Pronounced upturn ahead
Hugo P Matre
Schjødt
Oslo
Hugo P Matre (Bio)
The global financial crisis has dominated the news for a long time. From sub-prime mortgages in 2007, to the downgraded US debt status in 2011, the latest crisis point is unlikely to be the last. However, Norway represents an exception, as the country has suffered a comparatively short and shallow recession with unemployment only rising from 2.5% to 3.5% despite record immigration, primarily from EU countries. Norway has no national debt; indeed it has one of the world's three largest sovereign funds (NKr 3000 billion). Following a year and a half of moderate developments in the Norwegian economy, the government bureau, Statistics Norway, has stated that significantly higher growth is expected. This development is expected to be driven by a broad increase in domestic demand.
The prolonged weaknesses in the U.S. and European economies may be troublesome for Norway and the region is fighting potentially destabilising inflationary pressures. With its economy dependent on oil exports and related industries and services, Norway’s biggest downside risk is the impact of a new possible international downturn, which may put the country’s export industry in risk. The Norwegian currency is very strong, a situation that is expected to continue through 2012.
Nevertheless, investments and industrial activities are bright prospects. The cyclical upturn in the economy will contribute to a further increase in employment and gradually lower unemployment. The inflation-adjusted wage growth is set to increase going forward, but a clear increase in interest rates is also expected.
Several signs
There are several positive signs in the economy. There is a clear growth in household consumption and the housing market is gaining pace. Business investment is also increasing. Statistics Norway expects petroleum investments to increase by 12% in 2011, after a corresponding decline last year. These investments are expected to increase in the longer term, but to a far lesser extent than in 2011. There has been a trend of strong growth in investments in Norwegian mainland industries over the past year, and this development is expected to continue going forward. Significant new discoveries of oil in the North Sea have further increased expectations of very high activity and earnings in the rig and oil-service industries.
Strong transaction activity continues
During 2011 Norwegian companies have so far announced a higher number of public transactions in excess of $1 billion in deal value than the average number of equivalent transactions in the corresponding periods in the years 2008 to 2010. The largest deal volumes have been within telecom, media and IT, but several other sectors are represented, including manufacturing & construction, energy and basic industrial sectors. At the time of writing, the largest public transaction in 2011 is the Solveig Gas Norway AS $3.2 billion acquisition of a 24.1% stake in Gassled, from Statoil. Gassled is an unincorporated joint venture, which owns the majority of the gas transport infrastructure on the Norwegian Continental Shelf. Also, this year ExxonMobil Exploration and Production Norway completed its sale of a 8.036% participating interest in Gassled JV to Njord Gas Infrastructure and Shell sold its 5% interest to Infragas Norge for $730 million. Infragas Norge is an indirect wholly-owned subsidiary of the Public Sector Pension Investment Board, one of Canada’s largest pension investment managers.
During the past year private equity investors have been very active in Norway. In the mid-market, Norwegian-based Herkules Capital and HitechVision are leading investors. Foreign private equity firms active in Norway include KKR, Nordic Capital, EQT, Altor and HgCapital.
Legal framework
As regards Norwegian corporate finance law there have been only minor amendments or revisions recently. The Financial Supervisory Authority of Norway (Finanstilsynet) has taken charge of tasks that were previously the responsibility of the privately owned Oslo Stock Exchange. With respect to regulatory capital, the Ministry of Finance has decided to maintain the 80% per cent Basel I ‘floor’ for banks that calculate capital on the basis of internal models for 2010 and 2011 (based on the EU Capital Requirements Directive). A standing public committee on banking law delivered a proposal for a new consolidated law regarding financial institutions in 2011 (NOU 2011:8). The proposal restructures the regulations for this sector; however, Norway’s obligations to implement the various relevant EU directives limit the potential for action. In all likelihood, new legislation will not be enacted in 2011, but maybe in 2012.
The government has also launched a proposal, which aims to simplify company legislation. The most important suggestion is to lower the minimum share capital for limited liability companies from NKr100,000 to NKr30,000. The government also proposes that financial institutions shall be authoriszed to certify that the company has received share capital contributions in cash – which as of today must be confirmed by the auditor. Further, the possibility for companies to cover formation expenses is widened.
2011 Norway attacks
It is not possible to talk about the developments in Norway during the last year without mentioning the terrorist attacks. The attacks were two sequential attacks against the government and a socialist summer camp in Norway, on July 22 2011. Fortunately, they were the work of one man and the attack has not changed the openness and peace that marks this low-crime country.
Together with stable financial and governmental regulations and the impressive financial health of the country, this confirms Norway as a prime target for foreign investment.