SOVEREIGN AND SUPRANATIONAL

Government of Iceland - A2 Stable

ISSUER IN-DEPTH
29 July 2022

Annual credit analysis
OVERVIEW AND OUTLOOKRATINGS

IcelandGov. Bond Rating
Country Ceiling

Foreign
Currency

Local
Currency

A2/STA

A2/STA

Aa2

Aa1

TABLE OF CONTENTSOVERVIEW AND OUTLOOK
1
CREDIT PROFILE
2
Economic strength score: baa2
2
Institutions and governance strength
score: aa2
7
Fiscal strength score: baa2
11
Susceptibility to event risk score: a
16
ESG considerations
21
Scorecard-indicated outcome
23
Comparatives
24
DATA, CHARTS AND REFERENCES
25

Analyst Contacts
Kathrin+44.20.7772.1383
Muehlbronner
Senior Vice President
kathrin.muehlbronner@moodys.com
Lenaic Couderc+44.20.7772.1799
Associate Analyst 1
lenaic.couderc@moodys.com
Dietmar Hornung+49.69.70730.790
Associate Managing Director
dietmar.hornung@moodys.com
Alejandro Olivo+1.212.553.3837
MD-Sovereign/Sub Sovereign
alejandro.olivo@moodys.com

Iceland's credit strengths include the economy's flexibility, wealth, competitiveness andfavourable demographics, all of which support its long-term growth prospects and help it toabsorb shocks. The country's track record of effective macroeconomic management since itscrisis in 2008 and carefully managed capital-account liberalisation with minimal disruption
demonstrate the strength of its institutions.
The substantial decline in the government's debt burden over the past few years hasbolstered our assessment of fiscal strength, notwithstanding the pandemic-induced reversal
in 2020. Moreover, a consistent net external creditor position and very large foreign-currency
reserves provide a healthy buffer against external shocks.
Iceland's main credit weakness is the economy's small size and concentration in a limited
number of sectors, which increases its vulnerability to sector-specific shocks. For example,
the coronavirus pandemic weighed heavily on its crucial tourism sector, though it has been
recovering strongly since. Other key economic sectors are currently benefiting from the spikein commodity prices that have been amplified by the Russian invasion of Ukraine (Caa3
negative). Over the longer term, further diversification will be key to reduce growth volatility.
The government debt ratio started to decline last year after the increase in 2020 driven
by the pandemic and the re-classification of several public companies within the general
government accounts. Although debt remains above peers at 75% of GDP, the government's
strong fiscal track record over the past few years coupled with robust fiscal institutions andprocedures give us confidence that the debt burden will be reduced materially over the
coming years. The re-classification exercise in 2020 has also improved fiscal transparency.
Iceland’s rating would be upgraded if the government was able to rebuild its fiscal buffers
more rapidly than we expect. A diversification push that leads to a less volatile economic
performance would also be positive for the rating.
Conversely, the rating would come under downward pressure if the government deviatedsignificantly from its fiscal-consolidation plan that aims to stabilise public debt by the middleof the decade. An economic shock that leads to a large and permanent damage to thetourism industry, or to substantial capital outflows, weakening Iceland’s external position andthreatening financial stability, would also be credit negative, although we consider this anunlikely scenario.
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 Sovereign Ratings Methodology.

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICECREDIT 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 aconstraint, that can only lower the scorecard-indicated outcome. For more information please see our Sovereign Ratings Methodology.

Economic strength score: baa2

+

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

Scale

aa1

aaa

Factor 1: Overall score

-

Final

Factor 1: Sub-scores
Icelandbaa2

Score for IcelandMedian of countries with A2 rating
SCALE OF THE
ECONOMYGROWTH DYNAMICS
weight 25%
Average real GDP (% change)

NATIONAL INCOME

weight 10%

weight 30%

weight 35%

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 instructural 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, diversity, productivity and labour supply challenges.
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 scorewill appear in the table above.

