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SOVEREIGN AND SUPRANATIONAL ISSUER IN-DEPTH 14 August 2023 Government of Iceland - A2 positive Annual credit analysis RATINGS Iceland Gov.
Bond Rating Country Ceiling Foreign Currency Local Currency A2/POS A2/POS Aa2 Aa1 TABLE OF CONTENTS OVERVIEW AND OUTLOOK CREDIT PROFILE Economic strength score: baa1 Institutions and governance strength score: aa2 Fiscal strength score: a2 Susceptibility to event risk score: a ESG considerations Scorecard-indicated outcome Comparatives DATA, CHARTS AND REFERENCES 1 2 2 7 11 15 19 21 22 23 Contacts +44.20.7772.1383 Kathrin Muehlbronner Senior Vice President kathrin.muehlbronner@moodys.com Lenaic Couderc Associate Analyst lenaic.couderc@moodys.com +44.20.7772.1799 Dietmar Hornung Associate Managing Director dietmar.hornung@moodys.com +49.69.70730.790 Marie Diron MD-Global Sovereign Risk marie.diron@moodys.com +44.20.7772.1968 OVERVIEW AND OUTLOOK The credit profile of Iceland reflects the economy's flexibility, wealth, competitiveness and favourable demographics, all of which support its long-term growth prospects.
The economy has demonstrated its resilience to the twin shocks of the pandemic and the war in Ukraine (Ca stable), rebounding strongly on an effective policy response and a recovery in tourism.

The country has significantly strengthened its fiscal framework as well as banking supervision and regulation, which, together with a track record of effective macroeconomic management since 2008, demonstrates the strength of its institutions.
Iceland's main credit weaknesses are the economy's small size and concentration in a limited number of sectors, which increase its vulnerability to sector-specific shocks.

Despite the ongoing diversification efforts, Iceland remains particularly vulnerable to shocks to its tourism sector, which accounted for a third of exports and 9% of domestic employment in 2022.
Moreover, despite the recent and expected fiscal improvements, the Icelandic government’s debt and affordability metrics compare unfavourably with those of peers.

The positive outlook reflects the government’s rapid progress in reducing its budget deficit and bringing the public debt on a downward trajectory, which increases the probability of a faster-than-expected rebuilding of fiscal buffers.
Also, strong growth prospects of key economic sectors and the government's ongoing efforts to further diversify the economic base may reduce the impact of potential shocks.

We could upgrade the rating if Iceland continues to reduce its budget deficit and public debt ratio at the expected pace.

An early consensual resolution of the HF Fund (A2 positive) guarantee would help accelerate the decline in debt and would also be credit positive.
Progress in curbing inflation and re-anchoring inflation expectations while ensuring continued robust economic growth would support our assessment of Iceland’s strong institutions.

Further evidence that the government's economic diversification efforts are helping reduce growth volatility would also support a higher rating.

We would likely change the outlook back to stable if our expectations for rebuilding of fiscal and economic buffers do not materialise.
Downward rating pressure could arise if the authorities deviated significantly from their current medium-term fiscal consolidation plans, resulting in a substantial increase in the public debt ratio.

This credit analysis elaborates on Iceland’s credit profile in terms of economic strength, institutions and governance strength, fiscal strength and susceptibility to event risk, which are the four main analytic factors in our Sovereigns Rating Methodology.
MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL CREDIT PROFILE Our determination of a sovereign’s government bond rating is based on the consideration of four rating factors: Economic strength, institutions and governance strength, fiscal strength and susceptibility to event risk.

When a direct and imminent threat becomes a constraint, that can only lower the scorecard-indicated outcome.

For more information, please see our Sovereigns Rating Methodology.
Economic strength score: baa1 Factor 1: Overall score Scale a a a 1 a a 2 a a 3 a a 1 a 2 a 3 a + Factor 1: Sub-scores Final - Iceland baa1 Score for Iceland Median of countries with A2 rating GROWTH DYNAMICS weight 25% weight 10% SCALE OF THE ECONOMY weight 30% NATIONAL INCOME weight 35% Average real GDP (% change) MAD Volatility in real GDP growth (ppts) Nominal GDP ($ bn) GDP per capita (PPP, Intl$) aaa aa a baa ba b caa ca Economic strength evaluates the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as in structural factors that point to a country’s long-term economic robustness and shock-absorption capacity.
Adjustments to the economic strength factor score most often reflect our judgement regarding the economy's flexibility, diversification, productivity and labour supply.

Note: the initial factor score is shown in light blue in the scale above.

In case the initial and final factor scores are the same, only the final score will appear in the table above.
We assess Iceland's economic strength at “baa1”, which balances the country's small size and volatile economic growth with its very high wealth levels and strong competitiveness in its core industries.

Other sovereigns with the same assessment of economic strength include Lithuania (A2 stable) and Chile (A2 stable).
Exhibit 1 Peer comparison table factor 1: Economic strength Final score Initial score Nominal GDP ($ billion) GDP per capita (PPP, Intl$) Average real GDP (% change) MAD Volatility in real GDP growth (ppts) Iceland A2/POS baa1 baa1 27.8 66,512.4 2.4 1.2 baa1 Median 76.5 39,490.0 2.7 1.2 Chile Lithuania Malta Slovakia A2/STA baa1 a3 300.7 29,083.1 2.1 0.9 A2/STA baa1 a3 70.2 47,107.3 2.7 1.1 A2/STA baa1 baa1 17.7 58,072.1 4.1 2.1 A2/NEG baa1 baa1 115.3 39,490.0 2.0 1.2 Czech Republic Aa3/NEG Baa2/STA Kazakhstan a3 a2 290.9 49,421.0 1.5 0.6 baa2 a2 223.6 30,543.9 3.4 0.6 Sources: National authorities, IMF and Moody's Investors Service 2 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Iceland's wealth and competitiveness mitigate the economy's small size and concentration With nominal GDP of $28 billion in 2022, Iceland's economy is one of the smallest among the sovereigns we rate.
Limited diversification of exports, combined with relatively high trade openness, leads to high volatility in growth and vulnerability to sector- specific and external shocks.

Exports and imports account for over 90% of GDP, and three quarters of the country's export revenue comes from three sectors: tourism (26% of total export revenue), marine products (20% of total export revenue) and aluminium (23% of total export revenue) (see Exhibit 2).
For example, in 2020, the economy contracted more than 7% as a result of the pandemic- induced shock to the tourism industry, although the authorities' effective policy response (including a rapid vaccination rollout) helped the economy recover swiftly.
These challenges are mitigated by very high income levels and wealth buffers, which are also comparatively evenly distributed.1 GDP per-capita on a purchasing power parity basis was $66,512 in 2022, much higher than the median for A-rated sovereigns of $47,107 and the 18th highest among our rated sovereigns.

In addition, household assets in the form of pensions amount to around 180% of GDP, much higher than that of most other OECD countries (see Exhibit 3).
Households also reduced leverage substantially after the banking crisis in 2008, with debt at around 79% of GDP as of 2022.

Together with high income levels, household assets are an important shock absorber, as demonstrated during the banking crisis in 2008 and again during the pandemic when the government allowed temporary withdrawals from third-pillar pension savings.
Exhibit 2 Three sectors dominate Iceland's exports Exports of goods and services by sector (2022) Exhibit 3 Households have significant wealth buffers Pension assets in 2021 (as a percentage of GDP) Other 21% Marine products 20% Other manufacturing products 10% Tourism 26% Aluminium 23% 250 200 150 100 50 0 Sources: Statistics Iceland and Moody's Investors Service Sources: OECD and Moody's Investors Service Iceland's economy is also highly competitive, as demonstrated by its 16th rank in the World Competitiveness Index (see Exhibit 4).
The country fares particularly well compared with peers on institutions, technological readiness, educational environment and labour market efficiency.

