[NOK] Election outcome up in the air

The latest poll today by the Aftenposten newspaper shows the governing 3-party coalition and its Progress party supporters would get 84 of 169 Parliamentary seats, one short of a majority. Meanwhile, Labour's "Red-Green" alliance would have 82 seats, the unaligned Coastal party would have 2 and the Communists 1. This would give these small parties a potentially decisive role, and the Coastal party says it is undecided who it would support. Another poll by the Verdens Gang newspaper showed the governing coalition with a majority of 85. These estimates reflect the Liberal party, which is part of the centre-right coalition, getting more than 4% of the vote, which would entitle it to 7-8 seats instead of one. While momentum seems to have shifted in the govt's favour, the outcome is clearly on a knife edge.
In one way it wouldn't be surprising to see the current govt re-elected, as Norway's economy is doing well. And there are no particular reasons for dissatisfaction other than a public preference for more funding of public services at the expense of the wealthy. But even if the centre-right manages a Parliamentary majority, PM Bondevik of the Christian Democrats may still not be able to keep his job (which he has held for 6-1/2 of the last 8 years). The support of the Progress party he relies on is conditional on a new PM, which may be Ms Erna Solberg of the Conservative party. The other alternative PM is Progress Party leader Karl I Hagen himself. While as influential head of the country's second-largest party after Labour, this may not seem surprising. But by espousing populist -- free spending, anti-immigrant -- policies, Hagen is an anathema to the mainstream parties and thus would be an unlikely choice. We will not seriously consider this 'wildcard' scenario.
By contrast, either a continuation of the centre-right or a regaining of power by Labour's Stoltenberg would enjoy market credibility. After all, Stoltenberg, a trained economist and PM during 2000-2001, can be considered an advocate of 'New Labour'. In fact, it was under his administration that state oil company Statoil was part-privatised. Labour's record of fiscal responsibility is also about the same as the centre-right govt -- although unsurprisingly it favours relatively higher social spending and higher taxes. The net effect of such Labour priorities on the 2006 budget could be slightly expansionary for the economy. EU membership is controversial between all the parties, so little movement in that direction is expected in any case.
Market implications are relatively muted. While NGBs would tend to be most vulnerable to a Labour victory, implications are more ambiguous for NOK. On one hand, currencies tend to benefit from presumably more pro-market conservative governments, but also from the higher expected interest rates associated with the left. In any case, the FX market has evidently become relaxed about the election, after NOK has strengthened recently to 2-year records. In any case, the removal of election uncertainty next week should support our call for EUR/NOK to drop to/below 7.70 by end-month. We also continue to expect NGBs to continue their gradual underperformance.
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