ANALYSIS-Oil, budget to keep Norway under pressure
09:47 a.m. Aug 25, 1998 Eastern
By Alister Doyle
OSLO, Aug 25 (Reuters) - Low oil prices and wrangling over the 1999 budget will keep Norway's crown under pressure after the central bank effectively floated the currency, analysts said on Tuesday.
Politicians from both wings called for tight and responsible fiscal policies for 1999 after the central bank suspended monetary policy controls on Monday after jacking up interest rates for the seventh time in 1998.
But centrist Prime Minister Kjell Magne Bondevik has just 42 of 165 seats in parliament and faces huge problems forming a budget that will be acceptable to opposition parties while satisfying his own centrist voters.
''The problem is that there is no fiscal policy,'' said John Askildt at Union Bank of Norway.
The crown weakened slightly against the European currency unit (Ecu) and the mark on Tuesday, hitting its lowest levels in six years and 2-1/2 years respectively.
It was at 107.60 points against the inverse Ecu index in mid-afternoon and 4.3625 per mark, compared with 107.43 and 4.3535 late on Monday.
''Volatility will be here for a while,'' said Peter Warren, chief dealer at Finansbanken. ''Money market rates can come down but the central bank won't (cut rates) for a couple of months at least,'' he predicted.
''I think we're near the lows on the crown but there could still be more punishment in the short term. It depends largely on the quality of the budget tightening.''
The currency market is looking for a tighter budget as evidence that the government can control an economy at risk of overheating.
The budget pressure represents something of a reversal of fortunes for a country whose daily production of 3.1 million barrels of oil makes it the world's biggest oil exporter after Saudi Arabia.
Just a year ago, Norway was debating whether to spend its ballooning oil wealth now or to save it for future generations. Norway will still have budget and current account surpluses even with oil prices at 10-year lows, but not the gigantic cushion of wealth it envisaged a few months ago.
''The upside here is higher oil prices and a political tightening of the budget -- an agreement that produces something other than higher taxes,'' Askildt said.
He said many foreigners were expecting to see 4.40 crowns per mark but that he reckoned the crown was a good buy at 4.36.
Bondevik said late on Monday he was willing to review all aspects of planned spending in the 1999 budget, including a controversial plan to hike child support payments to parents of two-year-olds.
He reiterated there should be cuts in spending and higher taxes and duties. The opposition Labour Party welcomed his remarks and said widening awareness of Norway's economic plight might help foster a tighter budget.
''I don't rule out that this could help a quicker solution on the budget in parliament,'' said Hill Marta Solberg, deputy leader of the opposition Labour party, the biggest in parliament with 65 seats.
The opposition Conservative Party, with 23 seats, warned Bondevik against tightening fiscal policy too much, saying the interest rate hikes were already squeezing the economy.
''The private sector has been hard hit by these big rate rises. The way forward now is via cuts in public spending,'' party leader Jan Petersen said.
Petersen ensured Bondevik's coalition a majority for the 1998 budget with backing also from the far-right Progress Party.
Solberg rejected the idea that public spending should take the brunt of cuts.
''If they (the government) want to protect the richest and have big cuts in the public sector they can go to the right-wing parties.''
((Oslo newsroom +47 22 42 50 41, fax +47 22 42 00 18, oslo.newsroom+reuters.com))
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