Iceland’s demographic profile is more favourable than that of many advanced economies because of long working lives, higher fertility rates, high participation of women in the labour force and high net migration.
We project Iceland’s old-age dependency ratio — defined as the ratio of population aged 65+ years divided by the population aged 20-64 years — will remain lower than all EU (Aaa stable) sovereigns over the next two decades (see Exhibit 5).2 3 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Exhibit 4 Despite its small size, Iceland is highly competitive compared with peers World Competitiveness Index (rank) Exhibit 5 Iceland is less exposed to population ageing than peers Old-age dependency ratio (65+/20-64) 45 40 35 30 25 20 15 10 5 0 2022 2018 Iceland Sweden US Czech Republic Ireland 40 38 36 34 32 30 28 26 24 22 20 Sources: United Nations and Moody's Investors Service Sources: IMD and Moody's Investors Service Stronger-than-expected resilience to shocks and solid growth potential The Icelandic economy has dealt very well with the two major external shocks — the pandemic and the Russia-Ukraine war — in the past few years, which reflects its stronger-than-expected resilience.
Real GDP growth averaged 5.4% over 2021-22, supported by very strong growth in exports, investment and private consumption.

Iceland’s energy independence shielded it from the direct economic impact of Russia’s invasion of Ukraine, although inflation accelerated on house prices.

We expect the economy to continue to grow at a robust rate of around 4% in 2023, supported by stable growth in tourism demand.
The tourism sector is on track for its strongest year ever, with a projection of up to 2.4 million visitors compared with the previous peak of 2.3 million in 2018, despite the economic slowdown in key markets.

Tourist arrivals and foreign credit card spending in real terms have exceeded their pre-pandemic levels in the first half of 2023.

In contrast, fish and aluminium exports will contribute less to growth in 2023, although revenue will be strong because of high prices.
We expect private consumption to slow significantly over the course of 2023, following strong growth in the last two years driven by high wage increases and policy support measures.

The government is tightening both monetary and fiscal policies in an effort to curb inflation.

A tighter policy should also help reduce import demand, which has been very high.

However, still-solid nominal wage growth and a strong labour market will provide a buffer to consumption.
Labour demand remains high and vacancies are near historical highs.

In 2022, labour market needs were met by a substantial increase in foreign workers.

The population grew by 3.1%, marking the largest increase on record, and will expand significantly again in 2023 to meet still-strong labour demand, in particular in the tourism sector.

For 2024, we expect growth to return closer to potential, which we estimate at around 2.5%, reflecting tighter monetary and fiscal policies.
The Central Bank of Iceland (CBI) has raised its key policy rate by a cumulative 800 basis points (bps) since May 2021 with further tightening likely in the coming months (see more detailed discussion in the Institutions and Governance section).
4 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Exhibit 6 Tourism activity exceeds pre-pandemic levels Tourist arrivals (in thousands) Exhibit 7 Higher labour demand has been met by increased immigration Population (year-on-year change in percentage terms) 2019 2020 2021 2022 2023 Net migration Natural growth Population growth 350 300 250 200 150 100 50 0 4.0% 3.5% 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% Sources: Statistics Iceland and Moody's Investors Service Sources: Statistics Iceland and Moody's Investors Service Economic diversification could reduce the impact of future external shocks The Icelandic authorities have been pursuing efforts to further diversify the economy for years, in particular by offering generous tax credits for businesses' R&D spending, which is among the highest in OECD countries (see Exhibit 8).
The first results of these efforts are becoming visible, specifically in the biotechnology, aquaculture, and information and communications technology sectors.

Iceland has a tradition in the first two, with exports growing vigorously in both sectors over the past decade (see Exhibit 9).

It is also exploring new climate mitigation technologies, with Icelandic company Carbfix operating the world’s largest carbon capture plant.
Exhibit 8 The government is supporting diversification through R&D incentives Government R&D spending as % of GDP (2021) Direct government funding Tax incentive support 0.45 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 Exhibit 9 Some sectors offer diversification opportunities Four-quarter rolling exports (ISK billion) Pharmaceuticals ICT Aquaculture 120 100 80 60 40 20 0 d n a e c I l a i r t s u A e c n a r F 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: Statistics Iceland and Moody's Investors Service Sources: OECD and Moody's Investors Service Icelandic and Norwegian companies are also using Iceland's already very strong competitive position to expand into farmed fish, which will help counteract variations in fishing quotas that can affect GDP growth.
The aquaculture sector, although still small, has continued to grow in recent years, and significant investment is underway to increase the productive capacity.

According to a recent study,3 the sector could grow tenfold over the next decade if the current expansion plans are successfully implemented, and contribute up to 10% of exports (from 3% in 2022).
5 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL The IMF and the OECD point to other areas that could help Iceland further raise its growth potential, in particular by further reducing regulatory barriers, improving the business climate and ensuring that Iceland reaps the full benefits of high immigration.
The OECD estimates that reducing administrative burdens would raise per capita GDP by 1 percentage point (pp) over a 10-year period.
6 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Institutions and governance strength score: aa2 Factor 2: Overall score Scale + Final Factor 2: Sub-scores - Iceland aa2 Score for Iceland Median of countries with A2 rating QUALITY OF INSTITUTIONS POLICY EFFECTIVENESS weight 20% weight 20% weight 30% weight 30% Quality of Legislative and Executive Institutions Strength of Civil Society and the Judiciary Fiscal Policy Effectiveness Monetary Policy Effectiveness aaa aa a baa ba b caa ca Institutions and governance strength evaluates whether the country’s institutional features are conducive to supporting a country’s ability and willingness to repay its debt.
A related aspect is the government's capacity to conduct sound economic policies that foster economic growth and prosperity.

Institutions and governance strength is most often adjusted for the track record of default, which can only lower the final score.

Note: the initial factor score is shown in light blue in the scale above.

In case the initial and final factor scores are the same, only the final score will appear in the table above.
Our assessment of Iceland's institutions and governance strength at “aa2” is supported by the country's strong scores in the Worldwide Governance Indicators (WGIs), and a track record of effective macroeconomic management to restore economic and financial stability after the banking crisis.
The reforms introduced after the crisis have strengthened the macro-policy mix, and include enhanced financial regulation and supervision in line with global best practices, abolition of all capital flow restrictions and an improved fiscal framework.

Other sovereigns with the same assessment of institutional strength include Austria (Aa1 stable) and Ireland (Aa3 stable).
Exhibit 10 Peer comparison table factor 2: Institutions and governance strength Final score Initial score Quality of legislative & executive institutions Strength of civil society & judiciary Fiscal policy effectiveness Monetary & macro policy effectiveness Fiscal balance/GDP (3-year average) Average inflation (% change) Volatility of inflation (ppts) Iceland aa2 Median Austria France Ireland A2/POS aa2 aa2 aa aaa aa a -2.6 4.4 2.0 Aa1/STA aa2 aa2 aa aaa aa aa -2.5 3.5 2.3 Aa2/STA aa2 aa2 aaa aaa a aa -4.8 2.5 1.7 Aa3/STA aa2 aa2 aa aaa aa aa 1.6 2.7 2.5 aa aaa aa aa -2.6 2.9 2.1 Taiwan, China Aa3/STA aa2 aa2 aa aa aa aa -2.0 1.3 1.0 Germany Chile Aaa/STA aa1 aa1 aaa aaa aaa aa -2.3 3.1 2.5 A2/STA aa3 aa3 aa a a aa -0.7 4.4 2.9 Sources: National authorities, IMF and Moody's Investors Service 7 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Robust survey scores demonstrate strength of the institutions Iceland ranks highly compared with A-rated peers on the WGIs, supporting our strong assessment of the country's institutions.
It ranks in the 88th percentile of the WGI measure of government effectiveness and regulatory quality, reflecting its highly professional and capable public administration, as well as a transparent and predictable legislative framework, underpinning our “aa” assessment for the quality of legislative and executive institutions.

