Oil sustains Norway as EU wallows in debt
High oil prices, strong trade bring prosperity to Nordic nationStories You Might Like
OSLO (MarketWatch) — Blessed with large petroleum reserves, Norway is riding a wave of prosperity brought by high oil prices and robust public finances while the rest of Europe is mired in a debt crisis.
This Scandinavian nation of 4.9 million is the biggest oil producer and exporter in western Europe, with most of the oil production taking place offshore in the North Sea. Norway was also the world’s second largest exporter of natural gas after Russia last year, when crude oil, natural gas and pipeline transport services made up nearly 50% of its exports value.
A crane vessel is being resupplied outside of the oil town of Stavanger, Norway. “We’re a commodity-based economy,” said Snorre Evjen, senior economist at Fokus Bank, in a recent interview in his office overlooking the Parliament building in Oslo. “It all stems from the oil price and the strong terms of trade. Export prices have increased substantially, while import prices have remained fairly stable.”
To make sure future generations also benefit from the oil resources first discovered in 1969 and which will eventually run out, Norway saves petroleum revenues in a pension fund valued at roughly $550 billion. The so-called 4% fiscal rule limits the swings in the Norwegian economy; under the rule, the government aims to spend only 4% of the pension fund annually, though the exact percentage can vary.
“The country’s finances are solid,” Evjen said. “We don’t have net debt. That’s why Norwegians don’t worry too much.”
The budget surplus was more than 10% of gross domestic product last year, and unemployment is currently 3.3%. The mainland economy, which excludes oil and shipping, is expected to grow 3.3% this year and 4% next year after growth of 2.2% in 2010, the OECD estimates.
Norway’s population is also increasing rapidly, driven by labor immigration from Sweden, Poland and the Baltic nations, as newcomers are attracted by high wages and the low unemployment rate. Norway is part of the European Economic Area and participates in the European Union’s single market, but it’s not an EU member after two failed attempts by referendum to enter the union. As a result, the nation benefits from the free movement of goods and labor, but has its own monetary policy and currency.
The sovereign debt crisis, which has roiled the 17-nation zone that uses the euro, has had no impact on Norway’s real economy. In the financial markets, however, Norwegian stocks have fallen along with equities elsewhere in Europe; Oslo’s OBX stock index /quotes/zigman/1475606 NO:XOBX -0.10% is down nearly 19% year-to-date. At the same time, investors have bid up the value of the krone, while strong demand has pushed down the yields on Norwegian government bonds.
Reine, a fishing village in Lofoten, Norway. Steinar Juel, chief economist at Nordea in Oslo, said in an interview that the krone — a small, illiquid currency which tends to be sold when investors want to exit risky assets — has been acting differently. The currency has rallied around 8% against the dollar so far this year.
“The krone isn’t a safe haven in the same way as the Swiss franc, but we see a tendency that the krone is becoming more like that,” Juel said.
In recent weeks, investors looking for safety have piled into the Swiss franc, prompting the Swiss central bank to take a series of measures in an effort to stem the strength of its currency. Like the Swiss franc, the Norwegian krone and the Swedish krona are increasingly appealing.
Strategists at FxPro noted in a recent report that “one of the considerable attractions of the krone for foreign investors is the fabulous state of the public finances.”
Of concern for Norway is that the high exchange rate and rising wage demands are beginning to weigh on the competitiveness of the trade sector,” they cautioned.
That concern was evident when Norway’s central bank, Norges Bank, kept interest rates on hold at 2.25% in early August, reluctant to increase rates further given markets turbulence and clear signs of slowing global growth.
Norway is also dealing with the impact of the July 22 twin attacks, when an extremist killed 77 people and injured dozens others.
“The terror attacks will have a dampening effect on consumption,” Juel said. “It could take some time before people start acting normally.”
“We may lower the growth numbers somewhat because of weaker growth internationally,” he added. While the estimate revisions haven’t been finalized, he thinks growth in the mainland economy this year and next will be around 2.75%, lower by about 0.5% and 0.25% for 2010 and 2011, respectively, than Nordea’s previous forecasts.
“Slower hikes from Norges Bank will in 2012 to a large extent counteract the negative impulses from slower growth abroad,” Juel said.
/quotes/zigman/1475606 Add XOBX to portfolio NO:XOBX Oslo Stock Exchange Equity Index 324.72 -0.31 -0.10% Volume: 1.85MAug. 19, 2011 2:14p
Polya Lesova is chief of MarketWatch’s London bureau.