Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

IcelandThis report does not constitute a new
rating action for this issuer. It provides
more detailed credit analysis than thepreviously published Rating Action
Commentary, which can be found on
www.fitchratings.com.

Ratings
Foreign Currency

Key Rating Drivers
High Income, Governance Drive Ratings: Iceland’s ‘A’ rating is driven by its very high income percapita and very strong governance and human development indicators that are more consistent
with those of ‘AAA’ and ‘AA’ rated countries. A favourable demographic composition (the shareof people of working age was 65% in 2020) supports growth potential. The rating is constrainedby the high, but declining, public debt burden, the small size of the economy and limited export
diversification, which result in vulnerability to external shocks and balance of payments risks.
Macro Recovery: Economic recovery has strengthened in 2022. Real GDP grew by 6.1% yoy
in 2Q22, underpinned by domestic demand and solid export growth. Fitch Ratings expects thestrong recovery in tourism flows to continue. We expect real GDP growth of 5.9% this year,
an upward revision from our previous review (4.5%). We expect real GDP growth to slow
sharply to 1.9% in 2023 mainly due to weaker growth in Iceland’s trading partners (in particular,
the UK and the EU), which will be reflected in weaker tourism flows and tighter monetary
policy.
Resilience to Energy Shock: Iceland has been resilient to the global energy shock and we expect
this will continue to be the case. The share of renewables in the energy mix, at above 80%, isthe highest in Europe, and Iceland does not rely on natural gas. The main impact of the energy
crisis has been via higher prices of imported oil, which affected petrol prices at the pump. As
fuel and food prices decline, the squeeze on household incomes should ease. Export demand
from the UK and the EU will slow sharply and this will be the main driver of the slowdown nextyear.
High Inflation May Have Peaked: Headline consumer price inflation rose to 9.9% in July 2022,
its highest level in nearly a decade, but declined slightly to 9.7% in August and more firmly to
9.3% in September. This follows a period of aggressive rate hikes by the Central Bank of Iceland(CBI) and the adoption of macroprudential measures. It is too early to tell if inflation has
peaked, but there are some signs that it is moderating across the board.
In our view, the combination of higher interest rates, macro-prudential measures, pick-up in
housing supply and gradual withdrawal of fiscal support mean that house price growth shouldease further. Moreover, oil and commodity prices should continue to decline. We expect
inflation to average 8.8% in 2022 and decline more markedly to 6.4% in 2023, still well above
the CBI target.
Revenue Growth Underpins Deficit Reduction: We expect the general government deficit to
decline to 4.7% of GDP in 2022 from 8.9% of GDP in 2021, better than our previous review(6.5% of GDP) and lower than the ‘A’ peer current median (-5% of GDP). The improvement
reflects the stronger-than-expected revenue growth and the unwinding of the majority ofpandemic-related support.
The government has introduced some measures to protect low-income households fromhigher inflation by bringing forward increases in social benefits and pensions. However, given
the different nature of inflation, driven by house prices and not by energy prices, the size ofthe support package is small relative to other European countries.
Debt on a Gradual Downward Path: We expect gross general government debt (GGGD) to
decline gradually to 68.5% of GDP by 2024. The sovereign has high financing flexibility due tothe extremely large pool of private pension funds’ assets (205% of GDP), 65% of which isinvested domestically. The government also has strong access to the international bondmarket, a large cash deposit buffer, and is supported by robust liquidity in the banking system.
Moreover, government assets are large at 84% of GDP.

Long-Term IDRA

Short-Term IDR

F1+

Local Currency
Long-Term IDRA

Short-Term IDR

F1+Country CeilingA+

OutlooksLong-Term Foreign-Currency IDR Stable
Long-Term Local-Currency IDR

StableRating Derivation
Component
Sovereign Rating Model (SRM)

A

Qualitative Overlay (QO)

0

Structural features

0

Macroeconomic0

Public finances0

External finances0Long-Term Foreign-Currency IDR

A

Source: Fitch Ratings

Data
2022F
GDP (USDbn)

29

Population (m)0.4

Source: Fitch Ratings

Applicable Criteria
Sovereign Rating Criteria (July 2022)
Country Ceilings Criteria (July 2020)

Related Research
Fitch Affirms Iceland at ‘A’; Outlook Stable(September 2022)
Global Economic Outlook (September 2022)
Interactive Sovereign Rating Model
Fitch Fiscal Index - Analytical Tool
Click here for more Fitch Ratings content on
Iceland

Analysts
Michele Napolitano+44 20 3530 1882
michele.napolitano@fitchratings.com
Malgorzata Wegner+49 69 768076 279
malgorzata.wegner@fitchratings.com

Rating Report │ 10 October 2022

fitchratings.com

1

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Rating Summary
Long-Term Foreign-Currency Issuer Default Rating (LT FC IDR): A
Sovereign Rating Model: A

Qualitative Overlay: 0Contribution of variables, relative to ‘A’ median

Adjustments relative to SRM data and output
Structural Features: No adjustment.
Macroeconomic Outlook, policies and Prospects: No
adjustment.
Public Finances: No adjustment.
External Finances: No adjustment.

Note: See Peer Analysis table for summary data, including rating category medians; see the Full Rating Derivation table for detailed SRM data.
Source: Fitch Ratings

Sovereign Rating Model Trend

Rating Derivation History (last 10 reviews)
Review

LT FC

SRM

QO

Date

IDR

Resultab

S

M

PF

EF

Latest

A

A

0

0

0

0

18 Mar 22

A

A

0

0

0

0

24 Sep 21

A

A

0

0

0

0

26 Mar 21

A

A

0

0

0

0

23 Oct 20

A

A

0

0

0

0

22 May 20

A

A

0

0

0

0

22 Nov 19

A

A+

0

0

0

-1

24 May 19

A

A+

0

0

0

-1

7 Dec 18

A

A+

0

0

0

-1

8 Jun 18

A

A+

0

0

0

-1

a

The latest rating uses the SRM result for 2022 in the chart (this willroll forward to 2023 in July 2023).
b
Historical SRM results in this table may differ from the chart, which isbased on our latest data, due to data revisions.
Abbreviations: LT FC IDR = Long-Term Foreign-Currency Issuer Default
Rating; SRM = Sovereign Rating Model; QO = Qualitative Overlay
Source: Fitch Ratings

Iceland
Rating Report │ 10 October 2022

fitchratings.com

2

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandPeer Analysis―――

Iceland―――

A Median

Source: Fitch Ratings, Statistical Office, Ministry of Finance, IMF, World Bank

Iceland
Rating Report │ 10 October 2022

fitchratings.com

3

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandPeer Analysis
2022FᵃIceland