However, key economic data series can be subject to large revisions.
Iceland's rankings in the 93rd percentile for control of corruption and 94th percentile for rule of law reflect limited instances of corruption and the fact that its society acts as an effective check on the exercise of government power, supporting our “aaa” assessment for the strength of the civil society and the judiciary.
Iceland also scores very strongly on political stability given its long tradition of broad cooperation and consensus on economic matters between the government and employer and employee associations, which supports policy effectiveness.
Exhibit 11 Iceland's governance indicators rank above A-rated peers Percentile rank among our rated sovereigns (2021) Iceland Denmark Norway Median - A Regulatory Quality Political Stability 100 80 60 40 20 0 Government Effectiveness Voice and Accountability Rule of Law Control of Corruption Sources: Worldwide Governance Indicators and Moody's Investors Service Following the collapse of the banking system in 2008, the authorities have made significant progress in bringing the economy, the financial system and public finances back onto a sustainable path.
In conjunction with a three-year IMF Stand-By Arrangement and post-monitoring programmes, the authorities introduced a number of reforms, such as revised fiscal and monetary policy frameworks, a flexible exchange rate, and significant improvements to banking system supervision and regulation.
In 2020, the central bank and the Financial Supervisory Authority were merged, with the aim to achieve greater efficiency, operational independence and powers in financial oversight and, in June 2021, all restrictions on the capital account were lifted.
The authorities have expanded the central bank’s tool kit to limit the risks to financial stability from excessive flows, including transparent and clearly communicated foreign-currency interventions to smooth excessive krona volatility because of the small size of the foreign-currency market.

Foreign-currency reserves are very large at around 18% of GDP in mid-2023 and in excess of the IMF's various reserve adequacy metrics.
Monetary policy framework has become more credible The central bank has gained significant credibility following a major revision of the monetary policy framework and its governance and decision-making structure, mostly implemented by 2012.

Iceland’s inflation performance has significantly strengthened compared with that before the banking crisis, when the CBI rarely managed to meet its inflation target.
However, as a small currency area, Iceland remains more exposed to inflationary shocks, which can sometimes impair monetary policy effectiveness.

As a result, we score Iceland's monetary and macroeconomic policy effectiveness slightly weaker than highly rated peers at “a”.
8 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL While the war in Ukraine and resulting energy price increases did not directly affect Iceland, consumer price inflation rose rapidly over the course of 2021 on the back of surging house prices after the pandemic.
Since hitting a peak of 10.2% in February 2023, inflation started to slow thereafter; as of July 2023, consumer price inflation was 7.6%, arrested by aggressive monetary tightening.

The central bank has hiked its key policy rate by a cumulative 800 bps since May 2021 to currently 8.75%, and it maintains a tightening bias.
The Financial Stability Committee also tightened macroprudential measures, including lowering the maximum loan-to-value (LTV) ratio on household mortgages to 80% from 85% and to 85% from 90% for first-time buyers, and capping the debt-service-to-income ratio at 35%, with a higher ratio of 40% for first-time buyers.

The countercyclical capital buffer was raised to 2% in September 2022, and will be raised further to 2.5% in March 2024.
In response to these measures, house price growth has moderated from its peak since the beginning of 2023 and lending to households has also started to lose steam, which indicates cooling demand for housing (see Exhibit 13).

Risks of a disorderly correction are limited because of strong housing market fundamentals, including high population growth and supply shortages.
Exhibit 12 Headline inflation has started to cool, although some components are experiencing higher inflation Consumer price index (percentage change) and contributions (pps) Exhibit 13 Monetary policy tightening is starting to cool the housing market House price index relative to macro fundamentals 20 15 10 5 0 -5 Housing Services Imported inflation Policy rate Other goods 250 200 150 100 50 0 Nominal house price growth (RHS) Relative to the consumer price index Relative to the wage index Relative to the building cost index 50% 40% 30% 20% 10% 0% -10% -20% 8 0 - n a J 8 0 - g u A 9 0 - r a M 9 0 - t c O 0 1 - y a M 0 1 - c e D 1 1 - l u J 2 1 - b e F 2 1 - p e S 3 1 - r p A 3 1 - v o N 4 1 - n u J 5 1 - n a J 5 1 - g u A 6 1 - r a M 6 1 - t c O 7 1 - y a M 7 1 - c e D 8 1 - l u J 9 1 - b e F 9 1 - p e S 0 2 - r p A 0 2 - v o N 1 2 - n u J 2 2 - n a J 2 2 - g u A 3 2 - r a M 3 0 - n a J 3 0 - v o N 4 0 - p e S 5 0 - l u J 6 0 - y a M 7 0 - r a M 8 0 - n a J 8 0 - v o N 9 0 - p e S 0 1 - l u J 1 1 - y a M 2 1 - r a M 3 1 - n a J 3 1 - v o N 4 1 - p e S 5 1 - l u J 6 1 - y a M 7 1 - r a M 8 1 - n a J 8 1 - v o N 9 1 - p e S 0 2 - l u J 1 2 - y a M 2 2 - r a M 3 2 - n a J Sources: Central Bank of Iceland and Moody's Investors Service Sources: Central Bank of Iceland and Moody's Investors Service We expect further interest rate hikes in the coming months as inflation expectations have recently risen.
Another reason for the continued tightening bias is the risk of a wage-price spiral.

In 2022, social partners agreed on an interim one-year wage agreement given the then-high level of uncertainty.

Upside surprises to inflation during the year could lead to higher wage demands in the next round of collective bargaining, which will start this autumn.
Strong (real) wage increases in the past have raised concerns over declining price competitiveness and an increasing misalignment between wages and productivity growth (see Exhibit 14).

We generally consider the last three-year wage agreement from 2019 to have helped support private consumption during the pandemic but also to have contributed to rising inflation.
The agreement included an innovative GDP bonus in an effort to link wage increases to per capita GDP growth, but it was poorly designed and resulted in a payout in 2022 even though GDP per capita was still below pre-pandemic levels.

Both the OECD and the IMF recommend linking future wage increases more directly to productivity growth.
Strong fiscal framework supports policy credibility and effectiveness Before the banking crisis, weaknesses in the budgetary framework resulted in an often procyclical fiscal stance, weak budget discipline, and inadequate surveillance and management of fiscal risks.

However, a strong set of fiscal rules has been in place since the Organic Budget Law was passed in 2015.
The rules target a balanced budget over a five-year horizon with a maximum deficit of 2.5% of GDP in any given year and a net debt ceiling of 30% of GDP.4 The law also requires the government to publish a five-year fiscal policy statement at the beginning of each electoral term, as well as a rolling five-year fiscal strategy plan on an annual basis.

The fiscal rules were suspended during the pandemic but will be reinstated in 2025, one year ahead of initial plans.
9 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL The authorities demonstrated their adherence to the rules even before the formal entry of the law into force.

As a result of solid budgetary out-turns and the use of one-off revenue for debt reduction, Iceland's public debt declined by more than 50 percentage points of GDP between the peak in 2011 and 2018, one of the strongest ever episodes of debt reduction globally.
Exhibit 14 Wage increases have decoupled from productivity growth, putting pressure on inflation Index (Q1 2009 = 100) Real wages Real GDP per hour worked 160 150 140 130 120 110 100 90 80 Exhibit 15 Iceland has a history of procyclical budgetary policies Countercyclical easing Procyclical easing 20 15 ) % ( 10 t h w o r g g n d n e p s i l a e R 5 0 -5 -10 -15 Procyclical tightening -10 -8 -6 -4 -2 0 Real GDP growth (%) 2 Countercyclical tightening 4 6 8 10 Sources: Statistics Iceland and Moody's Investors Service Sources: OECD and Moody's Investors Service 10 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Fiscal strength score: a2 Factor 3: Overall score Scale + Final Factor 3: Sub-scores - Iceland a2 Score for Iceland Median of countries with A2 rating DEBT BURDEN DEBT AFFORDABILITY weight 25% weight 25% General government debt (% of GDP) General government debt (% of revenue) weight 25% General government interest payments (% of revenue) weight 25% General government interest payments (% of GDP) aaa aa a baa ba b caa ca Fiscal strength captures the overall health of government finances, incorporating the assessment of relative debt burdens and debt affordability as well as the structure of government debt.
Some governments have a greater ability to carry a higher debt burden at affordable rates than others.

Fiscal strength is adjusted for the debt trend, the share of foreign currency debt in government debt, other public sector debt and for cases in which public sector financial assets or sovereign wealth funds are present.

Depending on the adjustment factor, the overall score of fiscal strength can be lowered or increased.

Note: the initial factor score is shown in light blue in the scale above.
In case the initial and final factor scores are the same, only the final score will appear in the table above.

We assess Iceland's fiscal strength at “a2”, reflecting its improving fiscal metrics, with a rapidly declining budget deficit and a firmly established downward debt trend.

