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Thursday, July 18, 2024

Weak ‘krone’ baffles the experts

NEWS ANALYSIS: Norway’s economy remains strong, its biggest companies are more profitable than ever, the price of its oil is still high and unemployment is low. That’s led to lots of debate lately over why the country’s currency (the krone) is so weak, and what the central bank will or should do about it.

The value of Norway’s currency has fallen 20 percent in the past year, and 7 percent just since New Year. Most analysts and economists were expecting an interest rate hike this week. PHOTO: Norges Bank

At one point early this week, it cost NOK 10.81 to buy one US dollar, compared to the NOK 6-8 that was common for many years. On Wednesday it cost NOK 11.88 to buy one euro, resulting in exchange rates that are making summer holidays abroad much more expensive for Norwegians but also filling up their huge sovereign wealth fund. Norway’s North Sea crude oil is sold in US dollars, for example, meaning that lots more kroner is flowing into the country’s proverbial piggy bank.

The weak krone, though, is at odds with Norway’s image as a wealthy country. A nation’s currency reflects its stature and “what investors think about fundamental aspects” of its economy, according to Elisabeth Holvik, chief economist at Norway’s Sparebank 1 Group. When the Norwegian krone is weak, Holvik wrote in newspaper Dagens Næringsliv (DN) recently, “it reflects that we don’t have much to sell apart from oil and gas, that we depend on imports and we’re no longer an attractive country in which to invest.”

Ouch. That’s not what Norwegian business or its finance minister, Trygve Slagsvold Vedum of the Center Party, want to hear. Holvik, meanwhile, maintains that Norway’s krone will continue to weaken because of “weaker structure” in the economy. She also notes that Norway would have a state budget deficit of around NOK 350 billion if it weren’t for its oil and gas revenues, most of which are stashed away in its sovereign wealth fund (known as the Oil Fund) for future generations.

Finance Minister Trygve Slagsvold Vedum stresses that the central bank is responsible for interest rates and the value of the krone, but economists point to his high tax policy, too. PHOTO: Finansdepartementet/Celine Lyse Augdal

Norway, Holvik claims, has gone from being “a safe harbour” in 2008 (when the krone was strong) to a country viewed by investors as “more risky and unpredictable.” And that has a lot to do with its tax system that’s become more onerous since Vedum took control of the finance ministry in 2021. His Center Party and its much larger government partner, the Labour Party, have raised taxes formidably, especially those on both individual and companies’ net worth.

Other economists also point to questionable competitiveness, weaker productivity, the public sector’s large and increasing role in the economy and a tax system that some contend limits investment in the private sector and prompts early sales of start-up firms. Dozens of Norway’s wealthiest individuals, meanwhile, have been fleeing to Switzerland or at least sending offspring armed with the family’s wealth, while managing to remain in control of the business.

Holvik advocates removing Norway’s formueskatt (fortune tax), at least on ownership of companies. “In order to strengthen the willingness to invest, you have to increase incentives so that capital can be invested productively in Norway,” Holvik wrote “The first thing is to do what all our neighbouring countries have: remove fortune tax on business owners. The contrast between Norway’s and other countries’ taxation of business owners has become so great that many are choosing to move out of Norway.”

Others worry that the weak krone may be here to stay. They point to how it’s a “minor” currency that’s vulnerable to market turbulence, and to how it’s been tied so tightly to oil and gas prices. Even though they’ve soared, the krone hasn’t. The oil and gas industry, moreover, is widely viewed as entering its twilight years because of climate change that’s made fossil fuels unattractive and eventually will force emissions cuts. Norway has long talked about a so-called “green shift” to alternative energy sources, and investment in them, but progress has been slow. There’s still just so much money to be made on both oil and gas, and so many jobs tied to the industry.

Norwegian interest rates, meanwhile, have remained relatively low compared to other countries. The central bank’s policy rate was raised to 3 percent in March but that compares to 3.5 percent in neighbouring Sweden and 5 percent in the US. “Other central banks have raised interest rates more than Norway’s,” Ole Håkon Eek-Nielsen, chief analyst at Nordic banking group Nordea, told DN. Interest rate expectations were generally higher in Norway than rates are now, especially given that core inflation in March was 6.2 percent. The inflation goal at Norway’s central bank (Norges Bank) is still just 2 percent.

“We’re talking about a new situation,” Nils Kristian Knudsen, an interest rate- and currency strategist at Handelsbanken, told DN, referring to how the Norwegian krone has weakened by 20 percent against both the dollar and euro in the past year.

Knudsen notes that energy prices, which often fuel the krone, topped out last summer. Expectations for Norwegian interest rates are also weaker than they are for rates globally. “This can be the start of a new regime with a weaker krone,” he said, noting how the krone has tumbled 7 percent just since New Year.

While some point to large currency exchange transactions during the Easter holidays, and some shifting sales of the krone by Norway’s central bank, many think Norwegian interest rates are too low compared to other countries’ even though rates have risen. The bank is widely expected to raise its policy rate  again on Thursday, and later in the year as well.

Central Bank Governor Ida Wolden Bache finds herself caught between those wanting rates to remain low at a time when all other household costs are rising, and those who think they should rise to boost the krone. She attributed much of the weakness in the krone in March to “unease in the financial markets” that the bank thought would settle down.

Bache stressed, however, that there was “great uncertainty” tied to the value of the krone. She said last month that if the krone weakened further, rates would likely be raised to bring inflation down and boost the krone. Consumers thus faced for at least another quarter-point rise on Thursday, or more. Berglund



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