Bloomberg News

Norway Spending Restraint Tempered by Europe’s Deepening Crisis

October 06, 2011

Oct. 6 (Bloomberg) -- Norway will raise spending from its oil fund next year, without breaching a self-imposed cap, as the government responds to a deepening European debt crisis.

The world’s seventh-largest crude exporter will use 3.9 percent of its oil fund in 2012 to plug deficits, or 122 billion kroner ($21 billion), the Finance Ministry said today. That’s up from 3.5 percent this year, when spending was cut below a 4 percent spending rule of Norway’s $526 billion wealth fund for the first time since 2008.

The government, which described the budget as “tight,” expects spending to boost the economy by 0.3 percent point next year. The stimulus may add to pressure on the central bank, which is wedged between the risk of a credit-driven housing bubble at home and lackluster demand from abroad as Europe battles its debt crisis and U.S. growth slows.

“One might claim that the government should have tightened fiscal policy more than the budget proposal implies,” said Stein Bruun, a chief economist at SEB AB in Oslo. “However, the fiscal policy stance is justified by heightened uncertainty to the global outlook.”

The country’s sovereign-wealth fund has so far shielded Norway from the worst of Europe’s sovereign debt crisis and credit growth has accelerated this year as the country boasts Europe’s lowest unemployment rate. Growth in the mainland economy, which adjusts for income from oil, gas and shipping, will accelerate to 3.1 percent next year from 2.8 percent this year, the ministry said.

Period of Turbulence

The proposal takes into account challenges facing exporters while Europe’s debt crisis also shaped the bill, Finance Minister Sigbjoern Johnsen told reporters today. The budget represents growth in spending of 2.1 percent from 2011.

“It’s a budget that is set during a period with much turbulence and uncertainty in Europe,” Johnsen said. “An important objective with this budget was to take the export industry into consideration.”

Prime Minister Jens Stoltenberg last month said the government is committed to a tight budget and said the bill would spark “loud demands” to allow the central bank to keep rates low and prevent currency gains that hurt exporters.

Steinar Juel, chief economist at Nordea Bank AB in Oslo, said the budget “doesn’t fit very well with the rhetoric the prime minister has had.”

Wage Growth

Wages will grow 4 percent this year and next, up from 3.7 percent in 2010. Unemployment is expected to fall to 3.3 percent in 2011 and 2012 from 3.6 percent in 2010, according the budget.

Norges Bank in August postponed plans to raise its benchmark interest rate from 2.25 percent and last month signaled it may not resume tightening until 2012 as policy makers try to shield exporters from excessive krone gains.

The currency emerged as a haven for investors seeking to avoid the euro area’s debt woes and after Switzerland imposed a cap on franc appreciation. On Sept. 8, the krone rose to the highest level against the euro since February 2003. The gains have hurt exporters such as Norske Skogindustrier ASA. The world’s third-largest newsprint producer said it will lay off workers as profits succumb to krone appreciation.

The krone weakened 0.1 percent to 7.8223 against the euro by 12:27 p.m. and fell 0.1 percent to the dollar to 5.8592.

Overall economic growth, including oil and shipping output, will be 2.4 percent next year, up from 1.7 percent this year. Total exports will grow 0.4 percent this year and 1 percent next year, according to today’s budget.

Norway, which is also the world’s the second-largest natural gas exporter, places most of its energy revenue in a fund that invests abroad to avoid stoking inflation in the domestic economy. The Government Pension Fund Global is Europe’s largest equity investor. The government predicted today that the fund will grow 3.1 trillion kroner by the end of next year.

--with assistance by Marianne Stigset and Meera Bhatia in Oslo, Editors: Jonas Bergman, Tasneem Brogger

To contact the reporter on this story: Marianne Stigset in Oslo at mstigset@bloomberg.net

To contact the editor responsible for this story: Tasneem Brogger at tbrogger@bloomberg.net


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