Iceland has a strong track record of reducing its very high debt burden after the 2008 crisis.
Debt affordability is weaker than peers because of the large share of inflation-indexed debt as well as higher domestic funding costs.

However, we recently moved the score upward from “baa1” score to factor in some interest revenue that offsets interest expenditure.

Other sovereigns with an “a2” assessment of fiscal strength include Ireland and Poland (A2 stable).

Exhibit 16 Peer comparison table factor 3: Fiscal strength Final score Initial score Gen. gov.

debt (% of GDP) Gen. gov.


debt (% of revenue) Gen. gov.

interest payments (% of GDP) Gen. gov.

int.
payments (% of revenue) Iceland A2/POS a2 a2 68.7 172.0 2.3 5.8 a2 Median 58.9 183.3 1.5 3.5 Poland A2/STA a2 a1 49.1 123.4 1.6 3.9 France Aa2/STA a2 a1 111.8 209.0 1.9 3.5 Ireland Aa3/STA a2 aa2 44.7 194.6 0.7 2.8 Cyprus Ba1/POS a2 a2 86.5 206.4 1.5 3.6 Slovenia A3/STA a1 a1 69.9 164.7 1.1 2.5 Chile A2/STA a1 a1 38.0 146.4 1.0 3.9 Sources: National authorities, IMF and Moody's Investors Service 11 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Strong economic growth and credible fiscal framework support Iceland's fiscal metrics In 2022, government finances benefited from strong revenue growth stemming from a robust economic performance, as well as the termination of pandemic-related spending.
The general government budget deficit declined to 4.3% of GDP from 8.4% in 2021, far exceeding the government's original targets.

Budget execution in 2023 will also likely be significantly stronger than expected, again boosted by the strong economy and the government's recent decision to actively tighten policy in an effort to support the central bank's disinflation efforts.
The government now expects a deficit at the central government level of just 1.3% of GDP for 2023, compared with a target of 3% in the approved 2023 budget.

It postponed several public investment projects and introduced some additional discretionary measures on the revenue side.

For the general government (including local governments and the social security system), we forecast a budget deficit of 2% of GDP in 2023.
The government's medium-term fiscal plan for 2024-28 envisages a further gradual reduction in the central government deficit to 1.1% and 0.8% of GDP in 2024 and 2025, respectively, with the budget targeted to return to balance in 2027 and overall surplus in 2028.

To reach the targets, the government plans to limit spending growth below nominal GDP growth while keeping revenue broadly stable as a share of GDP.
Iceland’s strong track record of sustained deficit reduction and the high political acceptance of the medium-term fiscal framework lead us to believe that the government will meet and possibly exceed the targets again.
Exhibit 17 Budget deficit is declining faster than anticipated ... General government fiscal accounts (as a percentage of GDP) Exhibit 18 … and a balanced budget is now targeted for 2027 Central government deficit targets and out-turn (as a percentage of GDP) Revenue Expenditure Fiscal balance (RHS) 60 50 40 30 20 10 0 Realised 2022-2026 2024-2028 2021-2025 2023-2027 15 10 5 0 -5 -10 -15 2 0 -2 -4 -6 -8 -10 -12 Sources: Statistics Iceland and Moody's Investors Service Sources: Ministry of Finance and Moody's Investors Service 2020 2021 2022 2023 2024 2025 2026 2027 2028 Downward trend in public debt is firmly established Provided the fiscal targets are achieved as planned, government debt will decline more rapidly than we expect.
In the 2021-25 fiscal plan, the government had aimed to stabilise the public debt ratio no later than 2026, and targeted a debt-to-GDP ratio of 55% at year- end 2022.

The actual debt-to-GDP ratio — as defined in the fiscal framework — was 40%, and the government will likely stabilise debt already in 2023.

Based on our definition, we expect the debt ratio to decline below 60% of GDP by 2024, supported by the narrowing in the fiscal deficit, as well as continued strong nominal GDP growth.
Iceland's downward debt trend is also resilient to most shocks, with the exception of a severe combined fiscal and economic shock, which has low probability (see Exhibit 19).

The low share of foreign-currency debt reduces risks stemming from exchange-rate movements.

The foreign-currency debt share fell to less than 10% of total debt as of June 2023 with the full repayment of a maturity in 2022 and the buyback of 52% of the eurobond maturing in May 2024, earlier in 2023.
Our debt ratio includes 24 public-sector entities that were reclassified within the general government perimeter in 2020 by Statistics Iceland, leading to a significant deterioration in Iceland's debt ratio and debt-affordability indicators.

The debt-to-GDP ratio increased by about 32 pps of GDP mainly as a result of the inclusion of the liabilities of the HF-Fund (24% of GDP) and, to a lesser extent, the Student Loan Fund (2% of GDP).
12 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL The government has started discussions with domestic pension funds, the main holders of HF-Fund bonds, about an early resolution of the fund and the government's guarantee for its obligations.

The fund is in government-mandated wind-down and, from 2035 onward, its cash inflows will no longer be sufficient to cover its debt payments, requiring additional equity injections.
The government aims for an early consensual agreement with the pension funds, but is also considering a change in legislation to place the fund into liquidation.

So far, no conclusion has been reached.
An early resolution of the guarantee would help accelerate the decline in debt.5 Exhibit 19 Debt trajectory is resilient to most shocks General government debt (as a percentage of GDP) Central Scenario Growth shock Interest rate shock FX shock Fiscal shock Combined shock 80 75 70 65 60 55 50 45 40 Exhibit 20 General government debt includes large liabilities from HF-Fund General government debt (as a percentage of GDP) Central government HFF Other 160 140 120 100 80 60 40 20 0 2018 2019 2020 2021 2022 2023F 2024F 2025F 2026F 2027F Standardised shocks are based on a 0.5 standard deviation calculated for 10 years over the course of the forecast period.
Sources: Moody's Investors Service Other includes local governments, as well as public-sector entities classified under the general government.

Sources: Statistics Iceland, Central Bank of Iceland and Moody's Investors Service The government’s balance sheet is significantly stronger when taking into account its assets of 65% of GDP (see Exhibit 21).
The most important of these are the state's remaining equity stakes in the domestic banks, the HF-Fund's loan book and substantial cash deposits of around 12% of GDP.

The government has been gradually reducing its shareholding in the financial sector with the sale of its stake in Arion Bank hf.

(A3/A3 positive, baa3)6 in 2018 and that of 57.5% of Islandsbanki in 2021 and 2022, with proceeds used to reduce debt.
The government's fiscal plan assumes full disposal of the Islandsbanki stake by 2024, which we expect to be delayed, while no plans have been made for its holding of 98.2% of Landsbankinn.

The government receives dividends worth around 1% of GDP every year from its equity participations, and is considering the establishment of a sovereign wealth fund as a contingency fund for major disasters.
Debt affordability remains weaker than peers but is improving The retirement of higher-cost debt and the rebuilding of the revenue base since the banking crisis have helped improve the affordability of government debt, although the ratio of interest payments to revenue remain significantly above that of similarly rated peers like Poland and Slovakia (A2 negative).

Domestic funding costs are higher than in EU countries and the share of inflation-indexed debt is also higher than for most peers.
At the end of May 2023, 23% of Treasury debt was linked to inflation.

We now consider the interest income of the HF-Fund when calculating debt interest payments as those are used to cover interest payments due on the fund's obligations.

We also exclude assumed interest payments on unfunded pension liabilities for state employees to ensure consistency across countries.

Following these changes, Iceland's debt affordability metrics are much closer to those of peers than before, at 5.8% in 2022.
We expect debt affordability to stabilise at around current levels as inflation recedes but the cost of funding remains higher than in the past.
13 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Exhibit 21 Government assets are larger than most peers 2022 (as a percentage of GDP) Exhibit 22 Debt affordability has been improving, but remains weak compared with peers Interest payments (as a percentage of revenue) Currency Bonds Loans Equity Other 120 100 80 60 40 20 0 Sweden Slovenia Iceland Estonia Latvia Lithuania Malta Slovakia Ireland A-rated median Iceland 12 10 8 6 4 2 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Sources: Eurostat, Statistics Iceland and Moody's Investors Service Sources: National authorities and Moody's Investors Service Low contingent liabilities pose limited risk to the government's balance sheet As a result of the reclassification of public companies mentioned earlier, the number for contingent liabilities was significantly lower at around 1% of GDP as of year-end 2022.
The largest guarantees have been extended to the power company Landsvirkjun (Baa1 stable), which accounts for 49% of total outstanding guarantees.