A median

AA median

BBB median

76,52828,64949,53615,016Structural features
GDP per capita (USD) [SRM]
Share in world GDP (%) [SRM]

0.0

0.0

0.0

0.0

Composite governance indicator (percentile, latest) [SRM]b

94.2

75.6

84.3

59.1

Human development index (percentile, latest)

97.8

81.9

88.7

67.3

Broad money (% GDP) [SRM]

49.3

89.8

99.9

62.0

Private credit (% GDP, 3-year average)

97.3

73.4

104.2

57.9

Dollarisation ratio (% bank deposits, latest)

11.2

10.3

12.3

16.8

Bank system capital ratio (% assets, latest)

24.9

15.7

16.1

15.6

Real GDP growth (%, 3-year average) [SRM]

4.1

3.7

2.2

3.3

Real GDP growth volatility (complex standard deviation) [SRM]

4.2

3.1

2.3

3.3

Consumer price inflation (%, 3-year average) [SRM]

4.7

2.3

2.2

3.2

Unemployment rate (%)

3.8

6.4

5.0

7.8

-5.6

-2.3

-0.7

-2.5

Primary balance (% GDP, 3-year average)

-1.1

-0.5

0.8

-0.5

Interest payments (% revenue, 3-year average) [SRM]

10.8

4.6

3.7

7.5

Gross debt (% revenue, 3-year average)

172.4

138.4

134.8

146.1

Gross debt (% GDP, 3-year average) [SRM]

71.2

42.8

39.8

36.6

Net debt (% GDP, 3-year average)

58.4

38.6

27.2

30.8

FC debt (% gross debt, 3-year average) [SRM]

15.5

10.5

0.9

36.2

Current account balance (% GDP, 3-year average)

-1.3

0.9

1.6

-1.7

Current account balance + net FDI (% GDP, 3-year avg.) [SRM]

-1.4

2.4

1.1

0.6

Commodity dependence (% CXR) [SRM]

46.5

11.5

14.9

19.6

Gross external debt (% GDP, 3-year average)

75.9

64.9

115.2

55.1

Net external debt (% GDP, 3-year average)

23.5

-7.9

-9.4

9.4

Gross sovereign external debt (% GXD, 3-year average)

17.1

18.9

16.9

31.1

Sovereign net foreign assets (% GDP, 3-year average) [SRM]

10.9

11.7

5.5

2.1

External interest service (% CXR, 3-year average) [SRM]

2.6

2.4

4.5

4.2

Foreign-exchange reserves (months of CXP) [SRM]

4.7

4.4

2.9

4.9

186.5

107.4

55.9

134.9

Macroeconomic performance and policies

Public finances (general government)ᶜ
Balance (% GDP, 3-year average) [SRM]

External financesᶜ

Liquidity ratioᵃ Three-year averages are centred on this year. Fitch does not forecast indicators labelled ‘latest’, meaning data may be lagging.
ᵇ Composite of all six World Bank Worldwide Governance Indicators (see chart on the previous page).
ᶜ See Appendix 2: Data Notes and Conventions for details of data treatment for public finances and external finances.
Source: Fitch Ratings, Statistical Office, Ministry of Finance, IMF, World Bank, United Nations

Supplementary Information
BSI / MPI = n.a. / 1. About the BSI and MPI: Fitch’s bank systemic indicator (BSI) equates to a weighted average Viability Rating. The
macro-prudential risk indicator (MPI) focuses on one potential source of financial stress, ranging from ‘3’ – high potential
vulnerability to financial stress over the medium term based on trends in credit expansion, equity and property prices and realexchange rates – to ‘1’ – low likelihood. For more information, refer to Fitch’s most recent Macro-Prudential Risk Monitor report.
Year cured from the most recent default or restructuring event, since 1980 = No event.
The de facto exchange-rate regime, based on the latest IMF Annual Report on Exchange Arrangements and Exchange
Restrictions report, is ‘Floating’.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

4

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Rating Factors
Strengths•

Iceland ranks much higher on the World BankWorldwide Governance Indicators and Human
Development Index Indicators relative to themedians.

•

GDP and income per capita are significantly
higher than the ‘A’ and ‘AA’ medians.

•

Pension funds’ assets were 205% of GDP at endAugust 2022, providing support to thesovereign’s fiscal financing flexibility.

••

Sovereign

A+

China
IsraelMalta

A

Foreign-exchange reserves were 7.6 months ofcurrent external payments in 2021, well abovethe ‘A’ peer current median (of four months).
Iceland is highly reliant on tourism. According to
Statistics Iceland, the sector was 8% of GDP and
13.9% of employment prior to the Covid-19
pandemic in 2019 (versus 5% of GDP and 9.6%of employment at end-2021).

•

Volatility of real GDP growth and inflation are
higher than the ‘A’ peer median.

•

GGGD was 75% of GDP at end-2021, well
above the ‘AA’ current median.

•Iceland’s public debt interest payments and theshare of public debt maturing in a year are higher
than the ‘A’ peer median.

•

Gross and net external debt metrics are higher
than the ‘A’ medians. However, the netinternational investment position, which
includes equity and investment fund shares, was
39% of GDP in 2021, well above the current ‘A’median of 12%.

IcelandJapan
Lithuania
Ras Al Khaimah
Saudi Arabia

A favourable demographic composition (theshare of people of working age was 65% in 2020)
supports growth potential.

Weaknesses•

RatingSlovakia
Slovenia
A-

AndorraChile
LatviaPolandSpain

Source: Fitch Ratings

Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade•

Public Finances: Evidence that the government’s economic and fiscal strategy will lead to a resumption of an
upward trajectory of the government debt/GDP ratio over time.

•

Macro: Renewed economic weakness or an adverse shock, for example due to a sharp slowdown in the tourism
sector, a sustained correction in the real estate market and material negative impact on the banking sector.

Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade•

Public Finances: A sharp and sustained decline in the government debt/GDP ratio, for example throughimplementation of a fiscal consolidation strategy or sustained GDP growth over time.

