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UPDATE 1-IMF eyes gradual exit strategy for Norway

Published 11/23/2009, 10:45 AM
Updated 11/23/2009, 10:48 AM

* Says non-oil GDP seen growing 2 pct in 2010

* Calls on govt to reaffirm commitment to oil spending curb

* Seeks return to oil spending rule by 2013

* Sees banking risks in mortgages, shipping sector exposure

(Adds Norway reaction, growth forecast, banking risk views)

By Wojciech Moskwa and Camilla Bergsli

OSLO, Nov 23 (Reuters) - The International Monetary Fund (IMF) said Norway was right to begin tightening monetary policy and should proceed at a gradual pace while withdrawing fiscal stimulus in the medium term as the oil-fuelled economy recovers.

Norway has weathered the global financial crisis "remarkably well", helped by the country's oil wealth, the IMF said in a statement at the end of its consultation mission in Oslo on Monday.

"Given the relatively favourable cyclical position of Norway's economy, Norges Bank appropriately has been one of the first central banks to start raising policy rates again," the IMF said about last month's quarter point rate hike.

"Nonetheless, the tightening should proceed at a gradual pace to avoid undermining the economic recovery."

The IMF said that after declining by more than 1 percent in 2009, Norway's non-oil economy was projected to grow around 2 percent in 2010 as private domestic demand is rekindled.

It urged the government to "reaffirm commitment" to fiscal guidelines limiting the use of Norway's oil windfall, noting the 2010 budget envisaged "small additional stimulus" and makes permanent some temporary spending measures increased this year, which it deemed "unfortunate".

SPENDING LESS WINDFALL

Norway invests all of its oil and gas revenues in an offshore fund, which has grown to more than $450 billion, and aims to spend only 4 percent of the fund's value annually to plug underlying budget holes in normal years.

"Future budget plans should aim to reduce the structural nonoil deficit to the 4 percent target, preferably within the current term of parliament (to late 2013)," the IMF said.

Norway's finance minister was quick to agree the target should be hit by the time a new parliament is due to be elected in four years time.

"My clear goal is to do that within this period," Sigbjoern Johnsen told a news conference.

The IMF said Norway's financial institutions benefited from the "robust domestic economy, a sound prudential framework, low exposure to toxic assets, and stepped-up liquidity support" during the global crisis.

It noted that non-performing loans increased only modestly through the third quarter of 2009 and profitability remained strong. But some have "significant exposure to sectors facing a weak cyclical outlook, notably shipping and ship-building."

It said risks included high household debt levels and rich valuation of real estate markets, adding: "It is particularly worrisome that a significant share of new mortgage loans is extended at very high loan-to-value ratios."

(Editing by Ruth Pitchford) ((wojciech.moskwa@reuters.com; +47 22 93 69 62; Reuters messaging: rm://wojciech.moskwa.reuters.com@reuters.net))

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