It sounds like a contradiction, but Norwegian politicians can spend more money because Norway has become less attractive.
High wages and gloomy prospects for Norway’s most important industry are among the reasons used to explain that Norwegian kroner is on the cheap.
You now have to pay 80 percent more for one dollar, compared to before the drop in oil prices 10 years ago.
When the krone falls in value, the oil fund’s values abroad become much larger measured in Norwegian kroner. Norwegian politicians can thus spend several billions without breaking the rules of action.
Read also: The oil fund has NOK 3,122 billion that doesn’t really exist
The opposite is horror
But what happens if Norway’s attractiveness becomes high again?
Chief economist Jan Ludvig Andreassen in the Eika group describes it as one of two ingredients in a kind of horror scenario for the Norwegian economy:
– I think you are facing the biggest risk for our pension money this decade, and that is that the world economy will experience a downturn led by the failure of the American economy with both falling stock prices and a weaker dollar as a result, Andreassen tells Nettavisen.
We will return to exactly why this is foamy.
Is such a combination possible?
Normally does not have one economic collapse and a strongly strengthened krone came at the same time.
When the stock markets collapsed at the start of the pandemic, the krone fared badly – both against the dollar, euro and Swedish kroner.
However, there is something similar: In the months after Bear Sterns collapsed in March 2008, at the start of the financial crisis, the krone was at its strongest ever against the dollar. It was then possible to buy dollars for less than NOK 5.
But it didn’t last: When the stock exchanges really collapsed in autumn 2008, strengthened the dollar itself strongly. The euro exchange rate went straight to heaven.
What happens if the US stops paying its bills?
Now the world looks different. And it is the high national debt in particular that worries.
In the USA, there are regular arguments about whether the so-called “debt ceiling” should be raised. It is really about whether the state is allowed to pay on debts that have already been taken up.
If the US government is no longer considered a reliable borrower, there will be enormous consequences.
PS! By New Year, the Oil Fund had invested NOK 1,344 billion in US government bonds.
This is how it can develop
So how could we end up in a situation where both the market falls and the krone strengthens?
Chief economist Jan Ludvig Andreassen says that a hypothetical scenario could be as follows:
– Both China and the US have been downgraded by credit analysts in the past year. It is fully in line with the IMF’s warnings about the development of public finances. Here, China is probably worse off than the US, but China’s role in various financial networks is far smaller than that of the US.
In practice, this means that the consequences of a crisis in the US are much greater if it were to happen first.
– An increased risk premium from investors on all US debt could hit both the US and the world economy hard. Shares and bonds must be repurchased to clearly lower levels, which will be experienced as a drop in income for many.
– Falling incomes will in turn hit the US harder than others because they have more wealth to lose, with a fall in the dollar as a result. It is a juicy combo for the Norwegian economy and for all our financial investments, he says.
Investors have normally fled Norway in uncertain times. But now Norway is one of the few countries Norway has the highest rating of all the major credit bureaus. It can become important if other countries do not pay their bill.
– It would be particularly bad if Norway were to appear as a safe haven in the global credit market, with a sharp rise in the krone exchange rate as a result, says Andreassen.
Why is this a scary combination?
Let’s take a strengthening of the crown first:
- According to Norges Bank, the weak krone is the cause of NOK 3,122 billion of the fund’s value. A strengthening back to a “neutral” level will in itself wipe that money away.
- But the krone can become even stronger: In 2012, for example, the fund’s value in Norwegian kroner was adjusted down by eight percent due to strong crown. If this happens again, the fund’s value is cut from 17,700 to 13,400 billion
Just by adjusting the krone exchange rate back to the 2012 level, around NOK 4,300 billion of the fund is gone.
Admittedly, this does not make Norway any poorer, since the actual values in the fund are not affected by the krone exchange rate.
It nevertheless has enormous consequences: It means that the state can use on the state budget.
Has warned against a 40 percent drop in value
But it is when a strong krone exchange rate is combined with a fall in share prices that it really becomes dramatic.
Last year, the Oil Fund drew up an imaginary future in which a crash in the world economy would cause the fund to fall 40 per cent in value. It could happen if the tensions between East and West lead to a bifurcation of the world economy.
If this were to happen at the same time as the krone is strengthened, it would mean that the oil fund’s value would be shaved off by a further NOK 5,300 billion.
The combined effect is that around 9,600 billion of the fund’s value evaporates.
For the state, this is a complete crisis: the action rule’s limit of 3 per cent oil money use means that you have the opportunity to spend NOK 288 billion less.
This is almost as much money as the state spends on pension payments this year.
On top come other effects of a collapse in the world economy.
Worst case
Even if these numbers were to be dramatically exaggerated worst case-figures, even a drop that is only 1/3 as large will mean that the state will have to cut around NOK 100 billion in annual expenses.
Last year, Nettavisen could tell that no parties in the Storting had any ideas about how to cut 100 billion from the national budget, even though the Ministry of Finance warned that far too much oil money was being used.
Admittedly, a strengthened krone will make it very profitable to import goods, but the question then becomes: How are you going to pay for imports, when spending has to be reduced?
Tags: Krone rate Oil Fund horror scenario Norway scares economists
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