Harder before it gets easier

Norway responds to the impact of the coronavirus on the economy

Photo: Terje Pedersen / NTB scanpix Since the start of the year, the Norwegian krone has lost 30% of its value against the U.S. dollar.

RASMUS FALCK
Oslo

This is extreme. The Norwegian krone has dropped 30% since the New Year. The krone follows the oil prices. The price war over oil between Saudi Arabia and Russia has led to a steep fall. In uncertain and troubled times, the major players leave the small currencies and prefer the big, solid ones like the U.S. dollar.

This means that imports get more expensive. Norway has a very open economy with 30% to 40% of consumer goods imported. Everything from food to clothing, electronics, and automobiles will be more expensive. Some industries like fishing will make more profits. Tourists visiting Norway will also benefit.

Oljefondet (the Oil Fund), our international pension fund and the world’s largest sovereign wealth fund, invests abroad. Shares are down, but bonds and real estate are up. Thus, the NOK value of the fund has increased even though the krone is down.

The morning of March 20, Norges Bank announced another extraordinary rate cut by 0.75% to 0.25%. The previous week had seen a drop in the rate from 1.5% to 1.0%. Since the first policy rate last cut, the situation in the Norwegian economy has continued to worsen. According to the bank, the measures to contain the spread of coronavirus had led to a number of businesses having to close or reduce their activities. Many workers are being laid off, and unemployment is showing a marked increase. The negative impact on the world economy is intensifying, as oil prices have continued to fall. Financial market stress has increased, and higher credit and money market premiums make funding more expensive for Norwegian enterprises, along with the sharp depreciation of the krone.

Norway, however, has good social safety net, solid banks, and room for economic policy maneuvers. Therefore, the country is well positioned to face the prevailing crisis. Lower borrowing costs for existing and new loans can make it easier for Norwegian enterprises to weather a difficult period. This can also help households facing reduced income. When the containment measures are scaled back and the situation returns to normal, low interest rates can support a faster rebound of activity. Norges Bank says it will continually consider measures to ensure that the policy rate passes through to money market rates. They do not rule out that the policy rate may be reduced further. According to newspapers on March 20, Norges Bank is considering buying kroner.

The Norwegian government has also introduced stimulus measures. To support the airlines, they have introduced state loan guarantees for Norwegian and SAS as well as funding for air routes to the districts (the rural areas in Norway), which mainly consist of Widerøe’s flights, a stimulus of NOK 6 billion, plus NOK 40 million per month.

Other governmental measures include: a 4% reduction in payroll taxes for two months to the tune of NOK 10 billion; a compensation scheme for canceled sport and culture events worth NOK 1 billion; a halt on required payments to kindergarten for parents, amounting to about NOK 1 billion per month; state loan guarantees for new bank loans to small and medium enterprises worth NOK 100 billion.

Other measures include deferments of various taxes, suspension of airport fees, and increased health-care funding to municipalities. For laid-off workers, the government will offer 100% wage replacement for the first 20 days, up to NOK 600,000. The government is also restarting the Government Bond Fund to directly purchase corporate bonds.

On Sunday, March 15, King Harald V said in a television address to the Norwegian people: “Norway is known as a nation based on trust. Today there is a special need to trust each other. That each of us take responsibility to hamper infection and that our authorities make good and wise decisions. … We are in this together. Together we will manage to get through what’s ahead of us.”

This article originally appeared in the April 3, 2020, issue of The Norwegian American. To subscribe, visit SUBSCRIBE or call us at (206) 784-4617.