We’ve spent quite a bit of time documenting Norway’s precarious balancing act in the face of slumping crude prices.
On the one hand, falling crude puts pressure on the krone which essentially allows the Norges Bank to compete in the regional currency wars without resorting to the same type of deeply negative rates as the ECB, the Riksbank, the Nationalbank, and the SNB. In short, a falling krone preserves export competitiveness in a world gone Keynesian crazy.
At the same time, falling crude puts enormous pressure on the country’s economy, which is heavily dependent on oil production
Additionally, collapsing crude revenue means the country will soon be forced to drawdown its $830 billion sovereign wealth fund (the largest in the world) to plug the various budget leaks caused by “lower for longer.”
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Now, Norway has declared that its oil industry has entered a “crisis.”
“[The] industry is in a crisis now, we can’t deny that,” Bente Nyland, director general of the Norwegian Petroleum Directorate, told Bloomberg [9] who reminds us that “Norway depends on oil and gas for about one-fifth of its economic output and nationwide, the petroleum industry has cut almost 30,000 jobs.”
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The government last year announced plans to boost spending on the way to shoring up the flagging economy and officials says those measures - which are part of the reason why Norway will pull money from the SWF - should be sufficient to offset the pain from lower crude prices. “Finance Minister Siv Jensen says budget proposals [11] put forward last year already contain ‘a lot of expansion’ and will help stem job losses,” Bloomberg continues, before noting that “the question is how quickly the economic adjustment brought on by a weaker krone will manifest itself.”
Yes, that is the question. Of course that’s partly a function of how monetary policy plays out for Norway’s trade partners. Like Europe for instance. And Sweden, which is Norway’s fifth largest export destination.
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As a reminder, the Riksbank is effectively beholden to the ECB. If Draghi eases, so too must Stefan Ingves. This means that when it comes to whether a weaker krone helps Norway's non-oil industries, it's essentially a matter of whether the depreciation in the krone tied to falling crude is enough to offset any upward pressure on the currency tied to further easing by the ECB.
Of course that leads us to an absurd paradox: the lower oil goes, the stronger the disinflationary impulse in Europe and the more deflation Europe has, the more Draghi eases. In other words, the idea that falling crude prices will help support the krone is to a certain extent self-defeating in the current monetary policy regime.
In short, while we've seen some NOK weakness over the past 12 months, the currency "just can't get weak enough," to quote Bloomberg.
And because Norway's debt-to-GDP ratio is just 29%, QE isn't possible [13].
In the end then, you can expect the highlighted number in the following screengrab from the Norges Bank's webpage to go markedly lower if Mario Draghi decides he isn't done playing Krugman:
By the way, if the rest of 2016 ends up looking anything like the first two weeks, Norway can go ahead and forget about squeezing a respectable return out of its SWF this year. The less it returns, the less able it will be to offset the money being pulled out to shore up the budget and provide fiscal stimulus.