We assess Iceland's economic strength as “baa2”, which balances the country's small size and history of boom and bust episodes with
its very high wealth levels and strong competitiveness in its core industries. Other sovereigns with the same assessment of economic
strength include Latvia (A3 stable) and Peru (Baa1 stable).
Exhibit 1Peer comparison table factor 1: Economic strength

IcelandFinal score
Initial score
Nominal GDP ($ billion)
GDP per capita (PPP, Intl$)
Average real GDP (% change)
Volatility in real GDP growth (ppts)

A2/STA
baa2
baa2
25.5
59,791.5
2.4
3.8

baa2
Median78.9
29,843.2
3.0
3.4

BrazilLatviaPeru

Pakistan

Chile

CyprusBa2/STA
baa2
baa2
1,609.0
16,160.7
1.0
3.1

A3/STA
baa2
baa2
38.9
34,707.3
2.4
2.8

Baa1/STA
baa2
baa3
225.7
13,879.0
2.6
6.0

B3/NEG
baa2
baa2
348.2
5,973.1
4.3
1.9

A1/NEG
baa1
baa1
317.1
26,713.3
2.2
4.4

Ba1/STA
baa3
baa2
27.7
45,033.6
3.1
5.1

Source: National authorities, IMF, Moody's Investors Service

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29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Iceland's wealth and competitiveness mitigate the economy's small size and concentration
With nominal GDP of $25.5 billion in 2021, Iceland's economy is one of the smallest among the sovereigns we rate. Limited
diversification and relatively high openness lead to growth volatility, which increases the economy's vulnerability to sector-specificand external shocks. Exports and imports accounted for 38% and 40% of GDP, respectively, in 2021 and over 70% of the country's
export revenues come from three sectors: tourism (23% of total export revenues), marine products (24% of total export revenues) andaluminum (23% of total export revenues) (see Exhibit 2).
For example, in 2019, real GDP growth slowed to 2.6% from the average of close to 5% in the previous four years because of a
combination of negative events in all three sectors: the collapse of a low-cost airline that affected the tourism industry, production
issues at one of the aluminium smelters, and a ban on capelin catch so as to allow for the replenishment of fishing stocks. At the sametime, the economy is susceptible to environmental risks, such as the potential for natural disasters to interrupt tourism or for ocean
warming to disrupt fishing stocks.
These challenges are mitigated by very high income levels, which are also comparatively evenly distributed.1 GDP per-capita on apurchasing power parity basis stood at $59,792 in 2021, much higher than the median for A-rated sovereigns of $43,505 and the 15th
highest in our rating universe (see Exhibit 3). In addition, household assets in the form of pensions amount to around 200% of GDP,similar to Denmark (Aaa stable) and the Netherlands (Aaa stable) and much higher than most other OECD countries. Together withhigh income levels, these provide an important shock absorber, as demonstrated during the banking crisis and again during last year's
pandemic.
Exhibit 2

Exhibit 3

Three sectors dominate Iceland's exports

Iceland's high income levels act as an important shock absorber

Exports of goods and services by sector (2021)

GDP per capita PPP (US$)
2005

2010

2015

2021

70,000Other
21%

Marine products
24%

60,00050,00040,000Other
manufacturing
products
9%

Tourism
23%

30,00020,00010,000

Aluminium
23%

0
Iceland

Sources: Statistics Iceland, Moody's Investors Service

A-rated median

EU median

Source: IMF and Moody's Investors Service

Iceland's economy is highly competitive, as demonstrated by its 16th position in the World Competitiveness Index. The country fares
particularly well compared to peers on its institutions, technological readiness, educational environment and labour market efficiency.
Iceland’s demographic profile is also more favourable than in many other countries — particularly compared to continental Europe —because of exceptionally long working lives, higher fertility rates, a high participation of women to the labour force and the flexibility of
the labour market. Iceland’s old-age dependency ratio — defined as ratio of population aged 65+ divided by the population aged 20-64— is projected to remain lower than all EU sovereigns over the next two decades (see Exhibit 4).2

3

29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 4

Exhibit 5

Iceland is less exposed to population ageing than peers

Private sector is less leveraged than peers

Old-age dependency ratio (65+ / 20-64)
Finland
Estonia

Latest (% of GDP)