The company has a stable operating performance and has been able to raise debt without government guarantee.

It has also markedly improved its equity position and become a source of revenue for the government in recent years.

The company agreed to pay $140 million (0.5% of GDP) in dividends to the government for 2022.
14 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Susceptibility to event risk score: a Factor 4: Overall score Scale aaa aa + Factor 4: Sub-scores Iceland aa a Final Score for Iceland baa ba b caa ca - Median of countries with A2 rating Overall adjustment to Factor 4 Susceptibility to Event Risk: 0 Political Risk Government Liquidity Risk Banking Sector Risk External Vulnerability Risk MIN.
EXTERNAL VULNERABILITY RISK aaa aa a baa ba b caa ca Susceptibility to event risk evaluates a country’s vulnerability to the risk that sudden events may severely strain public finances, thus increasing the country’s probability of default.

Such risks include political, government liquidity, banking sector and external vulnerability risks.

Susceptibility to event risk is a constraint which can only lower the scorecard-indicated outcome.
Note: the initial factor score is shown in light blue in the scale above.

In case the initial and final factor scores are the same, only the final score will appear in the table above.

We assess susceptibility to event risk at “a”, driven by banking sector considerations.

However, risks emanating from the sector are well contained as Icelandic banks have large capital and liquidity buffers to weather any shocks.
Large foreign-currency reserves and a net creditor position are reflected in a “aa” score for external vulnerability risks, similar to government liquidity and political risk scores.

Broad-based consensus on economic policy direction and low geopolitical risks Political event risk, which we assess at “aa”, is low in Iceland, reflecting relatively consistent policies in key areas that are important in safeguarding the credit profile irrespective of the government composition.
Iceland's geographical location insulates the country from the current geopolitical risks stemming from the Russia-Ukraine war.

Peers sharing this assessment include Australia (Aaa stable) and Canada (Aaa stable).
Exhibit 23 Peer comparison table factor 4a: Political risk Final score Voice & accountability, score[1] Political stability, score[1] Iceland aa Median Australia Bahamas Canada Singapore A2/POS aa 1.4 1.4 Aaa/STA aa 1.4 0.9 B1/STA aa 0.9 0.9 Aaa/STA aa 1.5 0.9 Aaa/STA aa -0.1 1.5 0.9 1.0 Cayman Islands Aa3/STA aa 0.8 1.7 Uruguay Baa2/POS aa 1.3 1.0 [1] Composite index with values from about -2.50 to 2.50: higher values correspond to better governance.
Sources: National authorities, IMF and Moody's Investors Service 15 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL The coalition government of Left-Green Movement and centre/centre-right Progressive and Independence parties was confirmed in the 2021 parliamentary elections, although the relative shares of the parties has shifted somewhat.
This was the first time since 2009 that a coalition government has been renewed, with Prime Minister Katrín Jakobsdóttir continuing her term.

The government coalition holds 38 out of 63 seats in the Alþingi, the Icelandic Parliament.

Consensus on the direction of economic policies is broad, and political risk is low.
In contrast to most other European countries, we have not adjusted Iceland's score for political risk for geopolitical risks even though the country is a founding member of NATO, and thus in principle exposed to a potential conflict between NATO and Russia.

Iceland has no standing army and contributes only on a civilian basis to NATO's operations.

Besides Korea (Aa2 stable), Iceland is the only country with a Bilateral Defence Agreement with the US (Aaa stable), in force since 1951.
Low government liquidity risk because of strong fiscal credibility, a sizeable cash buffer and a large domestic investor base We assess government liquidity risk at “aa”, reflecting relatively modest borrowing needs, prudent liquidity management including significant cash buffers, and a large domestic investor base.

Other sovereigns sharing a “aa” assessment including Poland and Slovakia.
Exhibit 24 Peer comparison table factor 4b: Government liquidity risk Final score Initial score Ease of access to funding Gross borrowing requirements (% of GDP) Iceland A2/POS aa aa aa 6.6 aa Median aa 6.6 Bermuda A2/STA aa aa aa -0.5 Malta A2/STA aa aa aa 11.6 Poland A2/STA aa aa aa 13.8 Slovakia A2/NEG aa aa aa 12.2 Malaysia A3/STA aa aa aa 11.7 Slovenia A3/STA aa aa aa 11.0 Sources: National authorities, IMF and Moody's Investors Service Iceland's gross borrowing requirements are moderate at 7% of GDP in 2023, which include our estimate for the budget deficit and maturing debt.
Refinancing risks are also low with an average maturity of central government debt of 5.6 years as of May 2023.

The Treasury borrows mostly domestically and benefits from a large domestic investor base, including a large pension fund sector that holds around 40% of total Treasury bonds.

Pension funds are required to invest at least 50% of their assets in local currency assets, but this threshold will be gradually lowered to 35% by 2036, which could reduce demand for government bonds.
Foreign investors are much less present than in the past, holding just 6.7% of Icelandic government bonds as of June 2023, compared with 30% as of year-end 2009 (see Exhibit 26).

The full lifting of capital controls since 2021 could allow inflows of foreign investors to offset the lower participation of pension funds, especially given Iceland's relatively favourable interest rate differential compared with most advanced economies.
International bonds serve as benchmark issuances for local issuers but are kept as reserve at the central bank, helping mitigate liquidity risks.

The government repurchased 51% of the 2024 maturities in May 2023 and plans to issue a sustainable bond, which would not be placed with the central bank but spent to fund environmentally friendly projects.

In addition, the government keeps at least ISK40 billion in deposits at the central bank.
At the end of June 2023, deposits were ISK67 billion (2% of GDP), with an additional ISK199 billion held as foreign-exchange deposits.
16 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Exhibit 25 Favourable maturity profile limits refinancing risks ISK billion Exhibit 26 The government can rely on a large domestic investor base Domestic debt by owner (ISK billion) Bonds Bills External debt Non-marketable debt Foreign investors Pension funds Other residents Nonresident holdings (% of total) 300 250 200 150 100 50 0 1000 900 800 700 600 500 400 300 200 100 0 70% 60% 50% 40% 30% 20% 10% 0% 8 0 - p e S 9 0 - r p A 9 0 - v o N 0 1 - n u J 1 1 - n a J 1 1 - g u A 2 1 - r a M 2 1 - t c O 3 1 - y a M 3 1 - c e D 4 1 - l u J 5 1 - b e F 5 1 - p e S 6 1 - r p A 6 1 - v o N 7 1 - n u J 8 1 - n a J 8 1 - g u A 9 1 - r a M 9 1 - t c O 0 2 - y a M 0 2 - c e D 1 2 - l u J 2 2 - b e F 2 2 - p e S 3 2 - r p A Sources: Government debt management and Moody's Investors Service 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 The 2023 maturities include the early buyback of around half of the 2024 eurobond maturity, executed in May 2023.
Sources: Government debt management and Moody's Investors Service Strong capitalisation and liquidity help alleviate concentration risks in the banking system We assess Iceland’s banking sector risk at “a”, reflecting the sizeable capital and liquidity buffers of the three large domestic banks.

Other peers with a similar assessment of banking sector risk include Bermuda (A2 stable), Estonia (A1 stable) and Ireland.
Exhibit 27 Peer comparison table factor 4c: Banking sector risk Final score Initial score BCA[1] BSCE[2] Total domestic bank assets (% of GDP) Iceland A2/POS a a baa3 baa3 141.6 a Median baa2 baa2 170.6 Bermuda A2/STA a baa baa2 baa2 334.6 Chile A2/STA a a baa1 baa1 151.1 Lithuania A2/STA a a baa3 baa3 85.4 Poland A2/STA a a baa3 baa3 92.4 Estonia A1/STA a a baa3 baa3 105.4 Ireland Aa3/STA a a baa1 baa3 111.1 [1] BCA is an average of Baseline Credit Assessments (BCAs) for rated domestic banks, weighted by bank assets.
[2] Where we have no or small rating coverage in a system, we estimate the risk of Banking Sector Credit Event (BSCE) based on available data for aggregate banking system.
Sources: National authorities, IMF and Moody's Investors Service The Icelandic banking sector poses limited risks to the government's balance sheet because of its strong liquidity and capital buffers: the average Common Equity Tier 1 capital ratio was 20.4% at the end of the first quarter of 2023, significantly higher than that of most rating peers.

