Why is Norway the only country that will not be in debt due to the pandemic?

The COVID-19 pandemic pushed economies into a major lockdown that, while it helped contain the virus and save lives, also caused the worst recession since the Great Depression. Right now, more than 75 percent of countries are reopening at the same time that the pandemic is intensifying in many emerging markets and developing economies, so discussing any eventual economic recovery is futile.

What is even worse is the fact that the forecasts made at the beginning of the pandemic were wrong. New economic analyzes point to a deeper recession than estimated, as well as a much slower-than-expected recovery. In the United States alone, for example, GDP fell 32% in the second quarter of the year - the worst drop on record. Additionally, a cumulative loss to the global economy of more than $12 trillion dollars [1] is expected, that is, more than 10% of net world value.

The upper line indicates the expected growth based on the January indices. The bottom line is the adjustments made, while the blue area is the cumulative losses.

Faced with this situation, there have been quite a few governments that have had to implement various economic stimuli that have mostly been credits. This represents a risky scenario for the current decade, especially for developing countries such as Mexico, Brazil and the rest of Latin America. In this context, the international community will witness levels of public debt that are even higher than those reached at the end of the Second World War.

In green and gold, the average debt for developed and developing economies, respectively.

And despite the fact that there are initiatives to help release economic tension without interest involved, such as the one proposed by Macron and Merkel within the European Union, the only way to avoid any stagnation in both the short and long term is through of the existence of national funds that serve as support for this type of situation. Norway is one of the States that has a sovereign wealth fund whose objective is to face economic contingencies such as the one experienced this year.

Norway has not been spared from the ravages caused by the pandemic, in fact, it has been doubly affected: in the first instance, by the low prices registered in the oil industry at the beginning of the year; secondly, due to the cessation of economic activities as a consequence of the quarantine under which a large number of countries in the world have been. Put in figures, a contraction of 5% is expected for Norwegian GDP. As a reference, last year Norway recorded $410 billion in domestic product[2], so losses due to the pandemic would exceed $20 billion.

Fortunately, as mentioned above, Norway will not need to acquire more debt to deal with this situation since currently the market value of Norway's sovereign wealth fund exceeds one trillion dollars. That is, the fund is equivalent to 2.5 times the nominal value of Norway's GDP, so 5% shouldn't be too much of a problem.

The Norwegian fund is actually the largest FSI (sovereign wealth investment fund) in the world and much of the figure comes from the dividends that the oil industry has generated in the country. However, Norway's relationship with oil does not exceed 5 decades of existence.

From Fish to Oil

In the late 1950s, very few people believed that rich oil and gas deposits could be discovered on the Norwegian continental shelf. The Norwegian Geological Survey even wrote to the Foreign Office in 1958 stating that the possibility of finding coal, oil or sulfur on the continental shelf off the Norwegian coast could be ruled out. Fortunately, the discovery of the Groningen gas field in the Netherlands in 1959 opened people's eyes to the prospect that there might be hydrocarbons under the North Sea.

In May 1963, the Norwegian government declared sovereignty over the Norwegian continental shelf. A new law was adopted stating that all natural resources therein belonged to the Norwegian state and that only the King (in practice the Government) has the authority to grant licenses for exploration and production. The first round of licenses from Norway was announced on April 13, 1965, and 22 production licenses covering 78 geographically delimited areas (blocks)[3] were awarded.

Spatial distribution of licenses in the North Sea.

The licenses granted the exclusive right to explore, drill and extract oil and gas in the areas to which they applied. The first exploration well was drilled in the summer of 1966, but it turned out to be dry. Later, the first oil discovery was made on the Norwegian platform, in 1967, however, it was not considered economically viable at that time. The explorations continued their course, although they had great difficulties to be carried out - waves of more than 15 meters in height and winds of up to 110km/h made the region one of the most hostile seas[4].

It was not until 1969 that, just before Christmas, the Phillips Petroleum Company informed the Norwegian authorities of the discovery of Ekofisk, which turned out to be one of the largest offshore oil fields ever discovered. The production of the field would begin on June 15, 1971 and from that moment the success story of Norway would begin.

Initially, foreign companies dominated exploration activities and were responsible for the development of the first oil and gas fields. It would not be long before Norway established the principle that the state should have a 50 per cent share in each production license. Added to this, the Norwegian government chose to stay out of OPEC, as well as create its own oil company in 1972 – Statoil.

In that same year, in September 1972, the Norwegian parliament submitted to a referendum the question of whether Norway should join the European Economic Community. The proposal was rejected with a slim margin, whereupon the Norwegian government proceeded to negotiate a trade agreement with the EU that would give domestic companies access to European markets. Over time Norway renegotiated and refined this agreement, eventually joining the European Free Trade Association and the European Economic Area.

Future awareness

In 1990, the Norwegian government created the Oil Fund (Oljefondet) known today as the Global Government Pension Fund (GPF-G) or also known as the Norwegian Sovereign Fund. The objective of the fund is to invest parts of the large surplus of the oil industry and thereby generate dividends to continue the reinvestment and help fill possible budget deficits. This creates an important buffer and ensures that Norway's economy is not completely at the mercy of the world price of oil.

The fund is managed by a division of the Central Bank of Norway. It is the largest pension fund in the world, although it is clearly not a typical pension fund since, instead of being based on individual contributions, it is based on oil profits. The government can spend up to 3% of the inflation-adjusted fund's return.

Norges Bank shows the value of the fund live on its website

The first withdrawal from the fund took place in 2016 when the government had to take about $780 million. This was to counter an economic downturn caused by low world oil prices. In this way, the fund fulfilled exactly one of the functions with which it was created.

In the middle of the current year, Norway plans to take out a record of $37 billion dollars from its sovereign fund, or what is the same, 3.7% of the market value at the moment. To dispose of such a fund, the government will have to embark on a historic asset sale to generate cash. Such an act highlights the extent of the economic damage caused by the Covid-19 crisis and the collapse in global oil markets, with Western Europe's largest crude exporter now facing its worst economic depression since World War II.

The end of the golden goose

The sovereign wealth fund is a good start to future-proof Norway's economy. Currently worth over 250% of Norway's GDP, the country could effectively shut down for almost three years and not have to worry. This is a good buffer, but it's not enough in the long run.

Fortunately for the Norwegian people, the country is well positioned to transition to a world without oil as 98% of the country's electricity comes from hydropower and large numbers of consumers choose electric vehicles. In fact, one in three cars purchased in the country is electric, making Norway the second largest market for electric vehicles (behind only China, a state with a population 270 times that of the Nordic state). ). Additionally, the oil industry represents only 20% of the total gross domestic product [5].

Norway also aims to achieve an emission-free industry, as well as a merchant fleet under the same standard. Interestingly, since the shipping fleet accounts for almost all of Norway's oil use, the closer the country gets to this target the higher the cost/benefit ratio will be.

The tourism industry, which exploits Norway's stunningly beautiful landscape, continues to expand and will do so for some time. Finally, the old base of the economy, the fishing industry, continues to be quite solid. Whatever happens, various bodies such as the IMF believe that Norway's transition should be relatively smooth as long as it has at least one eye on the future.