In general, Norway's economy has been shielded from the worst of the global
credit crisis due primarily to its extensive oil wealth (world's sixth-largest
oil exporter), strong labor sector, a housing market that that continues to hold
up well and a mainland economy that is expected to continue expanding at a
somewhat moderate pace in 2H 2010. From a currency/interest rate perspective,
Norway's central bank (Norges Bank) was the first central bank in Europe to
actually raise interest rates this year to cool its economy, but despite its
higher rates and strong economy, Norway's krone (NOK) has actually depreciated
by nearly 8 percent vs. the USD this year. By comparison, its neighbor to the
south, Euroland, has seen the euro (EUR) plunge against the G-10 universe, and
over 17 percent vs. the USD, as global market participants continue to move away
from EUR-based investment flows due to the PIIGS (Portugal, Italy, Ireland,
Greece, and Spain) and their related sovereign debt concerns.
The Norges
Bank traditionally is a flexible inflation fighter, balancing inflation and
growth. Their inflation target on the consumer front focuses on the 2.5 percent
level over time and as the most recent government forecasts have indicated, that
rate is expected to hit 2.8 percent later this year. As expected, the Norges
Bank raised rates earlier this month by 25 bps to 2.00 percent to slow the
economy, with further 25 bps increases expected later at their meetings in
September and December. Although the FX regime is a freely floating structure,
the currency closely tracks the EUR. Norway's Finance Minister recently
commented on the elevated concern about the gap between borrowing costs in
Norway vs. Euroland, which is expected to widen as a result of the region's
sovereign debt crisis, resulting in a stronger NOK. The EURNOK cross rate in
fact widened this week following the surprise announcement of the EUR 750
billion package by the ECB and IMF last weekend.
On the economic front,
Norway's Q4 2009 GDP disappointed market expectations, rising just 0.3 percent
quarter-over-quarter, with the main source of weakness seen in private
investment. However, the economy has since strongly rebounded as merchandise
exports rose 4.9 percent Q1 2010 and consumer consumption rebounded robustly on
a monthly basis since the last GDP report. In addition, house prices are back to
their all-time highs. According to the Q1 Survey of Bank Lending, commercial
banks expect credit standards for households to remain unchanged despite the
current housing boom and further easing in credit standards for enterprises in
Q2. Norway's unemployment rate is also expected to stand at 3 percent, which is
on the lower end of their accepted range and ranks the lowest in
Europe.
Norway's current account fell sharply in 2009 following the
deterioration in oil prices and global trade, but as global trade bounces back
the Norwegian current account surplus is poised to move higher, with the latest
current account surplus report already exceeding the highest level since Q4
2008. Norway recently raised its estimate for crude oil prices this year by 11.8
percent as demand increases from emerging markets such as China are expected.
Crude oil pricing will continue to drive current account surpluses, and while
falling oil prices in '09 led to a 13 percent reduction of total GDP, this
year's elevated levels will add to the government's budget surplus. Norway,
which isn't a member of OPEC, expects output of 2.2 million barrels of oil and
natural gas liquids a day this year. Despite being the world's second largest
gas exporter, production is expected to be 6 percent less this year, the 10th
annual decline, as fields in the North Sea mature.
As a long-term hedging
tool related to the oil industry, the Norwegian government operates the
Government Pension Fund Global to support Norway in the future, for the period
when oil revenue has reduced or run out. The fund recycles the surplus generated
from petroleum sales by purchasing international equities and bonds. Recycling
part of the current account surplus in this manner results in regular NOK
selling, and thus also helps to reduce negative effects on the currency. Since
September 2009 the Norwegian government has not added to the national pension
fund, but has instead used the revenue to support the economy. The fiscal rule
requires the government to limit expenditures derived from the Government
Pension Fund Global to 4 percent of the fund, but the government is expected to
breach the rule for a second consecutive year in 2010 to support the economy.
For now, the NOK continues to benefit from the absence of the negative order
flow.
As the evolving Euroland sovereign crisis evolves and elevates, NOK
FX rates are expected to follow the EUR, albeit not on a one-for-one basis.
Regardless of how well the local economy has fared so far, the possible
contagion effect from Euroland will affect NOK. If/when the current crisis
morphs into something reminiscent to the U.S.-derived credit crisis, commodities
will again take a temporary plunge as seen in recent oil markets from nearly $90
a barrel to last Friday's close of $71, all within the last month! Increased
volatility is here again as seen in all of the global markets, but for now,
little Norway is quietly outshining the big boys in Western Europe.
The views expressed in this column are solely
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