Norway is in trouble. As we have detailed previously (here [12], here [13], here [14], and here [15]), the world's largest sovereign wealth fund has begun liquidating assets (after its largest quarterly loss) as the nation faces recessionary fears (key data deterioration as oil stays lower for longer) with expectations building (despite denials by the central bank) that ZIRP (or even NIRP) is coming. Why? Simple - as the following real-time map shows - every one of Norway's oil fields are currently underwater!
As we explained previously, [13]while the slump in oil has pressured the krone and thus helped the country preserve some semblance of export competitiveness, the fact that i) everyone else is easing, and ii) global demand and trade are in the doldrums, serves as a kind of counterweight, leading directly to a situation wherein the currency, in Bloomberg’s words, “just can’t get weak enough.”
Now, Svenska Handelsbanken is out predicting that “lower for longer” crude will eventually force Norway to cut rates to zero.
Here’s more, via Bloomberg [16]:
With oil prices still wobbling around $50, Norway is in danger of a recession that could drive its benchmark interest rates, already at a record low, to zero.
That’s what economists at Svenska Handelsbanken AB in Oslo say as they warn that “recessionary risks are significant.” The central bank in September cut rates to 0.75 percent and signaled more than a 50 percent chance for a third reduction since the drop in oil prices accelerated, about a year ago. Handelsbanken sees three cuts next year, bringing the benchmark to zero by the end of 2016.
“The Norwegian economy will now experience a deeper downturn than during the financial crisis, with output expected to stay below its potential for longer than it did last time,” Kari Due-Andresen and Knut Anton Mork, economists at Handelsbanken, wrote in their latest report.
[17]
Before the big oil price drop even got started, Norway was already battling a bigger-than-expected fall in investments. Now, with Brent crude lower still, investments by oil and gas companies operating in Norway are set to suffer.
As a reminder, Norway is now set to dip into its sovereign wealth fund for the first time. Earlier this month, budget estimates indicated that inflows from petroleum activities in 2016 will fall short of what the government plans to take out of the fund by nearly NKr4 billion. Here's a graphic from RBS which illustrates the relative size of Norway's SWF:
[18]
And while the asset allocation of SWFs varies meaningfully compared to official FX reserves, it's worth noting that this is but one more example of "Great Accumulation" reversal dynamic outlined [19] in thse pages last November and highlighted by Deutsche Bank [20] in the wake of the China deval. That is, regardless of what's being sold, it still represents a major turning point at which crude producers cease to be net exporters of capital.
Getting back to the Norges Bank, it's also worth noting that just today, Governor Oeystein Olsen mentioned NIRP. As reagular readers are no doubt aware, there's no surer sign that policymakers are in fact considering something than when they say they aren't considering it. The soundbite, from Bloomberg:
"We still have room to maneuver both ways. I hasten to stress that as prospects are now, we think it’s not likely in the near future that Norway will have negative rates. The board has not discussed moving into negative territory”
In the end, we suppose the real question is this: if the housing bubble that the Norges Bank has helped to inflate bursts, how does the central bank plan to deal with the fallout (which will be amplified by the economic drag from low oil prices) when it has exhausted its counter-cyclical capacity by cutting rates to zero?
And here is why it's circling the ZIRP drain... every Norwegian oil field is operating at a loss currently...
[21]
To follow Norway's demise in real-time, see here. [22]
As we concluded in a previous note, [15]
We are hoping that [Norwegian policy makers] can figure out the difference between spending and investment, taking time to understand the financials.
The stock and bond markets and collecting rent from high street properties cannot replace the oil industry. Although Norway has strong fishing and technology industries, their growth is relatively limited due to environmental limitations, strong unions (which are not a bad thing but they can limit a company’s ability to adapt during difficult times) and the high cost of employment. We need a new, difficult to duplicate, industry to carry us forward.
Norway needs to be more Swiss and American and less European in their approaches to business and immigration. Otherwise, Norway will become a “Socialist Paradise Lost.” It will become just another European country instead the exception, like Switzerland.
