Despite its geographic positioning and relative stability, Norway has not been immune from the developments in global financial markets and international trade dynamics. Rampant commodity deflation, especially in the oil and gas sector has contributed to a spectacular decline in the Norwegian Krone as the Central Bank frantically accommodates policy to cushion the fall. With energy prices forecast to stay depressed for years to come, the strain on the economy may only grow over time in spite of measures undertaken by the nation’s sovereign wealth fund to help close budgetary shortcomings resulting from lower government revenues.

The Fundamental Picture

On the whole, Norway is contending with a multitude of perilous developments from an economic and political standpoint. Aside from the slide in energy prices on account of global fundamentals, the nation is now struggling with a growing refugee problem that threatens to derail the budget even further. In many cases, as the authorities have discovered, the Afghan refugees that are pouring over the border are coming by way of Russia, applying for refugee status oftentimes in conditions that do not satisfy receipt of asylum status. Norway is planning to deport a substantial number of migrants, but the sheer size of the cost of housing, feeding, and even transporting these individuals represents a substantial burden on the budget. The nation is extremely likely to see the surpluses generated the last 20-years quickly decelerate and even potentially reach deficit territory due to the energy price decline.

From an economic perspective, the Norges Bank under the watchful eye of Governor Oeystein Olsen has cut rates dramatically in the last year in an effort to keep the pace with the over 40% decline in oil prices. Since 2014, the key rate has fallen by 75 basis points and the Norwegian Krone has largely reflected this drop against peer currencies, providing one of the worst performers amongst advanced economies. From a budgetary perspective, this devaluation is very helpful in keeping the government budget intact because the change in the Krone reflects in many ways the downside in oil prices. However, one thing that Olsen has not been able to prevent is the massive wave of layoffs approaching the industry as companies slash capital expenditures and payrolls. On a one-year basis, the Krone has lost over 26% versus the dollar as accommodative monetary policies diminish potential upside for the local currency.