•

Macro: Sustained economic recovery beyond 2022, for example supported by a diversification of the exportbase and without generating macroeconomic imbalances.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

5

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Forecast Summary
2019

2020

2021

2022F

2023F

2024F

Real GDP growth (%)

2.4

-6.8

4.4

5.9

1.9

2.5

Unemployment (%)

3.9

6.4

5.9

3.8

4.0

4.2

Consumer price inflation (annual average % change)

2.0

1.2

3.7

6.0

4.5

2.5

Macroeconomic indicators and policy

Policy interest rate (annual average, %)

3.0

0.8

2.0

6.0

6.0

5.5

General government balance (% GDP)

-1.5

-8.6

-8.9

-4.7

-3.2

-3.0

Gross general government debt (% GDP)

66.2

77.2

74.6

69.8

69.1

68.5

ISK per USD (annual average)

122.6

135.4

127.0

129.2

126.5

123.5

Real private credit growth (%)

1.8

8.1

8.9

0.9

-1.4

0.5

-1.0

-0.6

-1.3

-1.1

-1.3

-1.4

External finance
Merchandise trade balance (USDbn)
Current account balance (% GDP)

6.5

1.9

-1.6

-2.0

-0.3

0.0

Gross external debt (% GDP)

78.6

90.0

82.9

74.6

70.1

66.1

Net external debt (% GDP)

20.4

22.8

25.1

23.7

21.6

19.5

External debt service (principal + interest, USDbn)

2.1

1.7

1.2

2.2

1.3

1.6

Official international reserves including gold (USDbn)

6.8

6.4

7.1

6.5

6.6

6.9

Gross external financing requirement (% int. reserves)

0.7

13.2

20.4

32.6

15.5

14.4

US

2.3

-3.4

5.7

2.9

1.5

1.3

China

6.0

2.2

8.1

3.7

5.3

5.0

Eurozone

1.3

-6.4

5.4

2.6

2.1

2.1

World

2.6

-3.3

5.8

2.9

2.7

2.7

Oil (USD/barrel)

64.1

43.3

70.6

105.0

85.0

65.0

Real GDP growth (%)

Source: Fitch Ratings

Sources and Uses
External Finances

Public Finances (General Government)(ISKbn)

2022

2023

Uses

555.5

548.7

Budget deficit

173.1

124.8

MLT amortisation

382.4

423.9

Domestic

297.4

328.9

External

85.0

95.0

Sources

555.5

548.7

Gross borrowing

536.0

558.8

Domestic

371.5

433.5

External

164.6

125.4

Privatisation

53.0

0.0

Other

-60.0

-10.1

Change in deposits

26.5

0.0

(- = increase)
Source: Fitch Ratings

Iceland
Rating Report │ 10 October 2022

(USDbn)

2022

2023

Uses

2.3

1.0

Current account deficit

0.6

0.1

MLT amortisation

1.7

0.9

Sovereign

0.6

0.0

Non-sovereign

1.1

0.9

Sources

2.3

1.0

Gross MLT borrowing

1.7

1.2

Sovereign

0.5

0.1

Non-sovereign

1.2

1.1

FDI

-0.1

-0.1

Other

0.0

0.0

Change in FX reserves

0.6

-0.1

(- = increase)
Source: Fitch Ratings

fitchratings.com

6

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Credit Developments
Resilience to the Energy Shock
Following a contraction of 6.8% in 2020, Iceland’s real GDP grew by 4.4% in 2021. This was slightly better than our
initial expectations, but weaker than the ‘A’ peer current median. The recovery has strengthened over the course of2022: real GDP grew by 6.1% yoy in 2Q22 (7.6% in 1Q22), underpinned by domestic demand and solid export
growth. We expect the strong recovery in tourism flows to continue. High frequency indicators (passengers
thorough Keflavik Airport and foreign credit card spending) point to the continuation of the strong tourism
performance in the third quarter. We expect real GDP growth of 5.9% this year, an upward revision from ourprevious review (4.5%).
The other two key sectors of the economy, aluminium and fishing, have also performed well so far this year, withboth benefiting from the improving terms of trade. The prices of aluminium and some species of fish have risen
strongly in 1H22. However, aluminium prices have decreased sharply in recent months, which will have a negative
impact on the profits of aluminium smelters. Marine products’ exports volumes have increased over the course of2022, mainly owing to the increase in the quota for capelin, which is the largest since 2003. Iceland’s aquaculture
sector is small, but rising at a fast pace with significant investments to increase productive capacity.
The recovery and the financial support provided to businesses and households during the pandemic has led to a
sharp drop in unemployment in 2021. The labour market strengthened further this year; unemployment was 3.2%
in July 2022, down from the pandemic’s peak of 11.6%. in January 2021. There is some anecdotal evidence of labour
shortages particularly in the construction sector. However, at the same time, immigration has picked up and it should
help in easing pressures on labour demand. Wage pressures are likely to intensify as real wage growth has turned
negative in June 2022.
The Icelandic economy is partly insulated from the impact of the Ukraine-Russia war. The share of renewables in theenergy mix at above 80% is the highest in Europe, while gas is only a very small portion of it. As a result, household
purchasing power and industry profit margins have been less affected by higher energy costs than the rest of Europe.
Moreover, direct trade and financial sector linkages with Russia, Ukraine and Belarus are very limited. Nevertheless,weaker GDP growth in the main trading partners, particularly in the UK and the eurozone, will have a negative effecton Iceland’s export performance.
We expect real GDP growth to slow sharply to 1.9% in 2023 mainly due to weaker growth in Iceland’s trading
partners (in particular, the UK and the EU), which will be reflected in weaker tourism flows and tighter monetary
policy. However, the US market (the largest market of origin) should provide some buffer for the tourism sector.
Icelandic households will experience less of an income squeeze relative to the rest of western Europe and this should
provide some buffer to private consumption. Domestic energy prices will remain unaffected by the gas crisis as mostof Iceland’s energy is generated by geothermal and hydropower sources.
In Europe, we expect the economic impact of the shock to fade sharply in 2024 as production structures andconsumption patterns adjust and new gas infrastructure facilities come on stream. We expect this to benefit Iceland
where real GDP will grow by 2.5% in 2024.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