The banking sector is now entirely domestically focused and concentrated in three large banks, which together account for close to 95% of the system's assets.
Our outlook for the banking system is stable.

Higher interest rates support Icelandic banks' core profitability.

Asset quality might deteriorate but the starting position is solid, with average nonperforming loan (NPL) ratios at just 1.4% in March 2023.

The authorities have put in place a number of borrower-based measures to reduce the risks related to high house prices.
The measures have started to rein in house price inflation (see Exhibit 13), and relatively low average loan-to-value ratios and a strong labour market help protect the quality of the banks' mortgage book.

Icelandic borrowers facing difficulties also have the option of switching to inflation-linked mortgages, which will lower their interest payments in the coming years.
While banks’ exposure to the commercial real estate sector is sizeable (accounting for 17% of gross loans), it is low as a share of their capital base.

In addition, limited supply in recent years still supports price developments although activity is expected to slowdown due to the high level of interest rates.
17 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Large foreign-currency reserves and net external creditor limit external risks We have set external vulnerability risk at “aa”, reflecting Iceland's net external creditor position and very large foreign-currency reserves, which help buffer external shocks.

Peers sharing the same risk assessment include Malta (A2 stable) and Finland (Aa1 stable).
Exhibit 28 Peer comparison table factor 4d: External vulnerability risk Final score Initial score Current account balance (% of GDP) Net IIP (% of GDP)[1] Iceland aa Median Lithuania Malta Finland A2/POS aa aa -1.6 24.6 -0.8 0.6 A2/STA aa aa -5.1 -6.6 A2/STA aa aa -5.8 52.3 Aa1/STA aa aa -3.9 -2.7 Saudi Arabia A1/POS aa aa 13.6 64.4 Hong Kong SAR, China Aa3/STA aa aa 10.5 488.0 Bermuda A2/STA aaa aaa 13.5 70.4 [1] Net international investment position (% of GDP).
Sources: National authorities, IMF and Moody's Investors Service Helped by the tourism sector Iceland posted large current account surpluses until 2020.

Since then, the impact of the pandemic, strong domestic demand and large dividends to foreign companies have turned the current account into deficit.
We expect the deficit to narrow significantly to around 0.6% of GDP in 2023, backed by the strength in tourism demand and other exports as well as lower profits of foreign companies, particularly in the aluminium sector.

Iceland’s net international investment position (NIIP) has improved significantly since the banking crisis, helping buffer shocks to the small open economy.
The resolution of the failed bank estates in 2015, coupled with the increase in pension funds' foreign investments, mainly drove the return into a net external creditor position.

Valuation effects on the pension funds' portfolio investments resulted in a reduction in the NIIP to 25% of GDP at the end of 2022 compared to 38% in 2021, a still-solid position (see Exhibit 30).

Iceland has also substantially reduced its external debt stock, to 75% of GDP at the end of 2022 from more than 500% in 2007.
Banks and corporates are the main borrowers abroad, but they tend to hold large foreign-currency assets or earn foreign-currency earnings.
Exhibit 29 Current account is gradually improving towards a balanced position Current account as a percentage of GDP (four-quarter rolling sum) Exhibit 30 Pension funds' external assets drive net external creditor position As a percentage of GDP 15 10 5 0 -5 -10 Goods Secondary income Services Current account Primary income FDI Loans Portfolio investment Deposits Other Net IIP 50% 40% 30% 20% 10% 0% -10% -20% -30% -40% -50% 4 Q - 6 1 0 2 1 Q - 7 1 0 2 2 Q - 7 1 0 2 3 Q - 7 1 0 2 4 Q - 7 1 0 2 1 Q - 8 1 0 2 2 Q - 8 1 0 2 3 Q - 8 1 0 2 4 Q - 8 1 0 2 1 Q - 9 1 0 2 2 Q - 9 1 0 2 3 Q - 9 1 0 2 4 Q - 9 1 0 2 1 Q - 0 2 0 2 2 Q - 0 2 0 2 3 Q - 0 2 0 2 4 Q - 0 2 0 2 1 Q - 1 2 0 2 2 Q - 1 2 0 2 3 Q - 1 2 0 2 4 Q - 1 2 0 2 1 Q - 2 2 0 2 2 Q - 2 2 0 2 3 Q - 2 2 0 2 4 Q - 2 2 0 2 3 Q - 6 1 0 2 4 Q - 6 1 0 2 1 Q - 7 1 0 2 2 Q - 7 1 0 2 3 Q - 7 1 0 2 4 Q - 7 1 0 2 1 Q - 8 1 0 2 2 Q - 8 1 0 2 3 Q - 8 1 0 2 4 Q - 8 1 0 2 1 Q - 9 1 0 2 2 Q - 9 1 0 2 3 Q - 9 1 0 2 4 Q - 9 1 0 2 1 Q - 0 2 0 2 2 Q - 0 2 0 2 3 Q - 0 2 0 2 4 Q - 0 2 0 2 1 Q - 1 2 0 2 2 Q - 1 2 0 2 3 Q - 1 2 0 2 4 Q - 1 2 0 2 1 Q - 2 2 0 2 2 Q - 2 2 0 2 3 Q - 2 2 0 2 4 Q - 2 2 0 2 1 Q - 3 2 0 2 Sources: Central Bank of Iceland, Statistics Iceland and Moody's Investors Service Sources: Central Bank of Iceland, Statistics Iceland and Moody's Investors Service External surpluses have allowed the central bank to build substantial foreign-currency reserves, which it uses to smooth excessive volatility in the exchange rate.
Reserves were $4.9 billion at the end of May 2023, equivalent to 18% of GDP or 23% of the country's total external debt.

Reserves declined since 2021 as the Treasury used its account at the central bank to repay foreign debt, but using the IMF's reserve-adequacy metrics, reserves remain adequate, equivalent to 1.23x the recommended level at the end of 2022.
18 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL ESG considerations Iceland's ESG Credit Impact Score is Neutral-to-Low CIS-2 Exhibit 31 ESG Credit Impact Score Source: Moody's Investors Service Iceland's ESG Credit Impact Score is neutral to low (CIS-2), reflecting neutral-to-low exposure to environmental and social risks, and very strong institutions.
Exhibit 32 ESG Issuer Profile Scores Source: Moody's Investors Service Environmental Iceland's exposure to environmental risks is neutral to low (E-2) as nearly all of its energy generation and consumption are covered by renewable sources, in particular hydroelectric power and geothermal energy.

Iceland's unique geological features imply some exposure to physical climate risks but also offer opportunities for the country's key sectors.
The impact of warming seas on fish stocks in Icelandic waters is not yet clear; while some varieties may migrate out of Iceland's waters as illustrated by the decline in capelin fish stocks in 2019, other species have migrated into Icelandic waters.

Also, the sector has considerable flexibility to adapt to changing stocks, which it has proved multiple times.

Warmer temperatures are favourable for plant productivity and agriculture.
Around 11% of Iceland's land mass consists of glaciers; while the melting of glaciers raises the risk of landslides, it also increases availability of hydropower, at least for several decades.

Social Similarly, Iceland faces neutral to low social risks (S-2).

Iceland's demographic profile is more favourable than in many other countries because of long working lives, high participation rates of women and the flexibility of the labour force.
Strong inward migration further supports the economy, as immigrants’ participation rate exceeds that of the domestic population.

In contrast to some of the Nordic countries, immigrants and refugees are widely perceived to benefit the Icelandic economy and society.

Iceland also benefits from high-quality education, access to basic services and housing availability, similar to other Scandinavian countries.
Indicators for access to healthcare are very strong, in line with the fast response to the coronavirus pandemic.
While wage negotiations between employers and trade unions can affect Iceland's competitiveness, the highly coordinated collective bargaining has 19 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL generally been a stabilising factor, ensuring relatively contained wage differentials and contributing to limited income disparities and social peace.
Governance Iceland's very high institutions and governance strength is reflected in a positive G issuer profile score (G-1).

