The overall picture for Norway is excellent as the nation is prosperous, vibrant and home to a very high standard of living as Norway is one of the world’s richest countries. Norway today is well known as a very generous welfare state taking advantage of the nation’s substantial oil wealth. With a population of 4.6 million, Norway is consistently ranked by the United Nations as one of the best places to live on earth. Norway today runs one of the largest current account surpluses in the industrialized world along with Singapore.
POLITICS: prudent management. Prime Minister Kjell Bondevik since October 2001 after his party, right-wing Progress Party defeated Norway’s Labour party in an election rout, Labour’s worst defeat since 1924. Labour has dominated Norway’s politics historically. National independence came on June 7, 1905 from Sweden. Norway is presently a member of NATO although they rejected European Union (EU) membership in 1972 and in 1994 by a narrow vote. However, Norway is a member of the European Free Trade Association (EFTA).
Another vote for European Union membership? Perhaps in the future when Norway’s hydrocarbon energy resources get depleted sometime in the next 30 years, then it maybe more of an incentive to join.
ECONOMY: welfare capitalism, Norway is rich in petroleum resources. Norway’s economy like other Scandinavian countries follows a mix of government intervention and free market capitalism creating a system that results in the world’s best living standards. Historically, Norway’s economy was based on agriculture and fish resources up until the 1960’s with the discovery of oil & natural gas in the North Sea. Norway today is more of an educated white collar economy moving towards hi-tech and knowledge industries away from its past in farming and fishing.
During the 1990’s, low unemployment and strong economic growth propelled Norwegian living standards to rise to those levels similar to that of the United States. Today, Norway enjoys one of the world’s largest current account surpluses as a percentage of GDP in the industrial world. Government spending is at 40 percent of GDP, tax revenue is at 43 percent. There has been a very modest increase in house prices over the last five years, there is no price bubble unlike what has happened within the United Kingdom and parts of North America. Major industry components include shipbuilding, metals, chemicals, pulp & paper, mining and petroleum. It is important to note that Norway has no external debt and is a net creditor.
Norway’s Oil Economy
As of year 2003, Norway is the world’s third largest oil exporter behind that of Saudia Arabia and Russia. Although Norway is not a member of OPEC, it does at times work with OPEC to help regulate the oil market. Norway’s wealth boom began in year 1971 with the start of offshore oil production. World oil prices are currently high close to the $50 USD/barrel with Norwegian output capacity in the 3.3 million bpd range from the North Sea oilfields located off its west coast. Fortunately, Norway’s price support level for the oil industry is very low at about $20 USD/barrel. Norway’s state-run ‘Norwegian Petroleum Directorate’ also widely known as the Government Petroleum Fund (GPF) is managed by the central bank had a market value of $165 billion USD (January 2005) as its revenues are from state oil sales. GPF is managed effectively taking into account future Norwegian generations, the fund is allowed to spend upwards of 4 percent each year to compliment the regular central government budget.
Norway must begin to plan for the post-oil economy as it is forecasted that Norway will run out of oil reserves in perhaps 20 to 30 years taking into account new exploration successful discoveries. The era of large oil fields is coming to a close for Norway as new oil production will be focused on smaller to medium sized deposits. By year 2007, Norway’s oil production is forecasted to decline. Some statistics suggest that at today’s proven reserves, only 10 years of oil remain for Norway. Other statistics convey that Norway has only produced 50 percent of its proven resources and 18 percent of its natural gas inventory. As of January 2002, proven oil reserves for Norway were measured at 9.9 billion barrels. In either event, sometime within the next 30 years, Norway’s economy will drastically change from its present day form. Norway’s oil economy employs over 100,000 Norwegians. During June 2004, an oil strike impacted 10 percent of Norway’s output but did not do lasting damage to the economy unlike what happened in Venezuela.
As the seventh largest natural gas exporter in the world today, Norway is presently Western Europe’s largest natural gas producer. Natural gas reserves were measured at 1.71 trillion cu m. By year 2020, natural gas production in Norway will overtake its oil output. The next area of exploration for hydrocarbons will focus in on the highly prolific Barents Sea. Russia itself in its offshore boundaries within the Barents Sea has already made significant gas discoveries. This next wave of exploration is estimated to hold eight billion barrels of oil equivalent reserves.
Economic Statistics
GDP as measured by purchasing power parity stood at $172 billion USD (2003) with corresponding GDP/Capita at $37,800 USD. GDP growth estimate at 2.3 percent of GDP for year 2005, year 2004 at 2.7 percent, 2003 at 0.5 percent and year 2002 at 1 percent. Annual CPI inflation is currently running at 0.7 percent, CPI actually fell 0.7 percent in January 2005 and is forecasted at 1.8 percent for the year. Inflation for 2004 clocked in at a very low 0.5 percent, 2003 was at 2.5 percent. Fiscal surplus for year 2004 at 9.7 percent of GDP, Norway’s overall balance stood at 8 percent. Current account surplus for year 2005 projected at 16.3 percent of GDP, the previous 5 years from year 2000 the surplus has been huge ranging from 13 to 15.5 percent. Public debt to GDP is low at 22 percent of GDP (2003). Unemployment for 2004 was measured at 4.6 percent. Export partners include United Kingdom, Germany while imports are received from Sweden, Germany.