7

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandProlonged Rate Hiking Cycle to Tackle Inflation
Headline consumer price inflation rose fast over the course of 2022, but its dynamics are different relative to therest of western Europe. In Iceland, it is mostly driven by domestic factors, such as a more rapid rebound in economic
activity, rising house prices and wage growth. The increase in global commodity prices is also a factor, though not
the main driver, due to the predominance of renewables in the country’s energy mix. If measured by the Harmonised
Index of Consumer Prices (HICP) – the benchmark indicator of inflation for the EU and the eurozone – Iceland’s
inflation was the lowest across the European Economic Area (EEA), after Switzerland. However, the benchmark
inflation rate targeted by the CBI is the domestic CPI, which considers owner-occupied housing costs, and is muchhigher: HICP inflation was 6.4% in July 2022, while domestic CPI was 9.9%, well above the CBI’s target of 2.5%.
The strong labour market performance and growth in nominal wages have contributed to higher inflation. The swift
recovery in the labour market has been accompanied by steady wage growth. Nominal wages rose by 8.1% in the
12 months to July 2022; however, real wage growth has declined sharply since June 2021 as CPI picked up. In May
2022, real wage growth turned negative for the first time since 2010. In June 2022, real wage growth declined by
1.7%. A large number of collective wage agreements in the private sector expire in November 2022, and the tradeunions will likely push for pay settlements well above inflation. Our inflation forecasts assume that nominal wages
will grow by 7%, but we think risks are to the upside.
In September 2022, inflation declined to 9.3%, the second consecutive monthly decline (9.7% in August). This follows
a period of aggressive rate hikes by the CBI. There are some signs that inflation is moderating across the board. The
CPI (excluding housing) decreased as well to 7.1% in August from 7.5% in July. House prices and imported inflation
have been the main inflation drivers so far this year. Recent data suggest that these factors are easing.
The housing market has been buoyant since the start of the pandemic. House prices rose by nearly 16% in 2021 innominal terms, and just above 10% in real terms. Despite rising interest rates and tighter macroprudential measures,
housing demand has remained buoyant and nominal prices rose by 24.8% in the 12 months to August 2022. Fitch’s
Macro Prudential Risk Monitor indicates that real house prices are above their long-term trend. However, there aresome early signs that the housing market may be cooling. According to the Housing and Infrastructure Agency, inAugust, the level of purchase agreements was the lowest since April 2015. Moreover, housing supply has picked up
quite strongly in recent months. The supply of flats in the capital region has increased more than initially expected;
neighbouring municipalities to the capital region have experienced similar improvements in supply. The average time
to sale has also increased. All these factors suggest that the housing market may be slowing.
The CBI has withdrawn its pandemic-related accommodative policies, and, since May 2021, has raised the key policy
rate to 5.75% from 0.75%. In addition, it has also adopted a raft of macroprudential measures, including the loweringof the maximum loan-to-value ratio to 80% from 85% and to 85% from 90% for first-time buyers, an increase in the
countercyclical capital buffer to 2% from 0% (effective from September 2022) and introducing a limit to debt serviceto-income at 35% for mortgage borrowers and 40% for first-time buyers.
In our view, the combination of higher interest rates, macro-prudential measures, pick-up in housing supply andgradual withdrawal of fiscal support mean that house price growth should ease further. Moreover, oil and commodity
prices should continue to decrease. We expect inflation to average 8.8% in 2022 and decline more markedly to 6.4%
in 2023 – still well above the CBI target. For HICP, we estimate inflation to average 6% this year and 4.5% in 2023.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

8

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Revenue Growth Underpins Deficit Reduction
We expect the general government deficit to decline to 4.7% of GDP from 8.9% of GDP in 2021, better than ourprevious review (6.5% of GDP) and lower than the ‘A’ peer current median (-5% of GDP). The improvement reflects
the stronger-than-expected revenue growth (underpinned by stronger economic activity, but also higher inflation
boosting VAT receipts) and the unwinding of the majority of pandemic-related support. The government has
introduced some measures to protect low-income households from higher inflation by bringing forward increases insocial benefits and pensions. However, given the different nature of inflation, driven by house prices and not byenergy prices, the size of the support package is small (0.2% of GDP) relative to other European countries.
For 2023, we expect a deficit of 3.2% of GDP in line with the projected ‘A’ median (3.2% of GDP). The government
has announced a raft of measures to rebuild fiscal buffers and prevent overheating of the economy, as recommended
by the IMF. The measures account for 0.7% of GDP and include increases in excise taxes, changes to duty-free
discounts and increases in taxation for aquafarming industry. The government is also planning additional measures,
including a reform of road taxation (yet to be defined) and a review of the public investment plan. The government
does not intend to reinstate its own fiscal rules before 2026: in our view, this suggests that it intends to maintainfiscal flexibility and that it will likely extend further fiscal support to the economy should the recovery be weaker
than expected.

Debt on a Gradual Downward Path
The government-to-debt ratio declined to 74.6% of GDP in 2021 from 77.2% in 2020, despite a large deficit in 2021,
underpinned by nominal GDP growth of 6.3% and proceeds from asset sales. We expect GGGD to decline gradually
to 68.5% of GDP by 2024. The sovereign has high financing flexibility due to the extremely large pool of private
pension funds’ assets (205% of GDP at end-August 2022), 65% of which is invested domestically. The government
also has strong access to the international bond market, a large cash deposit buffer and is supported by robust
liquidity in the banking system. Moreover, government assets are large at 84% of GDP. In March 2022, the Treasury
sold a second stake (22.5%) in Islandsbanki raising ISK52 billion (1.4% of GDP), which is earmarked for debt
reduction. This follows the sale of the first 35% stake in Islandsbanki, raising ISK55 billion (1.7% of 2021 projectedGDP). Further sales of government equity stakes are likely1 and could accelerate debt reduction over the coming
years. However, we do not factor in further asset sales in our debt projections.
Iceland’s debt structure has improved in recent years. About 89% of central government debt is denominated in ISK,
while only 11% is denominated in FC. The low share of FC debt reduces risks from exchange-rate movements. Since
the start of the pandemic, the government has financed the budget deficit predominantly in the domestic market. It
has also used the liquid assets of the Housing Finance Fund (HFF) – a 100% state-owned company. We estimatethat about 21% of the 2021 financing requirement was financed by the use of HFF assets. Following acomprehensive revision of the public finance statistics in 2019, the HFF is within the general government scope. As
the HFF assets wind down, GGGD should decline. As HFF assets become liquid, either because mortgages areamortised or paid in advance, they will become a source of funding that will either lower the borrowing requirements
or allow the retirement of other government debt.
Iceland’s public debt interest payments and the share of public debt maturing in a year are higher than the ‘A’ peer
median. The inclusion of the HFF within the general government perimeter has led to a sharp rise in interest costs,
as the outstanding HFF bonds carry high annual interest costs of about ISK50 billion (1.6% of GDP). However, we
do not consider the sizeable interest income that the government receives from its large assets (1.8% of GDP; 4.3%
of revenue in 2021). If included, the net interest payment-to-revenue ratio would be about 5.8% of GDP, well below
the gross figure of 10.1% of GDP and closer to the ‘A’ peer median (4.6%).