This is underpinned by its strong scores in most of the WGIs, which reflect the high credibility of its institutions and the country's well-developed macroeconomic policy environment.

This contributes to its relatively strong resilience to E and S risks, along with very high wealth levels.

All of these considerations are further discussed in the “Credit profile” section above.
Our approach to ESG is explained in our report on how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector methodology General Principles for Assessing Environmental, Social and Governance Risks Methodology.

20 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Scorecard-indicated outcome Combining the scores for individual factors provides the scorecard-indicated outcome.
While the information used to determine the grid mapping is mainly historical, our ratings incorporate expectations around future metrics and risk developments that may differ from the ones implied by the scorecard-indicated outcome.

Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in an assigned rating outside the scorecard-indicated outcome.
For more information, please see our Sovereigns Rating Methodology.

Exhibit 33 Sovereign rating metrics: Iceland Economic strength How strong is the economic structure?

Sub-factors: growth dynamics, scale of the economy, wealth Institutions and governance strength Fiscal strength + + + How robust are the institutions and how predictable are the policies?
Sub-factors: quality of the institutions, policy effectiveness, government default history and track record of arrears How does the debt burden compare with the government's resource mobilization capacity?
Sub-factors: debt burden, debt affordability, debt trend, foreign currency debt burden, contingent liabilities, fiscal reserves - - - Susceptibility to event risk What is the risk of a direct and sudden threat to debt repayment?
Sub-factors: political risk, government liquidity risk, banking sector risk, external vulnerability risk a a a a a a a a b a b b a a c a c + - Source: Moody's Investors Service Economic resiliency + - Government financial strength + - Scorecard- indicated outcome: Aa2 - A1 Assigned rating: A2 21 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Comparatives This section compares credit relevant information regarding Iceland with other sovereigns that we rate.
It focuses on a comparison with sovereigns within the same scorecard- indicated outcome and shows the relevant credit metrics and factor scores.

Close peers are other small countries, such as Lithuania, Malta and Slovenia (A3 stable).

Iceland's higher institutional and governance strength is the main differentiating factor.

Exhibit 34 Iceland's key peers Rating/outlook Scorecard-indicated outcome Factor 1 Nominal GDP ($ bn) GDP per capita (PPP, Intl$) Avg.
real GDP (% change) MAD Volatility in real GDP growth (ppts) Factor 2 Quality of legislative & executive institutions Strength of civil society & judiciary Fiscal policy effectiveness Monetary & macro policy effectiveness Gen. gov.

fiscal balance (% of GDP) Average inflation (% change) Volatility of inflation (ppts) Factor 3 Gen. gov.

debt (% of GDP) Gen. gov.

debt (% of revenue) Gen. gov.

interest payments (% of revenue) Gen. gov.
interest payments (% of GDP) Factor 4 Political risk Government liquidity risk Gross borrowing requirements (% of GDP) Banking sector risk BSCE[1] Total domestic bank assets (% of GDP) External vulnerability risk Current account balance (% of GDP) External vulnerability indicator (EVI) External debt (% of current account receipts) Net international investment position (% of GDP) Year 2022 2022 2018 - 2027F 2013 - 2022 Latest available Latest available Latest available Latest available 2022 - 2024F 2018 - 2027F 2013 - 2022 2022 2022 2022 2022 Latest available Latest available 2023F Latest available Latest available 2022 Latest available 2022 2024F 2022 2022 Iceland A2/POS Aa2 - A1 baa1 27.8 66,512 2.4 1.2 aa2 aa aaa aa a -2.6 4.4 2.0 a2 68.7 172.1 6.6 2.7 a aa aa 6.6 a baa3 141.6 aa -1.6 -- 147.6 24.6 Israel A1/STA A1 - A3 aa3 522.0 52,349 3.8 0.3 a2 a a baa aa -0.7 2.0 1.5 a3 60.7 162.2 6.8 2.5 baa baa aaa 6.2 a baa2 147.4 aaa 3.8 -- 76.2 32.1 Slovenia A3/STA A1 - A3 baa1 62.0 50,059 2.7 1.3 a2 a a a a -3.3 3.3 2.7 a1 69.9 164.7 2.5 1.1 baa baa aa 11.0 baa ba1-ba2 88.0 a -0.4 -- 92.9 -0.6 Lithuania A2/STA Aa3 - A2 baa1 70.2 47,107 2.7 1.1 a1 a a aa a -1.8 5.0 5.6 aa2 38.4 107.2 1.0 0.4 ba ba a 5.8 a baa3 85.4 aa -5.1 -- 71.9 -6.6 Malta A2/STA A1 - A3 baa1 17.7 58,072 4.1 2.1 a3 baa baa a a -5.2 2.5 1.6 a1 53.4 152.2 2.8 1.0 baa a aa 11.6 baa baa3 189.1 aa -5.8 -- 285.5 52.3 Slovakia A2/NEG A1 - A3 baa1 115.3 39,490 2.0 1.2 a2 a a a a -4.4 5.4 3.6 a1 57.8 143.6 2.6 1.0 baa baa aa 12.2 a baa2 104.0 a -8.2 -- -- -61.0 A2 Median A2 A1 - A3 baa1 70.2 47,107 2.4 1.2 a2 a a a a -2.6 4.4 2.9 a1 49.1 146.4 3.9 1.0 baa a aa 6.6 a baa3 141.6 aa -5.1 135.6 169.6 -6.6 Western Europe Median Aa3 Aa2 - A1 a2 528.5 64,656 1.5 0.9 aa2 aa aaa aa aa -2.0 2.7 2.3 a1 66.1 152.2 2.1 0.8 baa baa aaa 9.3 a baa1 232.3 aa 0.6 -- 285.5 24.6 [1] BSCE is our estimate of the risk of a Banking Sector Credit Event (BSCE), which we use for sovereigns where we have no or very limited rating coverage of a system.
Otherwise, we use the Baseline Credit Assessment (BCA) for rated domestic banks, weighted by bank assets.
Sources: National authorities, IMF and Moody's Investors Service 22 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL DATA, CHARTS AND REFERENCES Chart pack: Iceland Exhibit 35 Economic growth MAD Real GDP volatility, t-9 to t (ppts) (RHS) Real GDP (% change) (LHS) 8.0 6.0 4.0 2.0 0.0 -2.0 -4.0 -6.0 -8.0 Exhibit 36 Investment and saving Gross investment/GDP Gross domestic saving/GDP 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 30 25 20 15 10 Source: Moody's Investors Service Source: Moody's Investors Service Exhibit 37 National income Exhibit 38 Population GDP per capita ($) GDP per capita (PPP basis, $) Population (Mil.)
(LHS) Population growth (% change) (RHS) 90000 80000 70000 60000 50000 40000 30000 20000 10000 0 0.39 0.38 0.37 0.36 0.35 0.34 0.33 0.32 0.31 0.30 0.29 Source: Moody's Investors Service Source: Moody's Investors Service Exhibit 39 Global Competitiveness Index Rank 26 out of 141 countries Exhibit 40 Inflation and inflation volatility Israel (A1/STA) Iceland (A2/POS) Slovenia (A3/STA) Malta (A2/STA) Lithuania (A2/STA) Slovakia (A2/NEG) Inflation rate volatility, t-9 to t (ppts) (RHS) Inflation rate (% change average) 10.0 9.0 8.0 7.0 6.0 5.0 4.0 3.0 2.0 1.0 0. 10 15 20 25 30 35 40 45 Source: Moody's Investors Service Source: World Economic Forum 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0 23 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Exhibit 41 Institutional framework and effectiveness Exhibit 42 Debt burden Government Effectiveness[1] Control of Corruption[1] Regulatory Quality[1] Rule of Law[1] Voice & Accountability[1] 2.5 2.0 1.5 1.0 0.5 0. [1] Composite index with values from about -2.50 to 2.50: higher values suggest greater maturity and responsiveness of government institutions.
Source: Worldwide Governance Indicators 140 120 100 80 60 40 20 0 Gen. gov.

debt/GDP (%) (LHS) Gen. gov.

debt/gen.

gov.

