Iceland’s improving risk score points to A-grade

By:
Jeremy Weltman
Published on:

The world’s northernmost borrower is beginning to look like a decent credit again, thanks to stronger financial safeguards and a plan to remove capital controls cementing a recovery now delivering impressive macro-fundamentals.

Iceland krona-R-600


Scoring more than 60 risk points from a maximum 100 in Euromoney’s country risk survey of economists and other experts, Iceland has rebounded 10 places in the global rankings since 2010, to 37th.

It means the borrower is closing in on tier-two status – the second of five Euromoney risk categories into which all 186 global credits are arranged, and one that is commensurate with an A-grade.

Iceland is rated a stable BBB+ credit by Fitch, but lower on Baa2 by Moody’s and is similarly ranked BBB by Standard & Poor’s,which responded to news of the capital controls removal plan by upgrading its rating.

Euromoney’s survey data suggest Iceland should soon be A-rated. It is only two places and less than four points below tier two and moreover sandwiched between two A-grades, Malaysia and China:

 

Brighter outlook

The IMF’s latest programme review signals booming tourism, investment and robust private consumption underpinning 4.1% real-terms GDP growth this year after the 1.9% expansion in 2014. The Central Bank of Iceland puts it even higher at 4.6%.

Aided by the stability of the krona, inflation is presently below 2%, the government’s budget is close to balance and the current account has reverted from deficit to surplus – highlighting how Iceland’s economy is now more in balance despite the legacy of mortgage debt.

Its economic risks are more acute than those of Nordic neighbours. High catch-up wage demands and uncertainty over the currency, inflation, renewed fiscal deterioration and balance-of-payments effects of relinquishing capital controls are still causing concern.

The central bank has recently hiked its policy interest rate by 50 basis points in response.

Yet, unlike Finland and Norway, which are weakening, experts have upgraded scores for Iceland’s bank stability, monetary policy/currency stability and government finances.

The centre-right coalition government that was formed after the elections in 2013 remains cohesive with a mandate until 2017, and as such political risk indicators are now mostly favourable, scoring around 7.0 or even 8.0 or more points out of 10 in Euromoney’s survey.

The only exception is the risk of non-payment/non-repatriation, since the plan to rescind capital controls involves bondholders leaving Iceland by purchasing foreign exchange at a premium or swapping existing bonds for investments in a 20-year krona or euro-denominated maturity.

The failure to accept either of these two options would lock-in their investments in non-interest-bearing accounts for an indefinite period.

This might be construed as "unnecessarily harsh, raising the risk premium required by foreign investors and acting as a deterrent for potential future investors", argues Iceland’s Arion Bank, which contributes to Euromoney’s risk survey.

There is, nevertheless, confidence building in the plan, which should avoid endless legal redress, shore up the krona and minimize any impact on the real economy.

Besides, as Arion Bank adds: "With continuing inflow of currency from the booming tourism sector, [it] should allow the central bank to build up strong reserves over the coming quarters – a much-needed development in the capital-account liberalization process."

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.