1

The 2023 budget includes the sale of the remaining shares of Islandsbanki for an estimated ISK75 billion. We do not include
these in our debt dynamics projections.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

9

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandExternal finances have been broadly resilient throughout the pandemic, despite the collapse in tourism receipts.
Following a surplus in 2020, the current account deficit (CAD) widened to 1.6% of GDP in 2021 (revised downwards
by the CBI from the initial estimate of 2.8%). We expect the CAD to widen further to 2% of GDP this year. The CAD
was 5% of GDP in 1Q22 and 4.3% in 2Q22. This reflects a sharp rise in services imports (Icelanders travelling abroad),but also the improved performance of foreign-owned companies in Iceland, which has resulted in a sharp worseningof the primary income balance. We expect the balance of payments to improve in 2H22, as the services balance
improves, underpinned by the tourism recovery and an improvement in the income balance. With aluminium prices
declining, profits of the foreign-owned aluminium smelters are set to decline. We expect the CAD to be 2% of GDP
at end-2022, and to decline more gradually thereafter as import-intensive investment slows down.
The Icelandic krona was broadly stable in 2022. The net international investment position (NIIP) improved despite
the CAD and was at 24.7% of GDP in 2Q22. Pension funds dominate the domestic financial market, and theiractivities have a strong impact on the NIIP and on the currency. In 2021, pension funds’ net purchases of foreign
assets were ISK53 billion (1.6 % of 2021 GDP), broadly unchanged from 2020.
Iceland has a 50% limit on the share of overseas foreign holdings in pension assets. The authorities are debating a
potential lifting or removal of the limit. If the legislation were changed, we would not expect a significant change infunds’ activity and do not think this would lead to excessive capital outflows. We would expect pension funds tocontinue diversifying their assets abroad given the reduced differential between international and domestic interest
rates. However, we expect the process to remain orderly and gradual. The risk of sudden sharp capital outflows frompension funds remains low, as we believe it would not be in the funds’ interest to excessively destabilise the krona.
Among other things, a weaker currency would hurt the pension funds’ stock market value and inflate their own
liabilities.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

10

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandPublic Debt Dynamics
According to Fitch’s baseline projections, GGGD will decline gradually to 68.5% of GDP by 2024 and decline slowly,
thereafter. In a scenario of looser fiscal policy, the debt ratio would rise to 74% of GDP by 2026. A low-growthscenario would see the debt continuing to rise over time and reach 74% of GDP by 2026. Conversely, further salesof government equity stakes could accelerate debt reduction over the coming years.

Debt Dynamics - Fitch’s Baseline Assumptions
2020

2021

2022

2023

2024

2025

2026

Gross general government debt (% of GDP)

77.2

74.6

69.8

69.1

68.5

68.2

67.2

Primary balance (% of GDP)

-4.6

-4.8

-0.1

1.5

1.5

1.5

1.8

Real GDP growth (%)

-6.8

4.4

5.9

1.9

2.5

2.3

2.3

Average nominal effective interest rate (%)

5.9

5.8

7.3

7.5

7.3

6.6

6.1

135.4

127.0

129.2

126.5

123.5

122.0

122.0

GDP deflator (%)

3.6

6.0

7.0

4.0

3.0

2.5

2.5

Stock-flow adjustments (% of GDP)

0.0

0.0

0.7

0.0

0.0

0.0

0.0

ISK/USD (annual avg.)

Source: Fitch Ratings

Debt Sensitivity Analysis: Fitch’s Scenario Assumptions
GrowthReal GDP growth 1.9% lower (half standard deviation lower)

Interest rate

Marginal interest rate 250bp higher

FiscalGradual Fiscal Easing. Primary balance deficit averaging 0.7% of GDP over 2023-2031

Exchange rate

40% devaluation at end-2022

Source: Fitch Ratings

About the Public Debt Dynamics
Fitch uses stylised projections for a sovereign’s GGGD/GDP ratio to illustrate the sustainability of its debt burden
and its sensitivity to economic growth, the cost of borrowing, fiscal policy and the exchange rate.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

11

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Data Tables
General Government Summary(% GDP)

2016

2017

2018

2019

2020

2021

2022F

2023F

2024F

Revenue

59.0

45.4

44.8

41.9

41.9

40.2

42.0

41.8

41.5

Expenditure

46.4

44.4

43.8

43.4

50.6

49.1

46.7

45.0

44.5

o/w interest payments

6.1

5.7

4.9

4.3

4.0

4.1

4.6

4.7

4.5

Interest payments (% revenue)

10.3

12.6

11.0

10.2

9.6

10.1

11.0

11.2

10.8

Primary balance

18.6

6.7

5.9

2.8

-4.6

-4.8

-0.1

1.5

1.5

Overall balance

12.5

1.0

0.9

-1.5

-8.6

-8.9

-4.7

-3.2

-3.0

Gross government debt

82.4

71.6

63.1

66.2

77.2

74.6

69.8

69.1

68.5

% of government revenue

139.6

157.9

141.1

158.2

184.1

185.6

166.3

165.4

165.0

Domestic debt

74.3

67.2

58.8

60.1

68.8

64.0

58.5

57.9

57.4

External debt

8.1

4.4

4.4

6.1

8.4

10.6

11.3

11.2

11.1

Local currency

74.3

67.2

58.8

60.1

68.8

64.0

58.5

57.9

57.4

Foreign currency

8.1

4.4

4.4

6.1

8.4

10.6

11.3

11.2

11.1

Central government deposits

11.4

7.2

7.9

8.4

16.6

14.6

12.2

11.5

10.9

Net government debt

71.0

64.5

55.3

57.9

60.5

60.0

57.6

57.6

57.6

Financing

-1.0

-0.9

1.5

8.6

8.9

4.7

3.2

3.0

Domestic borrowing

-3.4

-3.7

5.2

6.5

1.9

2.0

2.7

2.5

External borrowing

-2.8

-0.2

1.9

1.8

2.8

2.2

0.8

0.7

Other financing

5.2

2.9

-5.6

0.3

4.3

0.5

-0.3

-0.3

Change in deposits (- = increase)

3.6

-1.2

-1.0

-8.0

0.4

0.7

0.0

0.0

Privatisation

0.0

0.0

0.0

0.0

1.7

1.4

0.0

0.0

Other

1.6

4.2

-4.6

8.3

2.2

-1.6

-0.3

-0.3

Source: Fitch Ratings, Ministry of Finance

Iceland
Rating Report │ 10 October 2022

fitchratings.com

12

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Balance of Payments(USDbn)

