Moody's: Norway's creditworthiness remains strong, despite weaknesses in the oil sector

The Norwegian government's dependence on the oil and gas industry presents long-term challenges related to the volatility of oil prices and structural shifts in the sector, but the country's strong institutional framework will likely mitigate any difficulties, says Moody's Investors Service in a report published today.

The rating agency's report is an update to the markets and does not constitute a rating action.

Moody's expects Norway's mainland GDP to grow by 1.0% in real terms this year owing to slowdowns in the oil and housing sectors. Growth will predominantly be driven by relatively robust non-oil exports and moderate levels of business investment and consumption, and is expected to increase to 1.6% in 2016 and 2.1% in 2017-19.

Despite the government's effort to segregate its income from the hydrocarbon sector from both the budget and the domestic economy, the main risk to the Norwegian economy stems from its vulnerability to the sector. The hydrocarbon sector, which accounts for approximately 20% of national GDP, has been undergoing structural changes, including reduced investment and lower oil prices, that are weighing on the Norwegian economy and the government's fiscal position. Although these developments do not have immediate implications for Norway's creditworthiness, the structural shifts in the sector raise some long-term concerns regarding the viability of the reliance on the hydrocarbon sector, and necessitate adjustments in the economy and government budget.

That said, Moody's notes that Norway has one of the strongest institutional frameworks among rated sovereigns, which is reflected in a fiscal rule that cushions the budget from volatility in oil markets and preserves the growing value of the Global Pension Fund- Global (GPF-G, the world's largest sovereign wealth fund). Specifically, over time only the real return on the fund, estimated at 4%, is allowed to be incorporated into the annual government budget; although the increasing size of the GPF-G (it has surpassed NOK 7 trillion, or 223% of GDP) has reduced incentives for fiscal restraint. Norway's sensible planning, robust and forward-looking institutional structure, and high levels of wealth -- GDP per-capita on a PPP basis ($66,937) surpassed most countries in 2014 -- support the government's creditworthiness.

The stable outlook on Norway's Aaa government bond rating is informed by Moody's expectation that sound governance of the country's resources will remain in place, and that the government will continue to build financial assets.