revenue (%) (RHS) 350 300 250 200 150 100 50 Source: Moody's Investors Service Exhibit 43 Debt affordability Exhibit 44 Financial balance Gen. gov.

interest payment/GDP (%) (LHS) Gen. gov.

interest payment/gen.

gov.

revenue (%) (RHS) Gen. gov.

financial balance/GDP (%) Gen. gov.


primary balance/GDP (%) 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0. Source: Moody's Investors Service Exhibit 45 Government liquidity risk Gen. gov.

debt/GDP (%) (RHS) Gen. gov.

external debt/total gen. gov.
debt (%) (LHS) -5 -10 -15 Source: Moody's Investors Service Exhibit 46 External vulnerability risk Current account balance/GDP (%) (LHS) Net international investment position/GDP (%) (RHS) 10 8 6 4 2 0 -2 -4 50 40 30 20 10 0 -10 -20 -30 -40 -50 -60 Source: Moody's Investors Service Source: Moody's Investors Service 24 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Rating history Exhibit 47 Iceland[1] Long Term Ratings Outlook Review Action Short Term Ratings Action Date Foreign Currency Local Currency Foreign Currency Currency Local Foreign Currency Local Currency A2 A2 A3 A3 Baa2 Baa2 Baa3 Baa3 Baa3 Baa3 Baa3 Baa1 A1 Aa1 Aa1 Aaa Aaa Aaa Aa3 A1 A1 A2 A2 A2 A2 A3 A3 Baa2 Baa2 Baa3 Baa3 Baa3 Baa3 Baa3 Baa1 A1 Aa1 Aa1 Aaa Aaa Aaa Aaa - - - - POS STA POS STA RUR STA STA NEG STA NEG STA NEG RUR RUR STA NEG STA - - - - - - - - - - - - - - Possible Upgrade Possible Upgrade - - - - - - - - - - - - - - Possible Downgrade Possible Downgrade Possible Downgrade Possible Downgrade - - - - - Possible Upgrade - Possible Upgrade - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - [1] Table excludes rating affirmations and ceilings.
Please visit the issuer page for Iceland for the full rating history.
Source: Moody's Investors Service - - - - - - - - - - - - - - - - - - - - - - - Jul-23 Nov-19 Jul-18 Sep-16 Jun-16 Jun-15 Feb-13 Jul-10 Apr-10 Apr-10 Nov-09 Dec-08 Oct-08 Sep-08 May-08 Mar-08 Nov-03 Oct-02 Jul-97 Jun-97 Jun-96 Apr-96 May-89 25 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Annual statistics Exhibit 48 Iceland Economic structure and performance Nominal GDP (US$ bil.)

Population (Mil.)
GDP per capita (US$) GDP per capita (PPP basis, US$) Nominal GDP (% change, local currency) Real GDP (% change) Inflation rate (% change average) Unemployment rate (%) Gross investment/GDP Gross domestic saving/GDP Nominal exports of G & S (% change, US$ basis) Nominal imports of G & S (% change, US$ basis) Real exports of G & S (% change) Real imports of G & S (% change) Net exports of goods & services/GDP Openness of the economy[1] Government Effectiveness[2] Government finance Gen. gov.
revenue/GDP Gen. gov.

expenditures/GDP[3] Gen. gov.

financial balance/GDP[3] Gen. gov.

primary balance/GDP[3] Gen. gov.

debt (US$ bil.

)[3] Gen. gov.

debt/GDP[3] Gen. gov.

debt/gen.

gov.

revenue[3] Gen. gov.

interest payments/gen.

gov.

revenue External payments and debt Nominal exchange rate (local currency per US$, Dec) Real eff.

exchange rate (% change) Relative unit labor cost Current account balance (US$ bil.
)[4] Current account balance/GDP[4] Net foreign direct investment/GDP Net international investment position/GDP[4] Official forex reserves (US$ bil.)
Source: Moody's Investors Service 2013 2014 2015 2016 2017 2018 2019 2020E 2021E 2022E 2023F 2024F 16.1 0.3 50,078 44,673 6.8 4.6 3.9 5.8 15.6 23.2 6.0 1.3 6.8 0.1 7.7 98.8 1.5 41.3 42.5 -1.2 3.0 20.8 122.0 295.6 10.3 115.6 4.2 89.8 1.2 7.7 -0.3 - -3.7 4.1 17.5 0.3 53,244 49,471 10.8 4.4 1.6 4.5 19.3 26.9 -1.7 -4.1 8.9 13.5 7.5 95.8 1.5 40.8 41.2 -0.4 3.7 17.4 97.3 238.3 10.1 129.6 2.4 100.0 1.0 5.7 4.0 - -0.9 3.5 88.6 1.5 42.9 42.0 0.9 3.5 15.5 63.2 147.5 6.1 116.3 -2.6 116.7 1.1 4.3 -1.7 8.6 6.0 24.7 0.4 69,086 60,076 6.3 1.8 3.0 3.9 20.9 25.2 -10.9 -13.6 -5.5 -9.1 4.5 82.9 1.5 40.6 42.1 -1.5 0.8 16.6 66.6 164.2 5.8 121.1 -7.0 118.1 1.6 6.5 -2.9 20.3 6.4 21.6 0.4 59,212 55,345 -3.5 -7.2 2.8 6.4 21.3 19.8 -33.5 -22.4 -31.1 -20.6 -1.6 68.0 1.5 41.1 50.1 -9.0 -6.6 17.8 77.8 189.2 5.9 127.2 -8.1 123.3 0.2 0.9 -2.3 36.7 6.0 25.6 0.4 69,248 59,575 11.2 4.3 4.5 6.0 22.2 20.3 33.3 34.3 14.7 19.9 -2.0 76.8 1.6 40.2 48.6 -8.4 -6.2 18.8 75.6 187.9 5.3 130.4 4.0 128.6 -0.6 -2.4 0.7 38.3 6.3 27.8 0.4 74,047 66,512 16.1 6.4 8.3 3.8 22.4 21.9 35.0 30.0 20.6 19.7 -0.7 93.4 -- 40.0 44.2 -4.3 -2.0 18.2 68.7 172.0 5.8 142.0 2.8 139.2 -0.5 -1.6 2.9 24.6 5.1 27.4 0.4 71,978 -- 9.2 4.0 8.7 3.2 20.6 20.2 0.1 -6.1 5.7 -0.8 2.2 91.9 -- 39.9 42.0 -2.1 0.1 18.1 63.8 160.1 5.7 145.0 -- -- -0.2 -0.6 0.5 -- 5.5 30.5 0.4 79,156 -- 6.3 2.5 5.7 3.5 21.1 19.3 14.9 13.0 6.0 4.2 3.1 94.3 -- 39.4 41.1 -1.7 0.5 17.9 58.2 148.0 5.7 142.1 -- -- 0.0 -0.1 1.2 -- 5.6 26 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Related websites and information sources » Sovereign risk group webpage » Sovereign ratings list MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services.
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Endnotes 1 Iceland has the lowest Gini coefficient of all OECD countries, implying the most even distribution of wealth among this group of countries.

2 According to forecasts from the 2021 Ageing Report and Statistics Iceland.

3 Conducted by the Icelandic Food and Veterinary Authority in collaboration with Boston Consulting Group.
4 The government defines net general government debt as gross debt excluding pension liabilities and accounts payable, and also net of currency and deposits.

The definition excludes the public-sector companies that were included in the general government perimeter in 2020.

These are, however, included for information purposes in future budgets and financial plans.

5 For more details, please see the Credit Analysis published on 29 July 2022.
6 The ratings shown are Arion Bank’s deposit rating, senior unsecured debt rating and Baseline Credit Assessment.

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REPORT NUMBER 1372468 28 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL Contacts Kathrin Muehlbronner Senior Vice President kathrin.muehlbronner@moodys.com +44.20.7772.1383 Marie Diron MD-Global Sovereign Risk marie.diron@moodys.com +44.20.7772.1968 Lenaic Couderc Associate Analyst lenaic.couderc@moodys.com +44.20.7772.1799 Dietmar Hornung Associate Managing Director dietmar.hornung@moodys.com +49.69.70730.790 29 14 August 2023 Government of Iceland - A2 positive: Annual credit analysis