According to a Norwegian proverb, “If you speak of the sun, it will shine.” And the sun does indeed shine on the relatively small country and its population of just 5.2 million (as at 2016) and a staggering 2,650-kilometre coastline (not including fjords and inlets) – figuratively speaking that is. For Norway has undergone an enormous economic development since harnessing its oil and gas reserves in the early 1970s.
From being one of the poorer countries in Europe, dominated by shipping, fishing, agriculture and forestry, it became one of the greatest oil and gas exporters in the world.
For the country this has brought many positive benefits but also some downsides: “No other European country is as dependent on oil price movements as Norway. In 2015, for example, storm clouds gathered over the $524bn economy on account of low oil prices,” says Hagen-Holger Apel, economist at DNB Asset Management.
Norway is the world’s fifth largest supplier of oil and Europe’s second gas supplier. The oil and gas industry contributes around 15 % to the nation’s economic output every year, making up around half of the total export volume. Almost a third of the market capitalisation of the Oslo Stock Exchange is accounted for by the oil industry. But this is the exception in the Nordics. If you look at the investment universe in Scandinavia as a whole, the energy sector represents a share of less than 4% – and still below the European or global average.
“Yet, despite the drop in the oil price since October 2014, which at times came close to the $30 threshold per barrel, Norway has not entered into a recession. This is an indication of the robustness of the economy,” according to Apel.
The country can also fall back on the largest sovereign wealth fund in the world in order to cushion the negative effects of falling energy prices. This year alone, the equivalent of around €13.4bn are expected to be withdrawn from the fund assets and spent on stimulus programmes. Consequently, this year, despite the economic downturn on account of the decline in the oil price, economic growth of around 1.2% is expected.
Little surprise that the largest company in Norway comes from the energy sector. Statoil based in Stavanger focuses on the production and processing of oil and gas in particular. The Norwegian government owns the majority, 67% of the shares. Statoil employs around 21,300 people, including 19,000 in Norway, making it Norway’s biggest company (as at March 2016). In 2015, the company achieved total revenues of NOK465.30bn (around €49bn). In order to reduce its dependency on oil and gas, the firm is also increasingly investing in renewable energies such as wind farms and solar power plants.
Norway has one of the highest per capita incomes in the world and one of the most expensive capital cities in Oslo. The country has managed to create a stable and dynamic economy based on the oil and gas industry, registering large current account and budget surpluses year after year. This has been accompanied by a rapid development in the service sector.
Despite the most recent price decline oil remains the foundation of Norway’s prosperity. No other can so readily match the country when it comes to the unique mix of raw materials and their efficient production and utilisation (oil, gas, hydroelectric power, fish and timber).
“The Norwegian government is practically free of debt thanks to the regular incomes from the oil and gas industry,” according to Apel.
But Norway is also Europe’s biggest hydropower producer. Thanks to the country’s extensive water resources and differences in elevation Norway is able to meet around 95% of its own electricity demand. The country also leads the way in the registration of electric cars. There are currently more than 110,000 battery-powered lorries. The boom is enabled by a massive state subsidy.
DNB is Norway’s largest bank with total assets of around €276bn and just under 10,700 full-time posts (as at June 2017).
“The banking sector is relatively small but robust and adequately capitalised. Scandinavian banks are, without exception, the market leaders. The effects of risks in the eurozone are slight,” says Apel.
For investors who are interested in investing in Scandinavia because of any uncertainties in Europe an investment in Norwegian kroner is likely an attractive option.
“One good example being high-yield bonds of Norwegian companies. Most bonds are short duration and are consequently relatively well protected against any changes in interest rates. In addition, the Norwegian krone certainly promises further upside potential given the recent developments,” continues Apel.
Indeed, Norway’s central bank no longer has any inflation worries. After the upsurge in prices in 2016, at times quite considerably above the 2.5% inflation target of the central bank (Norges Bank), inflation since February has fallen back to this mark and weakened further. In August it was just over 1.3 % and in September slightly above 1.6 %.
“More restrictive monetary policies are, therefore, slightly more remote even if the increasing property prices must still be monitored. After the Norwegian krone gave back some of its gains early in the year the low levels of sovereign debt and the economic recovery would indicate that the Norwegian currency is back on the road to success,” according to Apel.
This is part 2 of a series on the Nordic markets
DNB Asset Management features at the Nordic Investment Managers Forum in Luxembourg on 26 October. For further information visit www.nimf.lu
