OREANDA-NEWS. April 21, 2015. Fitch Ratings has affirmed Norway's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA'. The issue ratings on Norway's senior unsecured bonds are also affirmed at 'AAA'. The Outlooks on the Long-term IDRs are Stable. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.

KEY RATING DRIVERS

Norway's 'AAA' ratings reflect the strength of the sovereign balance sheet, a very high income per capita, solid human development and governance indicators, and a strong macroeconomic policy framework.

North Sea revenues have been prudently managed and invested through a sovereign wealth fund (SWF). Revenues from oil and gas accrue to the SWF, while the current budget deficit is financed by a transfer from the SWF. At end-2014, the market value of the SWF was NOK6.431bn (USD865m), 2.5x the size of the non-oil economy. The SWF provides a substantial buffer against oil price fluctuations such that Fitch does not view the recent oil price decline as a threat to the ratings.

Norway's fiscal rule limits the size of the non-oil deficit to (on average to take account of cyclical developments) 4% of the market value of the SWF. The fiscal policy framework decouples oil price developments from fiscal outturns, and affords the authorities flexibility to implement counter-cyclical policies, if needed.

The fall in the oil price since last autumn will dampen growth in the broader economy. Lower investment and production in the oil sector will also weaken demand for goods and services in non-oil sectors. Downward pressures on wages will also spread to the non-oil economy. This, together with weakening consumer confidence, may put downward pressure on consumption.

At the same time, other factors will counter the negative effects. The exchange rate has depreciated by around 9.5% in trade-weighted terms since September 2014. Together with lower wage growth, this will improve Norwegian firms' competitiveness and boost non-oil exports. Overall, Fitch has revised down its forecasts for real Mainland GDP growth to 1.5% in 2015 and 2.2% in 2016 from 2.3% and 2.8% in the last rating review in October 2014.

Norway's external position will remain strong, even with lower oil prices. The current account surplus fell back to 8.5% of GDP in 2014 from 10% in 2013. We expect an average surplus of 5.2% over the next two years.

House prices have been rising since January 2014. Annual house price inflation reached 8.7% in February 2015, before ticking down to 7.9% in March. Strong income growth implied that the house price-to-income ratio only increased by 2.4% over the course of last year, while the household debt-to-income ratio in 4Q14 was 227.4%, up from 224.4% a year earlier. At the same time, the house-price-to-income ratio is around 20 percentage points above its 1979-2014 average. Nevertheless, the banking system is well-capitalised. The Financial Supervisory Authority recently proposed the introduction of regulations to address the risks from rising house prices and household debt.

RATING SENSITIVITIES

Fitch judges Norway's credit profile as solid, implying that a negative rating action in the near term is unlikely. However, the following factors could, individually or collectively, put downward pressure on the ratings:

-An even sharper and sustained fall in the oil price, giving rise to erosion of Norway's sovereign and external balance sheet strengths over the medium-term
-Risks to financial stability, for example, emerging from excessive credit growth in the private sector or household indebtedness

KEY ASSUMPTIONS

Fitch assumes as the basis for its current projections that Brent oil prices will average USD65p/b in 2015 and USD75p/b in 2016.

Fitch assumes that the Norwegian government will continue to adhere to the fiscal policy rule in its current form.

Over the medium-term, Fitch assumes Norway will implement policy measures to address the impact of weakening demographics on long-term fiscal sustainability.