The Daily Update - Norway

This week Norway re-elected a centre-right government headed up by Prime Minister Erna Solberg from the Conservatives: the coalition and parties seen to be aligned with it gained 88 seats out of 169.  The Conservatives and anti-immigration Progress Party are expected to form a coalition and minority government reliant on the Christian Democratic Party and Liberal Party for support.

While there might be an initial sense of ‘status quo’ about the result, centre-right parties now control fewer seats and Solberg will now need the support of both the Christian Democrats and Liberals to enact legislation. Not surprisingly Solberg has invited the parties for talks. The Christian Democrats were reported to have ruled out a formal alliance with a coalition including the Progress Party but neither would they support the Labour Party, the main party in opposition.

The result can be seen as vindicating the centre-right Government’s effective management of the economy, using fiscal stimulus to aid economic recovery, as it is the first time in 30 years a Conservative leader has won re-election, although with a weakened mandate. But it also perhaps reflected the Labour Party’s campaign pledge to raise taxes and a disastrous campaign under its leader Jonas Gahr Støre.

Since the oil price plunge in 2014 the Norwegian government increased expenditure to 24% of GDP from 21% and cut taxes showing the merits of having a large sovereign wealth fund to draw upon.  The SWF is valued at USD 1tn which is ~2.5x Norway’s GDP.  Although, going forward fiscal policy is expected to tighten as the upper band for withdrawals from the sovereign wealth fund fall to 3% (from 4%) but with the Progress Party expected to be in the coalition any tightening is likely to be tempered.

The election result also shows public support for the current government’s strategy with its energy policy, an important factor being Norway’s sovereign wealth fund.  The fund was established in 1998 to save oil and gas revenues for future generations.  The opposition Green party had backed an end to Norwegian oil exploration and in the final analysis ended up performing worse than the polls.

The election result is unlikely to change a lot in terms of macro policy although the government’s allies are likely to extract some concessions for their support.  For example, the Liberals have a less pro-drilling energy policy and favour rolling back tax subsidies for exploration: they are against opening up ‘vulnerable areas’ such as Lofoten and Vesteralen for oil drilling and exploring the polar region.  This stance is at odds with the Progressive Party’s more pro-drilling oil stance.  While Solberg favours Norway becoming less reliant on oil it is more a gradual thing as oil production accounts for ~12% of the economy and employs ~200,000 workers.  Nevertheless, we expect Norway’s ratings (rated Aaa/AAA with stable outlooks by Moody’s and S&P respectively) to remain unchanged on the back of this election result.

While we see many positive attributes at the sovereign level we prefer to get exposure through quasi-sovereign issuer Statoil.  It is the main exploration and production company in Norway which is 67% owned by the government.  Moody’s view Statoil has having strong support from the government reflecting its strategic role in the economy and reputational importance so they give it 2 notches of uplift to a final rating of Aa3 (stable).  On our models the US dollar denominated issue Statoil ASA 3.95% 2043 trades on a yield of 3.87% and is trading around 2.4 credit notches cheap.