Norway may become Europe’s next investor haven as the region’s fiscal turmoil raises the appeal of debt and currency markets in an economy with the smallest default-risk.
The Nordic country’s budget surplus equaled 10.3 percent of gross domestic product last year as oil revenue and the lowest unemployment rate in Europe protected government finances from the drain suffered by deficit-laden countries such as Greece and Ireland. Norwegian bonds with maturities of one to 10 years returned 6.197 percent this year, compared with 4.747 percent for similar German debt and 2.931 percent for Swiss bonds.
“Because Norway is the best sovereign credit in the world, it’s such a safe haven,” said Par Magnusson, chief Nordic economist at Royal Bank of Scotland Group Plc, in an interview. The current “risk aversion is euro-centric,” he said.
Norway is the world’s seventh-biggest oil exporter and avoids the unpredictable swings that other energy-rich nations suffer by investing oil revenue offshore through its sovereign wealth fund. The $305 billion mainland economy will grow 3 percent in 2011, the central bank estimates, outpacing expansion rates in Switzerland and Germany. Norway’s budget surplus will stay close to 10 percent of GDP this year and next, according to the government.
Investor focus on fiscal health will benefit the whole Nordic region for “a long time,” according to Carl Hammer, chief currency strategist at SEB AB in Stockholm. Both Norway and Sweden offer “strong fundamentals, better growth prospects than Europe,” he said in an interview.
The Swedish krona was the best performer today of the 16 major currencies tracked by Bloomberg, gaining 0.9 percent against the dollar to 6.8646 at 3:09 p.m. local time. Norway’s krone traded 0.8 percent higher versus the greenback at 5.9882.
The Norwegian krone “will benefit from improving flow outlook,” said SEB analysts led by Hammer, in a note to clients today. “The long-term outlook is still strong for the krone.”
Norway’s $505 billion wealth fund means the country’s default risk is lower than that of the U.S. or Germany. Credit default swap contracts show the cost of insuring against a Norwegian default dropped to 21.5 basis points this week, compared with 39 for German debt, 42 on Swiss debt and 41 for U.S. debt, according to data provider CMA. The country boasts the lowest CDS level of all sovereigns tracked by CMA.
Irish bonds led a market rout from Portugal to Greece this month amid concern Ireland won’t be able to contain its fiscal and banking crisis without a bailout. Even France is feeling the contagion as investors punish countries with high debt levels.
“Because of the oil wealth, the fiscal situation in Norway is as far away as you can get from the peripherals,” said Olav Chen, a senior portfolio manager who oversees about $6 billion at Storebrand Asset Management, in an interview.
“We have not been influenced very much by” Europe’s debt crisis “and the reason is that our fiscal position is very much different,” central bank Governor Svein Gjedrem said in an interview yesterday.
Though Gjedrem said liquidity in Norway’s currency and debt markets in the past has kept some investors away, “new on the table is of course all the fuss about the fiscal situation, so that is a new argument for the krone having a different path and potentially being looked at as a safe haven,” Chen said.
Level to Buy
The krone’s 12 percent appreciation against the dollar since a June low still leaves room for gains, said Magnusson at RBS and Hammer at SEB.
Camilla Viland, a currency analyst at DnB NOR ASA, Norway’s biggest bank, said the krone’s 6 percent drop against the euro since a May high could offer a buying opportunity. For long-term investors, the krone’s exchange rate “may seem like good levels to buy,” she said.
The bullish predictions come as the central bank takes steps to minimize the krone’s gains. Norges Bank said last month it will push back tightening plans by about six months to the middle of 2011.
“Norway is also in the currency war,” Chen said.
Sweden’s currency and debt markets also may offer investors refuge from Europe’s debt woes as the government predicts the economy will deliver the European Union’s biggest rebound this year. Sweden had the second-smallest budget deficit last year in the EU after Luxemburg at 0.9 percent of GDP, the European Commission said on Nov. 15. The largest Nordic economy will grow 4.8 percent this year, the government estimates.
‘Less Euro, More Scandi’
That’s prompted the Riksbank to raise rates three times since July. The central bank expects the benchmark to reach 3.4 percent by the end of 2013, up from 1 percent today.
Riksbank Deputy Governor Lars Nyberg said in a Nov. 12 interview the country is facing a capital influx as low borrowing costs and sluggish growth prospects in the U.S. and Europe force investors to seek higher returns elsewhere. He also indicated his bank won’t take policy steps to stem those flows.
Sweden’s krona has appreciated 12 percent against the dollar since the end of June, making it the third-best performer in the period of the 16 major currencies tracked by Bloomberg after the Australian and New Zealand dollars. Swedish bonds returned 4.264 percent this year, compared with the 6.667 percent for U.S. Treasuries.
Swedish government debt will narrow to 29 percent of GDP by 2012, compared with 35 percent this year, the country’s debt office said on Nov. 16.
“That’s a very, very good figure and very strong finances means that the risk of losing money is almost zero,” said Bo Lundgren, the head of Sweden’s National Debt Office, in an interview. “So Sweden is a safe haven.”
SEB considers the “long-term trend as beneficial for both Sweden and Norway,” Hammer said. That means the bank is buying “less euro papers and more Scandinavian paper,” he said.