Hard to see halt to NOK’s rise and rise, says Terra’s Jan Andreassen

Jan Andreassen, chief economist at Terra in Norway, says it is hard to see any halt to the ongoing appreciation of NOK against other currencies.

In a world where governments, many with falling credit ratings, continue to borrow heavily, it was just a matter of time before international investors would be attracted to Norway. And indeed, these days money seems to be flowing from all corners of the planet into what was once an exotic market.

Norway’ attractions for are many. The most important being a systematic higher rate of return on safe assets than asset managers can find elsewhere in Europe. Norway’s money market rates are almost two percent higher than present Euribor rates.

While most European countries have seen their ‘AAA’ rating weakened since Lehman Brothers went bust, Norway’s financial wealth has roughly doubled in size. Contrary to the warnings of the financial authorities, Norway’s households have incredibly strong finances. Yes, gross debt levels are relatively high, but financial and real assets are three times debt. In addition the government holds net financial assets of more than $200,000 per capita. Assets that continue to grow rapidly.

Third, the diversification of risk makes Norwegian government assets a must for any well managed global portfolio.

Through the past couple of years, foreign investor interest in NOK has been gradually increasing. What was once a very cyclical currency, is now increasingly a safe-haven that rises on so-called “Risk off” days in the financial markets.

Looking forward, it is hard to see what can stop the Norwegian currency from becoming even stronger relative to its European cousins. Norway’s current account surpluses are expected by the IMF (October 2012) to stay at 10% of GDP or more in coming years. On current projections Norway’s $700bn sovereign wealth fund is likely to double over the next decade.

Euro-land will, despite all its efforts, have in excess of 10% unemployment for the foreseeable future. Low capacity utilization will in turn result in both minimal returns and further deterioration of credit quality across the continent.

Our forecasts suggest that Norway’s central bank will have to cut interest rates significantly to reduce the rate of currency appreciation. In essence, Norges Bank will be forced to abandon its present plans for rate hikes.

One way to describe my forecast for a coming turn of monetary policy is to call it a suspension of inflation targeting until Europe regains its financial health. Norway’s economy is just too small, open and oil dependent to operate an independent monetary policy in the present European climate.

If I am right, The central bank will relatively soon have to adjust its interest rates. The 1 March meeting is a natural starting point for rate cuts. However, nobody should expect fireworks. A cut of a quarter percent will only marginally diminish the excess returns investors get from investing in Norway. More cuts are in my view likely, although the reader should be warned that my forecast is radically different from the present consensus.

There are of course risks regarding the call for rate cuts from Norges Bank. No country is without vulnerabilities, and Norway’s high cost welfare state is dependent on oil prices that may seem painfully high for many other Europeans – oil prices that could turn out to be unsustainable.

There are also other risks. NOK could weaken if the European outlook should improve. Politicians may change course and start mismanaging the economy. And you always have your unknown unknowns.

Most other countries have worse risk profiles. Indeed, a preliminary verdict must be that the Norwegian currency can potentially rally quite a lot further. Falling interest rates will probably only pause its gains.


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