Mighty oil Vikings are in trouble (again). ‘Meltdown provides dramatic changes, Winners, losers, risks and opportunities. Ways to benefit of their cheaper currency
Norway has a currency that speculators and cash hungry big investors must love. It is somewhat predictable, with potential to high volatility (at least with highs and lows) “rational” patterns. Norwegian Crown (Krone) certainly does not lack drama! Will Norway remain among wealthiest economies, by Gross Domestic Product (GDP) per-capita and capital stock after financial Sharks and rogue traders have taken theirs?
At Fyggex our main focus is in the currencies themselves, not so much politics or generic society, but the case of Norway is truly fascinating and therefore we cover it here from many angles. Currently we are witnessing the major meltdown. Fyggex investigated the historical perspective of the situation and tried to open up here by asking a simple question.. what is going on?
Follow the money (backbone of Norway)
Let’s start with the money. Norwegian news site e24.no reminded that the country actually possesses the wealthiest national pension fund of the entire world, being among the very biggest global investors in this planet.
The whole idea of this fund system was to balance international shocks and Norwegians have been saving and investing for decades to face exactly this kind of disruptions to control inflation and currency price to be less oil dependent. In 2015 Two students (Iversen & Vandvik) were particularly interested in this matter, and did their extensively grounded and covered Master’s thesis to the Copenhagen Business school about the oil impact. They found out that during their 16-year-old observation period each bump in global oil price had a spillover effect to the rest of the economy and the Krone currency value.
This so-called “Oil fund” has approximately 10 0000 billions (milliard) Krones. Hence, the recent headlines from Swedish daily Dagens nyheter (29th March 2020) that they have lost 1330 Billions of value did not seem to matter, as their savings horizon is 30 years. Hard to understand for common pension taker. What is wrong now? Is it not helping?
Norway’s historical troubles
Before jumping to the current radical currency situation (if in hurry, please scroll down), let’s have a look into the history and past developments with Norwegian currency the Krone. Historically some similar crisis to that of today had also happened earlier. Albeit less dramatically as can be seen from the picture here. More the price falls, the more expensive the imported food, and any consumer goods or industrial components from abroad become.
Picture 1: Historical price fluctuation if norwegian currency. Source: e24.no
Back in 1998 BBC reported back then that already then (1998), the Norwegian currency was targeted by trader speculators. At that time Norway used to be the second largest oil exporter after Saudi Arabia. As a consequence, each oil price drop impacted the currency valuation negatively as well. The traditional response from the central bank was to raise interest rates to protect the value of money. Hence, borrowing became more expensive and caused trouble for consumers and companies alike.
The advantages of the low currency rate were that from Salmon to advanced scientific instruments to commodities such as natural gas and aluminium, all such products became cheaper for foreign companies to buy and increased Norway’s exports.
Each time krone lost value, the businesses which had sales in foreign currencies enjoyed higher profitability, demand for more workers and lowering risk of closures. Negative sides were of course the Oil sector specific unemployment and imported products and goods inflation, that made Norwegians poor unable to travel and enjoy foreign currency priced items.
What goes down, comes up. From better to worse?
Fast forward to year 2013, Norwegian context had transformed to face opposite kind of problems. CNBC highlighted that the expensive currency made Norwegian less competitive in the international market, while the growing oil sector made everything worse since their salary increases had a halo effect to the remaining society to follow the same route, again cutting away from business profitability.
This was not a trivial issue at all, since other than oil sector related industries were forced to mass layoffs. Unemployment rose to its highest level in eight years, even though other countries could still envy the low 3.5 percent jobless rate of the population.
Craziness of the matter was that year earlier the Norwegian government had worried about the unemployment being too low, thus heating up the housing market. People who were employed had enjoyed increasing buying power since the wages had skyrocketed up 60% from the levels of year 2000. That was 6 times more than in Germany and Sweden during the same period.
Oil sector did well, but all businesses could not pay such hikes, one example was the Retail sector which saw a tsunami of businesses closing doors. And they were not the only ones, as the Norwegian currency kept on rising in value, the whole country faced a 31,9 % increase in bankruptcies. Another suffering sector was manufacturing, when Norwegian EU area exports decreased 2 percent, theirs fell 13 percent! If the competitor country could do the same products with cheaper currency, Norway just could not compete.
