to address these issues on September 6 when, according to Bloomberg, he entered talks with banks and insurers about ways of limiting the availability of credit. These included the introduction of capital requirements on mortgage lending and placing a floor on the risk-weighting assigned to mortgages.
Norway's financial regulator last year brought in new guidelines limiting the loan-to-value ratios on residential mortgages to 90%. However these failed to put restrain Norwegian house price growth, which stood at an annual 8% in the first six months of the year, following an 8.3% rise in 2010.
While there's no denying that the "red-green" coalition of Norwegian prime minister Jens Stoltenberg faces some tough economic conundrums, they probably seem like mere bagatelles to his southern European neighbors.