Icelandic risk continues to ease as political crisis recedes

COPYING AND DISTRIBUTING ARE PROHIBITED WITHOUT PERMISSION OF THE PUBLISHER: CHUNT@EUROMONEY.COM

By:
Jeremy Weltman
Published on:

With a new government installed and favourable economic trends continuing, Iceland’s prospects are undiminished going into 2018.

Katrin-Jakobsdottir-Iceland-R-600
It's a wrap: Katrín Jakobsdóttir is warmly welcomed as the new prime minister
by the populace – and ECR experts

The formation of a new tripartite grand coalition comprising the centre-left Left-Green Movement, the centre-right Independence Party, and centrist Progressive Party has removed the political uncertainty welling in the wake of twice-held parliamentary elections in the space of 13 months.

The new government has a majority of 35 members in the 63-seat parliament, and despite gaining fewer seats than the Independence Party, it is the 41-year-old Left-Green Movement leader Katrín Jakobsdóttir – a popular politician in Iceland – who becomes prime minister.

Her predecessor Bjarni Benediktsson is expected to return to his former role as minister of finance and economic affairs, promising fiscal policy continuity.

Economists and other risk experts had taken the political problems in their stride in the belief scandals surrounding the Independence Party would not greatly affect investor prospects, given recent economic trends, improved regulation and the desire to restore and maintain Iceland’s reputation after the financial crisis a decade ago.

Its country risk score has steadily improved since the calamitous event in 2008 resulted in mass default, huge recession and capital controls weighing on its risk profile in the ensuing years:

ECR_Iceland_deep_freeze-585

Over the past year alone, Iceland has gained three points in the survey, rising slightly higher in Q4 according to early scoring in the latest survey round, due to be published at the beginning of 2018.

All five of its economic indicators were upgraded, along with higher scores for structural factors, debt, capital access and credit ratings in 2017.

On a total score now exceeding 66 points from a maximum 100, the country remains comfortably within the second of five tiered groups, lying 30th in the global rankings of 186 countries.

The rating agencies cottoned on to this upward trend. In July, Fitch upgraded Iceland from BBB+ (positive) to A- (positive), preceded in March with an upgrade by S&P from A- (stable) to A (stable). Moody’s has kept its stable A3 (A- equivalent) unchanged.

Stein Gjerding, chief economist at Arbeidsgiverforeningen Spekter – a Norwegian employers’ organization – questions political stability, but is among several experts who agree the situation has improved, noting the broad-based coalition and the PM’s popularity.

“The new government will follow a pragmatic economic policy – business as usual,” he says. “A broad-based coalition has no other choice.”

Different views

The parties forming the coalition have different views on the need for rising taxes. There had been speculation the government might raise value-added tax on tourism, one of the principal sources of budget revenue and export earnings, but a departure fee seems more likely.

The economy is also forecast to slow down in 2018, but from an unsustainable to a more manageable pace, given the country’s reputation for volatile swings in demand often spurred by investment patterns.

Forecasts released in November by the central bank, statistical office, European Commission and OECD paint a broadly similar picture with real GDP growth slowing to around 3% to 4% next year, after slightly exceeding 7% in 2016.

Inflation is forecast to rise to 2.5%, or higher in 2018, underpinned by wage growth and rising import costs.

However, the fiscal budget and current account are expected to remain in surplus, supporting the currency and enabling the debt burden to follow a declining trend. Exceeding 70% of GDP in 2015, the general government debt burden has shrunk to 65% this year and is expected to edge closer to 60% by 2019.

Stefán Gudjónsson, head of research at the state-owned Arion Bank, expects more political stability due to the coalition’s majority, Jakobsdóttir’s popularity and the desire to avoid the most politically contentious issues dividing the parties.

“Unsurprisingly, the coalition agreement is rather uneventful and it is full of compromises,” he says. “I don’t see that, in the short run at least, major changes will be made in terms of fiscal or currency policy, and that the government will continue on its path of lowering debt, albeit not as firmly as the outgoing government.”

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