What started in 2019 and why it all exploded early 2020?
Gradually from April 2019, Norwegian Krone got smaller hits up and down with a regression trend towards continuous record lows. In October reaching 10.31 to the euro, that for instance gained higher value just in a few days. For traders, Norwegian currency was a sweet spot as they could make money with each swing.
Picture 2. Green = EURO, Red = US Dollar. Source: Norways central bank via www.nrk.no
If the traditional approach was to raise the central bank interest rate to protect falling currency, this time it was different. March 2020 when the Corona crisis was advancing with full speed and Russian and Saudi-Arabian dispute about oil prices escalated, several Norwegian banks were begging the central bank to keep interest rates low.
This devastated closest business companions too, as Norwegian currency impact hit neighbors fast. Crisis had accelerated to the point where rich Norway with their expensive Norwegian Krone became cheaper than the neighboring country Swedish Krona. Norwegian Krone reached its lowest ever level against the Euro too. For the Scandinavian companies trading with Norwegians this has been an Armageddon.
Denmark has Norway as their very largest export destination. The fall of Norwegian krone together with the global Corona crisis puts Danes down too. And in Sweden, border consumption was 80-90 % thanks to Norwegians doing their weekend grocery shopping “en masse “over the border. Not so anymore, causing economic catastrophe in western Norway facing Sweden.
The Krone mystery and counterstrike of the Norwegian Central Bank
Norwegian Krone is now a currency that almost nobody wants to have as it keeps on losing value every day.
According to Norwegian news, the analysts are puzzled and call this as the “Krone mystery” when the basic economic fundamentals were solid even during the 2019, which saw frequent Krone value ups and downs.
Once again, as in the past history we saw above, other than oil related export industries enjoy peak in demand and competitiveness. Svenska dagbladet daily (26h March 2020) wrote that Krone has also reached the lowest ever rate against the US Dollar.
Conservatism of 2019 policies with the Norwegian Central Bank are gone, as they buy Krones with 12 billion. To give you the perspective, it has not done anything as radical for 20 years. To balance the situation, the Norwegian Central Bank is joining the fight and proving a counter strike. Question is; does it matter anymore as the whole world economy is on fire?
CONCLUSION: what to avoid, what to do?
Norwegian Crown (Krone) as a currency is not for the people looking for safe stability. Norwegian currency is definitely a high-risk currency. If you plan to invest in assets or the currency itself, in the current situation you can get more with the same money. A Buyer’s market in many areas.
Yet, the situation carries its own risks as well and we do not give any recommendation to act before you have conducted your proper research. Other than oil, the export industry may flourish and can be interesting to investigate more in detail. To acquire any oil sector products, services or assets requires an appetite for risk to lose it all and very good nerves as the prices are likely to remain low as long as the Corona crisis goes on.
When the value increases, the nation ends up in trouble, and the value decreases the “same but different” situation repeats. Naturally in both scenarios certain sectors of the society get hurt more than others. If you understand the dynamics of the crisis, you can adjust accordingly.
Historical lows and highs of Norwegian economy may give you some guidance on where to look. It is such a ride at the moment that to be a central bank governor, a fund manager or an oil business executive or worker is now truly a sweaty place where most would not prefer to be.
Disclaimer: Fyggex, does not give any guidance, advice or recommendations to neither invest or not in any available cryptocurrency directly or indirectly via any trading platform, exchange or provider. Our sole purpose is to make you aware of the related real or potential risks and opportunities so that you can make your own research prior to any financial decisions you may want to take. Past performance and position are not a guarantee of risk-free future returns.
Copenhagen Business school 2015 Masters thesis. Iversen & Vanvik https://research-api.cbs.dk/ws/portalfiles/portal/58429975/S_ren_IversenMartine_Vanvik.pdf
SVT 9th March 2020
Dagens nyheter 29th March 2020
Svenska dagbladet 26h March 2020
Cover image: Alexvongutthenbachlindau