SwedenIreland

NorwayIceland

Household debt

Corporate debt

250

60

200
50

150

40

100

30

20

50

10

0

0
2019

2025

2030

2035

2040

Source: 2020 Ageing Report, Statistics Iceland and Moody's Investors Service

2045

Source: Eurostat, Statistics Iceland and Moody's Investors Service

Economic recovery is well underway, supported by strong tourism demand
Iceland's economy recovered reasonably strongly last year with real GDP growth of 4.3%, following a deep contraction of over 7%
in 2020. The tourism sector recovered in 2021, thanks to good vaccination campaigns in both Iceland and key countries of origin, inparticular the United States (US, Aaa stable), the United Kingdom (UK, Aa3 stable) and the European Union (EU, Aaa stable). Tourist
arrivals were 49% higher than in 2020 but remained 65% lower than in 2019. The sector directly and indirectly accounted for 22.8% of
Iceland’s GDP before the pandemic, 20% of employment and 30% of total exports according to the World Travel and Tourism Council(WTTC).3
The recovery accelerated further with real GDP growth of 7.3% year-on-year in the first quarter of 2022, helped by domestic demandand strong export growth. We expect the continued recovery in tourism will drive the economy this year and alongside still strong
consumption and investment lead to real GDP growth of around 4.5% in 2022. Although the omicron variant dented the recovery at
the beginning of the year, tourist arrivals are now close to their 2019 levels and foreign credit card spending in real terms is now higher
than before the pandemic. Export growth of marine products and aluminium will also be strong, both supported by strong demand andprice dynamics. Higher aluminum and fish prices will more than offset higher input costs, leading to an improvement in Iceland's termsof trade.
The economic recovery as well as the significant support that the government provided to businesses and households during the
pandemic has led to a sharp drop in unemployment, which stood at 3.5% in May (seasonally adjusted terms). Labour shortages,
particularly in the tourism industry, may somewhat hold back the pace of the recovery but immigration has picked up and is expected
to help fill some of the increased demand for labour.
The good employment situation will continue to support domestic demand. Although most of the pandemic-related support will bephased out this year, positive real wage growth of around 1% on average in the first five months of the year will continue to support
private consumption. That said, the import content of domestic demand is high in Iceland and imports will also increase materially.

4

29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 6

Exhibit 7

Tourism activity is rebounding strongly

Wages have decoupled from productivity

Tourist arrivals ('000)
2019

Q1-2009 = 100
2020

2021

2022

Real wages

350

160

300

150

250

140

200

GDP per hour worked

130
120

150

110
100
100

50

90
0

Source: Keflavik Airport and Moody's Investors Service

80

Source: Statistics Iceland and Moody's Investors Service

The invasion of Ukraine has a minimal direct impact on Iceland. Domestic energy prices have not been affected by the spike incommodity prices given that most of Iceland's energy is generated from geothermal and hydropower sources. Iceland also has oneof the highest share of electric cars in Europe, reducing the impact of higher fuel costs. In addition, the government has put in placemeasures in response to higher inflation targeted to poorer households such as bringing forward housing and child benefits as well as
pension increases. Overall trade exposure to Russia and Ukraine accounts for 1% of total exports and 0.5% of imports. Iceland will be
more affected by the slowdown in growth in its key trading partners, particularly in Europe.
For 2023, we expect slower growth of around 2.8%, mainly due to tighter monetary policy and more moderate economic activity
in Iceland's key trading partners, which will be reflected in lower export growth. The Central Bank of Iceland (CBI) has raised its key
policy rate by a cumulative 400 basis points since May 2021, reflecting strongly rising inflation. Consumer price inflation reached 8.8%
in June, the highest rate since late 2009. Around half of the increase was driven by house prices. Excluding the housing component,
inflation stood at 5.2%. Lower interest rates and increased savings during the pandemic have led to a surge in demand for housing
while supply is low (see Banking sector risk section for further details).
We expect the CBI to raise its key policy rates further in the coming months, which should help to dampen price growth in the quarters
ahead (see more detailed discussion in Institutions and Governance section).
Longer-term focus on economic diversification strategy
The pandemic has highlighted the need for further economic diversification to reduce growth volatility. The government estimates
growth potential at just below 2.5%, in line with IMF estimates. The government is looking to support a knowledge-based economy,
with a view of further raising trend growth by emphasising sectors with good prospects in Iceland such as biotechnology, aquaculture
and information technology and communication. Iceland has a tradition in the first two, with exports growing vigorously in both
sectors over the past few years (see Exhibit 8). Iceland's aquaculture sector, though still small, has continued to grow despite thepandemic and significant investment is underway to increase the productive capacity. Higher aquaculture exports will help counteract
variations in fishing quotas that have impacted GDP growth in recent years and provide significant opportunities for economic
diversification.
Materially changing the structure of the economy will take time, and the three key sectors – tourism, marine products and aluminum –will likely remain dominant over the medium term. The IMF and the OECD point to other areas that could help Iceland to further raise
its growth potential, in particular by improving education outcomes and digitalisation of the economy. The IMF notes that Iceland iswell ahead of many other advanced economies in terms of digital skills and infrastructure but high-tech sectors contribute relatively
less to growth than in other OECD countries. The government’s tax incentives for private-sector R&D investment and public venture
capital funds are helping to promote innovation in the economy.