POSITIVE: violent crime is rare, terrific social services, large foreign aid donor as a percentage of GDP - very generous, very long life expectancy at 79.25 years. CONCERN: underground economy component is moderate to high at 19 percent of GDP, shortage of labor, possible pension liabilities due to unfavorable demographic trends - ageing population with fewer working Norwegians to support those pensioners could also put extra strain on the Government Petroleum Fund to meet these obligations, very high tax rates and environmental issues such as water pollution & acid rain.
BANKING SYSTEM: very sound. The banking system is modern where banks are home to high capital adequacy ratios, low non-performing loans and high system profitability. The nation’s central bank, Norges Bank follows inflation targeting for anchoring monetary policy which began in 2001. The bank has a target of 2.5 percent for an inflation ceiling. As of March 2004, the Norges Bank then lowered short-term interest rates to a record low of 1.75 percent of where it sits today, well down from 7 percent in June 2002 when rates peaked. At present, Norway is behind the global trend of rising interest rates such as the case in countries like Brazil, United States, Australia, etc. Finally, when analyzing official reserve assets, Norway has very good coverage with $44.3 billion USD equivalent as of December 2004.
REGIONAL ANALYSIS: Russia, Europe, Sweden
Geographically, Norway is strategically located for shipping lanes for both continental Europe and Russia. Norway is also home to a large merchant marine fleet. Norway has recently been outperforming the eurozone as the euro economy is stagnant. As measured by GDP/Capita, the eurozone is poorer to those rich Norwegians. This wealth differential is perhaps why many in Norway wish to stay outside the euro bloc. Like Norway, Sweden voted no for EU membership thus rejecting the euro as national currency.
KNOWLEDGE: New Industries of the Future
Information technology spending was at 6.5 percent of GDP (2000) as this figure should be increased in order for Norway to prepare for the post-oil economy which includes a shift towards knowledge based industries such as Internet, bio-technology, nano-technology, knowledge - services, etc. The Norway economy may also take another hard look at its mineral resources with the upswing in global commodity prices over the last three years focusing in on minerals and metals of the likes of nickel, iron ore, gold, copper, etc. Expect to see an upswing in mineral exploration companies exploring within Norway. BI.C thinks over the short to medium term, the world oil price will stay above $40 USD /barrel due to USD depreciation and tight supply/demand equation.
CURRENCY: ISO Symbol ‘NOK’, Norwegian krone, norske kroner. At time of review on February 18, 2005, the Norwegian krone had an exchange value of 6.349 NOK to the US-dollar (USD) and/or 8.278 NOK to the Euroland euro (EUR). The currency regime for the krone is that of a floating exchange rate. It is government policy to preserve currency stability for the krone. As measured by purchasing power parity, the krone was approximately 49 percent overvalued to the USD as of February 17, 2005. The krone during year 2004 appreciated by 9 percent versus the USD.
CURRENCY HISTORY: historical quotes include: January 1991 at 5.902 NOK to the USD, July 1991 at 6.96, August 1992 at 5.71, year 1993 average at 7.09, 1994 at 7.05, July 1995 at 6.16, August 1997 at 7.61, October 2000 at 9.38, January 2003 at 6.91, December 2004 at 6.14. In relation to the Euroland euro, the krone was valued at January 1999 at 8.64 NOK to the EUR, January 2000 at 8.12, January 2001 at 8.23, January 2002 at 7.91, January 2003 at 7.34, January 2004 at 8.22. When comparing the Norwegian kroner to the Swedish krona, exchange quotes include January 1997 at 1.09 Swedish krona (SEK) to the kroner (NOK), January 1998 at 1.069, January 1999 at 1.048, January 2000 at 1.057, January 2001 at 1.08, January 2002 at 1.165, July 2002 at 1.252, July 2003 at 1.109, February 2004 at 1.044 and January 2005 at 1.101. During year 2002, Norway was a world’s top performing currency when Norway’s interest rates reached 7 percent while domestic inflation was running at 2 percent resulting in a net 5 percent real yield.
CURRENCY FORECAST: krone to decline modestly against the EUR and USD as Norwegian inflation comes in well below forecasts thus keeping Norwegian interest rates below major economic trading blocs. Unlike year 2002, Norwegian interest rates are now below those of the United States with the current U.S. Fed rate at 2.5 percent, negative interest rate differential to Norway. It is forecasted the United States interest rates will continue to rise during year 2005 thereby widening the interest rate differential between Norway and America. Although the krone is tremendously overvalued to the USD as measured by purchasing power parity, the USD remains very vulnerable particularly if central banks worldwide begin to diversify their official reserves assets away from their USD holdings to other currencies including the euro. The USD may still indeed fall further in value. There is a widely held view that so goes the oil price, so goes the krone. Higher oil prices are generally bullish for the Norwegian krone and oil is most likely to stay quite high for some time yet. Other factors can greatly influence the krone’s value such as capital flows. The Government Petroleum Fund does purchase foreign exchange, this would be considered bearish for the krone.
The krone is a very safe currency in the world today to park some monies, although liquidity is not that deep for large institutional investors. In the very long term, BankINTRO.com does not think the krone will plunge in value after the hyrdrocarbon economy gets depleted. With massive securities holdings worth hundreds of billions of USD equivalent and no debt, the people of Norway are highly intelligent to discover new profitable industries to replace energy (ie. knowledge - Internet, bio-technology, the upcoming nano-technology boom, etc.
UPDATED: February 18, 2005
