The October elections did not deliver the shock investors were bracing themselves for when anti-government protests took place earlier in the year – easing the risks and endorsing Iceland’s credentials for a credit rating upgrade based on its improving macro-fiscal profile.
Ace-land: Investors could be on to a winner if they play their hand right in the Nordic island
The four-year old anti-establishment Pirate Party secured just 14.5% of the vote at the general election held early in Iceland after the Panama Papers tax-haven scandal implicated the former Progressive Party prime minister Sigmundur Davíð Gunnlaugsson, who was forced to resign.
That hands the party 10 seats in the 63-seat Althingi, seven more than previously, and the same number as the Left-Green Movement it was planning to form a four-party coalition with.
That prospect has been dashed after the potential coalition only secured 27 seats; two short of the total for the incumbent centre-right parties.
The balance of power has now shifted to the Independence Party (IP), which took 29% of the vote and 21 seats, two more than previously. Its leader Bjarni Benediktsson has been given the first opportunity to form a government.
IP’s coalition partner, the Progressive Party, lost more than half its seats due to the scandal, forcing Sigurður Ingi Jóhannsson, the party’s second prime minister in six months, to step down.
This would leave a centre-right government in a minority requiring a larger coalition or a confidence and supply agreement to minimize the risks of the opposition blocking its plans.
One possible partner is Viðreisn, a green-liberal pro-free trade splinter group from IP which would probably demand a referendum on joining the EU in accordance with the popular will for staging one.
A majority is against joining the EU, but with many also angry they are denied the right to say so in a plebiscite.
In any event, a more consensual approach to policymaking will become necessary, and unless the Pirates are left to form a government, heightening the risk of unorthodox policymaking, it seems unlikely to derail Iceland’s improving risk profile.
Myriad factors in favour
The economy is strong, the fiscal finances improving and investors can look forward to the removal of capital controls in a year’s time.
The central bank has indicated it will wait until it has sufficient foreign-exchange reserves as a buffer against any currency shocks, and it has resolved a dispute with US funds.
Eventually, it will put a line under the catastrophe caused by the 2008 banking crisis.
Risk experts agree. Iceland’s total risk score has increased by more than two points to 63.9 out of 100 so far this year, despite the political uncertainty caused by the elections.
A small budget surplus is expected this year, and the current account is already in surplus, lending support to the krona.
Iceland has risen two places in the global risk rankings, climbing back into the second of five categories synonymous with an A- rating:
That puts Moody’s ahead of the pack, with Fitch and S&P lagging on BBB+.
The agencies were slow to react when the banks collapsed in 2008, and would seem to be slow in appreciating the extent to which prospects have now improved, despite the background politics.
GDP increased by 4% in real terms last year, and is expected to grow at a faster pace in 2016. The central bank and IMF are predicting 4.9%.
Inflation might rise as wage demands build due to “full employment”, but is presently low, averaging 1% in recent months.
The prospect of setbacks cannot be ignored, but Iceland is still moving in the right direction.
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.