2016

2017

2018

2019

2020

2021

2022F

2023F

2024F

Current account

1.7

1.0

1.1

1.6

0.4

-0.4

-0.6

-0.1

0.0

% GDP

8.1

4.2

4.1

6.5

1.9

-1.6

-2.0

-0.3

0.0

Goods

-0.8

-1.5

-1.5

-1.0

-0.6

-1.3

-1.1

-1.3

-1.4

Services

2.2

2.6

2.4

2.1

0.5

0.8

1.1

1.1

1.2

Primary income

0.4

0.1

0.4

0.7

0.7

0.3

-0.4

0.2

0.3

Secondary income

-0.1

-0.2

-0.2

-0.2

-0.2

-0.3

-0.1

-0.1

-0.1

Capital account

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Financial account

-0.6

1.1

1.4

0.9

1.6

0.1

1.0

0.8

0.7

Direct investment

-0.7

-0.2

0.5

0.7

0.7

0.0

0.1

0.1

0.1

Portfolio investment

1.9

2.3

1.0

0.6

0.9

0.1

0.9

0.7

0.6

Derivatives

0.0

0.1

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Other investments

-1.8

-1.1

-0.1

-0.5

0.0

0.0

0.0

0.0

0.0

Net errors and omissions

0.2

-0.7

0.4

-0.1

1.0

1.0

1.0

1.0

1.0

Change in reserves (+ = increase)

2.4

-0.8

0.0

0.6

-0.2

0.4

-0.6

0.1

0.3

International reserves, incl. gold

7.2

6.6

6.3

6.8

6.4

7.1

6.5

6.6

6.9

Liquidity ratio (%)

54.6

191.5

164.8

183.7

207.3

224.7

186.5

206.0

195.5

11.1

12.3

13.4

12.2

8.4

10.7

16.0

17.6

19.3

Current external payments (CXP)

9.5

11.3

12.3

10.6

8.0

11.1

16.5

17.7

19.3

CXR growth (%)

10.8

10.7

8.7

-9.0

-30.7

26.9

49.0

10.5

9.4

CXP growth (%)

4.3

19.3

9.2

-14.1

-23.9

38.3

48.6

7.3

8.6

Memo
Current external receipts (CXR)

Gross external financing requirement% International reserves
Net external borrowing

-0.9

0.0

1.0

0.0

0.9

1.3

2.3

1.0

0.9

-17.6

-0.5

15.9

0.7

13.2

20.4

32.6

15.5

14.4

-5.5

-5.9

-1.3

-0.9

-1.0

1.7

0.0

0.4

0.4

Source: Fitch Ratings, IMF

Iceland
Rating Report │ 10 October 2022

fitchratings.com

13

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandExternal Debt and Assets(USDbn)

2016

2017

2018

2019

2020

2021

2022F

2023F

2024F

Gross external debt

26.0

22.5

20.1

19.5

19.5

21.2

21.3

21.6

22.0

% GDP

125.2

91.1

76.6

78.6

90.0

82.9

74.6

70.1

66.1

% CXR

233.8

182.8

150.3

160.1

231.1

198.0

133.2

122.6

114.2

6.4

7.2

7.9

6.9

7.6

8.3

8.3

8.3

8.3

Sovereign

4.0

2.8

2.6

3.0

2.8

3.7

3.6

3.7

3.8

Monetary authorities

0.4

0.4

0.4

0.5

0.4

0.7

0.8

0.9

1.0
2.8

Short-term debt (% GXD)
By debtor

General government

3.6

2.5

2.2

2.5

2.4

3.0

2.7

2.8

Banks

4.2

5.8

5.9

5.5

5.9

6.4

6.7

7.0

7.1

Other sectors

17.8

13.9

11.7

10.9

10.9

11.1

11.0

11.0

11.1

Gross external assets (non-equity)

19.3

14.6

15.0

14.5

14.6

14.8

14.5

15.0

15.5

Sovereign

7.2

6.6

6.3

6.8

6.4

7.1

6.5

6.6

6.9

International reserves, incl. gold

7.2

6.6

6.3

6.8

6.4

7.1

6.5

6.6

6.9

Other sovereign assets

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Banks

2.3

3.1

3.6

3.1

3.4

3.3

3.3

3.3

3.3

Other sectors

9.8

5.1

5.1

4.7

4.8

4.5

4.4

4.3

4.2

Net external debt

6.8

7.9

5.2

5.1

5.0

6.4

6.8

6.7

6.5

% GDP

32.6

31.8

19.7

20.4

22.8

25.1

23.7

21.6

19.5

Sovereign

-3.2

-3.7

-3.7

-3.8

-3.7

-3.4

-2.9

-2.9

-3.0

Banks

2.0

2.8

2.3

2.5

2.6

3.2

3.1

2.9

2.6

Other sectors

8.0

8.8

6.6

6.3

6.0

6.6

6.6

6.7

6.9

Assets

35.0

29.2

29.2

32.1

35.3

39.5

-

-

-

Liabilities

34.6

28.7

26.9

27.1

27.5

29.5

-

-

-

Net

0.4

0.5

2.3

4.9

7.9

10.0

-

-

-

International investment position

Net sovereign

3.2

3.7

3.7

3.8

3.7

3.4

2.9

2.9

3.1

15.6

15.1

14.2

15.1

16.9

13.2

10.2

9.4

9.2

External debt service (principal + interest)

1.5

1.6

2.6

2.1

1.7

1.2

2.2

1.3

1.6

Interest (% CXR)

5.9

4.6

3.5

3.7

4.9

2.5

2.7

2.4

3.4

% GDP

Source: Fitch Ratings, central bank, IMF, World Bank

Iceland
Rating Report │ 10 October 2022

fitchratings.com

14

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Full Rating Derivation
Long-Term Foreign-Currency Issuer Default Rating (SRM + QO)

A

Sovereign Rating Model

Applied Ratingd

A

Model Result and Predicted Rating
Input Indicator

Weight (%)

2021

Governance indicators (percentile)

20.3

n.a.

GDP per capita (USD)

13.3

Nominal GDP (% world GDP)
Most recent default or restructuring
Broad money (% GDP)

2022 2023 Adjustment to Final Data

10,6 = A

Final Data

Coefficient

Output (notches)n.a. -

94.2

0.074

6.95

n.a. 76,528

n.a. Percentile

94.9

0.042

3.95

13.2

n.a.

0.03

n.a. Natural log

-3.5

0.596

-2.10

5.0

n.a.

None

n.a. Inverse 0-1a

0.0

-2.017

0

1.4

n.a.

49.3

n.a. Natural log

3.9

0.188

0.73

Structural features

9.54
94.2

Macroeconomic performance, policies and prospects-1.12

Real GDP growth volatility

5.1

n.a.

4.2

n.a. Natural log

1.4-0.815-1.16

Consumer price inflation

2.9

3.7

6.0

4.5 3-yr avg.b

4.7-0.058-0.27

Real GDP growth

2.4

4.4

5.9

1.9 3-yr avg.

4.1

0.076

0.31

Gross general govt debt (% GDP)

8.3

74.6

69.8

69.1 3-yr avg.

71.2

-0.022-1.55

General govt interest (% revenue)

4.5

10.1

11.0

11.2 3-yr avg.

10.8

-0.043-0.47

General govt fiscal balance (% GDP)

2.6

-8.9

-4.7

-3.2 3-yr avg.

-5.6

0.048

-0.27

FC debt (% of total general govt debt)

2.4

13.8

16.4

16.4 3-yr avg.

15.5

-0.006-0.10

Reserve currency (RC) flexibility

7.8

n.a.

0.0

n.a. RC score 0 - 4.5c

0.0

0.549

SNFA (% of GDP)

7.3

13.2

10.2

9.4 3-yr avg.

10.9

0.011

0.13

Commodity dependence

1.1

n.a.

46.5

n.a. Latest

46.5-0.004-0.19

FX reserves (months of CXP)

1.8

n.a.

4.7

n.a. n.a. if RC score> 0

4.7

0.036

0.17

External interest service (% CXR)

0.4

2.5

2.7

2.4 3-yr avg.

2.6

-0.006-0.02

CAB + net FDI (% GDP)

0.1

-1.6

-2.2

-0.5 3-yr avg.

-1.4

0.001

-0.00

Public finances-2.39

External finances

0.08

Intercept Term (constant across all sovereigns)

0

4.49

ᵃ Inverse 0-1 scale, declining weight; ᵇ of truncated value (2%-50%); ᶜ Declining weight; ᵈ Sovereign rating committee can override SRM Predicted Rating if a marginal change
in the Model Result leads to a notch change, which is judged to be temporary or caused by a re-estimation of the SRM, a process that Fitch undertakes on at least an annual
basis. Please refer to the Rating Action Commentary for further information when the Applied Rating differs from the Predicted Rating.
Note: This table contains data as at the date of the most recent rating action. There may be minor differences to data presented elsewhere in this report, which may have been
updated where appropriate, for example in the event of subsequent data releases.
Source: Fitch Ratings

Qualitative Overlay (notch adjustment, range +/-3)0Structural features

0

Macroeconomic outlook, policies and prospects

0

Public finances0

External finances0

About the SRM and QO
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages,
including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework
designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully
quantifiable and/or not fully reflected in the SRM.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

15

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Supplementary Ratings
Local-Currency Rating
Iceland’s credit profile does not support an uplift of the LT Local-Currency (LC) IDR above the LT FC IDR. In Fitch’sview, neither of the two key factors supporting the upward notching of the LT LC IDR cited in the criteria is present,
namely: strong public finance fundamentals relative to external finance fundamentals; and previous preferential
treatment of LC creditors relative to FC creditors.

Country Ceiling
Fitch lifted Iceland’s Country Ceiling to ‘A+’ at the May 2019 rating review, one notch above Iceland’s LT FC IDR.
This reflects the record of liberalisation of capital controls since 2016. In March 2019, the remaining offshore kronadenominated assets that were restricted from conversion into FC assets at market rates were released.

Full Rating History
Foreign-Currency Rating

Local-Currency Rating

Date

Long-Term

Short-Term

Outlook/Watch

Long-Term

Short-Term

Country
Outlook/Watch Ceiling

18 Mar 22

A

F1+

StableA

F1+

StableA+

22 May 20

A

F1+

Negative

A

F1+

NegativeA+

24 May 19

A

F1+

StableA

F1+

StableA+

08 Dec 17

A

F1

StableA

F1

StableA

07 Jul 17

A-

F2

Positive

A-

F1

PositiveA-

13 Jan 17

BBB+

F2

Positive

BBB+

F2

Positive

BBB+

22 Jul 16

BBB+

F2

StableBBB+

F2StableBBB+

24 Jul 15

BBB+

F2

StableA--

StableBBB+

30 Jan 15

BBB

F3

Positive

BBB+-

Positive

BBB

14 Feb 13

BBB

F3

StableBBB+-

StableBBB

17 Feb 12

BBB-

F3

StableBBB+-

StableBBB-

16 May 11BB+

B

StableBBB+-

StableBB+

05 Jan 10

BB+

B

Negative

BBB+-

NegativeBB+

23 Dec 09

BBB-

F3

Negative

A--

Negative

BBB-

08 Oct 08

BBB-

F3

Watch Negative

A--

Watch Negative BBB-

30 Sep 08

A-

F2

Watch NegativeAA-

Watch Negative A

01 Apr 08

A+

F1

NegativeAA+-

NegativeAA-

15 Mar 07

A+

F1

StableAA+-

StableAA-

21 Feb 06

AA-

F1+

Negative

AAA-

NegativeAA

17 Jun 04

AA-

F1+

StableAAA-

StableAA

31 Mar 03

AA-

F1+

StableAAA-

Stable-15 Feb 02

AA-

F1+

Negative

AAA-

Negative-

26 Feb 01

AA-

F1+

Stable

AAA

-

-

-

21 Sep 00

AA-

F1+

StableAAA-

Stable-03 Feb 00

AA-

F1+

-

AAA

-

-

-

Source: Fitch Ratings

Iceland
Rating Report │ 10 October 2022

fitchratings.com

16

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandAppendix 1: Environmental, Social and Governance (ESG)
Credit Relevance Scores
General Issues

Key Sovereign Issues

SRM

QO

ScoreaEnvironmental (E)GHG Emissions and Air Quality

Emissions and air pollution as a constraint on GDP growth

2

2

2

Energy Management

Energy resource management, including potential for ‘stranded assets’, affecting
exports, government revenues and GDP

3

2

3

Water Resources and Management

Water resource availability and management as a constraint on GDP growth

2

2

2

Biodiversity and Natural Resource
Management

Natural resource management, including potential for ‘stranded assets’, affecting
exports, government revenues and GDP

3

3

3

Natural Disasters and Climate Change

Impact of adverse climate trends, and likelihood of and resilience to shocks

3

3

3

Human Rights and Political Freedoms

Social stability, voice and accountability, regime legitimacy

4

2

4+

Human Development, Health and
Education

Impact of human development, health and education on GDP per capita and GDP
growth3

2

3

Employment and Income Equality

Impact of unemployment and income equality on GDP per capita, GDP growth andpolitical and social stability

3

2

3

Public Safety and Security

Impact of public safety and security on business environment and/or economic
performance

3

2

3

Demographic Trends

Population decline or aging, rapidly rising youth population; pensions sustainability

3

2

3

Political Stability and Rights

Political divisions and vested interests; geo-political risks including conflict, security
threats and violence; policy capacity: unpredictable policy shifts or stasis

5

2

5+

Rule of Law, Institutional & Regulatory
Quality, Control of Corruption

Government effectiveness, control of corruption, rule of law, regulatory quality

5

2

5+

International Relations and Trade

Trade agreements, membership of international organizations, bilateral relations;sanctions or other costly international actions

3

2

3

Creditor Rights

Willingness to service and repay debt

4

2

4+

Data Quality and Transparency

Availability, limitations and reliability of economic and financial data, includingtransparency of public debt and contingent liabilities

3

2

3

Social (S)Governance (G)Source: Fitch Ratings

About ESG Credit Relevance Scores
The scores signify the credit relevance of the respective E, S and G issues to the sovereign entity’s credit rating, according to the following
scale:•

5 – Highly relevant to the rating, a key rating driver with a high weight.

•

4 – Relevant to the rating, a rating driver.

•3 – Relevant, but only has an impact on the entity rating in combination with other factors.

•

2 – Irrelevant to the entity rating but relevant to the sector (sovereigns).

•

1 – Irrelevant to the entity rating and irrelevant to the sector (sovereigns).

The score for each ‘General Issue’ comprises a component SRM and QO score, and is simply the higher of the two. SRM scores are fixed
across all sovereigns as the weights in the SRM are the same for all sovereigns; QO component scores vary across all sovereigns.
All scores of ‘4’ or ‘5’ result in a negative impact on the rating, unless indicated otherwise. Where a positive impact is occurring, the scoreof ‘4’ or ‘5’ is appended with a ‘+’ symbol. Scores of ‘3’, ‘2’ and ‘1’ do not have a direction of impact assigned.
Please refer to ESG Relevance Scores for Sovereigns for further information on the framework, including ‘Sovereign Rating Criteria
References’ (which identify specific potentially related SRM variables and QO factors for each ‘General Issue’).

Iceland
Rating Report │ 10 October 2022

fitchratings.com

17

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

Credit-Relevant ESG Derivation
Iceland has an ESG Relevance Score of ‘5[+]’ for Political Stability and Rights as World Bank Worldwide GovernanceIndicators have the highest weight in Fitch’s SRM and are, therefore, highly relevant to the rating and a key rating
driver with a high weight. As Iceland has a percentile rank above 50 for the respective Governance Indicator, thishas a positive impact on the credit profile.
Iceland has an ESG Relevance Score of ‘5[+]’ for Rule of Law, Institutional & Regulatory Quality and Control ofCorruption as World Bank Worldwide Governance Indicators have the highest weight in Fitch’s SRM and are,therefore, highly relevant to the rating and are a key rating driver with a high weight. As Iceland has a percentile rank
above 50 for the respective Governance Indicators, this has a positive impact on the credit profile.
Iceland has an ESG Relevance Score of ‘4[+]’ for Human Rights and Political Freedoms as the Voice andAccountability pillar of the World Bank Worldwide Governance Indicators is relevant to the rating and a rating driver.
As Iceland has a percentile rank above 50 for the respective Governance Indicator, this has a positive impact on thecredit profile.
Iceland has an ESG Relevance Score of ‘4[+]’ for Creditor Rights as willingness to service and repay debt is relevantto the rating and is a rating driver for Iceland, as for all sovereigns. As Iceland has a record of 20+ years without arestructuring of public debt and captured in our SRM variable, this has a positive impact on the credit profile.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. Thismeans ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature orto the way in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores,
visit www.fitchratings.com/esg:

Iceland
Rating Report │ 10 October 2022

fitchratings.com

18

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
IcelandAppendix 2: Data Notes and Conventions
Acronyms
Acronyms used in the above table and elsewhere in report are: Gross Domestic Product (GDP), Current External
Receipts (CXR), Current External Payments (CXP), Current Account Balance (CAB), Foreign Direct Investment (FDI),World Bank Worldwide Governance Indicators (WBGI), Sovereign Rating Model (SRM), Qualitative Overlay (QO).
For a full list of indicator definitions, please refer to the most recent Sovereign Data Comparator.

Medians
Medians underlying the SRM relative to rating category chart on the Rating Summary page and as reported in thePeer Analysis table on page 4 are long-term historical medians. These are based on actual data since 2000 for all
sovereign-year observations when the sovereign was in the respective rating category at year-end. Current year
ratings and data are excluded.
Chart medians on page 3 are based on data for sovereigns in the respective rating category at the end of each year.
Latest ratings are used for the current year and forecast period.

Notes for Iceland
All data are on a calendar-year basis, which aligns with the domestic fiscal year for this sovereign.
Public finances data referenced in this report relate to the consolidated general government, as per our principal
approach, unless specifically noted otherwise where cited.
The external balance sheet data referenced in this report are derived from the international investment position
dataset, as per our principal approach.

Iceland
Rating Report │ 10 October 2022

fitchratings.com

19

Exclusively for the use of Michele Napolitano at Fitch Group, Inc.. Downloaded: 14-Oct-2022

Sovereigns
Iceland

The ratings above were solicited and assigned or maintained at the request of the rated entity/issuer or a related
third party. Any exceptions follow below.
zxcvbnm729mnbvcxz481
DISCLAIMER & DISCLOSURESAll Fitch Ratings (Fitch) credit ratings are subject to certain limitations and disclaimers. Please read these limitations and disclaimersbyfollowing
this
link:
https://www.fitchratings.com/understandingcreditratings.
In
addition,thefollowinghttps://www.fitchratings.com/rating-definitions-document details Fitch’s rating definitions for each rating scale and rating
categories, including definitions relating to default. Published ratings, criteria, and methodologies are available from this site at all
times. Fitch’s code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance, and other relevant policies andprocedures are also available from the Code of Conduct section of this site. Directors and shareholders’ relevant interests areavailable at https://www.fitchratings.com/site/regulatory. Fitch may have provided another permissible or ancillary service to therated entity or its related third parties. Details of permissible or ancillary service(s) for which the lead analyst is based in an ESMAor FCA-registered Fitch Ratings company (or branch of such a company) can be found on the entity summary page for this issuer
on the Fitch Ratings website.
In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters
and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings
methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given
jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its
issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevantpublic information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-uponprocedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competentthird- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings andreports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection
with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and tothe market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect
to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking
and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings andforecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed.
The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its
contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by
Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product ofFitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk,
unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch
report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch ratingis neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the
securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are
not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or
the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for
rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number ofissues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to
US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its nameas an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom,or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic
subscribers up to three days earlier than to print subscribers.
For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it toprovide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaningof the Corporations Act 2001.
Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of
the NRSRO’s credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (seehttps://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by thosesubsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.
Copyright © 2022 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212)480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved.
z

Iceland
Rating Report │ 10 October 2022

fitchratings.com

20