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29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 8

Exhibit 9Some sectors offer diversification opportunities

Iceland is ahead of peers in terms of ICT adoption

4-quarter rolling exports (ISK billion)

Adults with above basic digital skills (% of total)

Pharmaceuticals
Acquaculture70

ICT
Total (% of GDP), RHS

200
180

7

60

6

50

160
5

140

40
30

120

4

100

20
3

80

10

60

2

0

40

1

20
0

0
2012

2013

2014

2015

2016

2017

2018

Source: Statistics Iceland and Moody's Investors Service

2019

2020

2021

2022

Source: Eurostat and Moody's Investors Service

Iceland’s spending on education is similar to other countries but educational attainment lags other high-income peers. Education
reform is ongoing and the government has recently announced a retraining and upskilling programme for professions in short supply.
The government also plans to ease access to work permits for high-skilled workers from outside the European Economic Area, to easelabour shortages.
The OECD and the IMF also point to stringent regulations, in particular in services and startups, that tend to stifle competition. Barriers
to entry are high, and administrative burdens and an extensive licensing and permit system protect incumbents and slow new andinnovative start-ups. The OECD estimates that reducing administrative burdens would raise per-capita GDP by 1 percentage point overa 10-year period while the IMF estimated that some degree of deregulation could raise GDP by 2.3%.4.

629 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

Institutions and governance strength score: aa2

+

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

Scale

aa1

aaa

Factor 2: Overall score

-

Final

Factor 2: Sub-scores
Icelandaa2

Score for IcelandMedian of countries with A2 rating

QUALITY OF INSTITUTIONSPOLICY EFFECTIVENESS

weight 20%

weight 20%

weight 30%

weight 30%

Quality of Legislative and Executive
Institutions

Strength of Civil Society and the Judiciary

Fiscal Policy EffectivenessMonetary 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 andwillingness to repay its debt. A related aspect is the government's capacity to conduct sound economic policies that foster economic growth andprosperity. 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 scorewill appear in the table above.

Our assessment of Iceland's institutions and governance strength as “aa2” is supported by the country's strong scores in the Worldwide
Governance Indicators (WGI) and a track record of effective macroeconomic management to restore economic and financial
stability after the banking crisis. The latter was demonstrated by the careful liberalisation of the capital account and the increased
maturation of financial regulation and supervision in line with global best practices. The reforms introduced following the crisis havealso strengthened the macro-policy mix.
Other sovereigns with the same assessment of institutional strength include Austria (Aa1 stable) and Ireland (A1 positive).
Exhibit 10Peer comparison table factor 2: Institutions and governance strength

Final score
Initial score
Quality of legislative & executive institutions
Strength of civil society & judiciary
Fiscal policy effectivenessMonetary & macro policy effectivenessFiscal balance/GDP (3-year average)
Average inflation (% change)
Volatility of inflation (ppts)

Iceland
A2/STA
aa2
aa2
aa
aaa
aa
a
-5.7
3.8
1.2

aa2 Median

aa
aaa
aa
aa
-4.4
2.2
0.9

Austria
Aa1/STA
aa2
aa2
aa
aaa
aa
aa
-3.6
2.4
0.7

Ireland
A1/POS
aa2
aa2
aa
aa
aa
aa
-0.6
2.0
0.9

FranceAa2/STA
aa2
aa2
aaa
aaa
a
aa
-5.1
2.0
0.8

Korea
Aa2/STA
aa1
aa1
aa
aa
aaa
aa
-2.5
1.9
0.7

Australia
Aaa/STA
aa1
aa1
aa
aaa
aa
aaa
-6.4
2.2
0.6

Chile
A1/NEG
aa3
aa3
aa
a
a
aa
-4.6
3.0
1.1

Source: National authorities, World Bank, Moody's Investors Service

7

29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Robust survey scores demonstrate Iceland's strengthened institutions
Iceland ranks highly compared to A-rated peers on the Worldwide Governance Indicators (WGI), supporting our strong assessment of
the country's institutions. It ranks in the 88th percentile of the WGI's measure of government effectiveness and 89th for 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 although key economic data series
can be subject to large revisions.
Furthermore, Iceland's rankings in the 93rd percentile for control of corruption and 94th percentile for rule of law reflect limited
instances of corruption and that 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, employer and employee associations,which contribute positively to policy effectiveness.
Exhibit 11

Iceland's governance indicators rank above A-rated peers
Percentile rank among our rating universe (2020)
IcelandDenmarkMedian - A

Median - W.Europe

Political Stability
100
80
Regulatory Quality

60

Government Effectiveness

40
20
0

Voice and Accountability

Rule of Law

Control of Corruption
Source: 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, thefinancial system and public finances back onto a sustainable path. In conjunction with a three-year IMF Stand-By Arrangement andpost-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 to prevent such distortions fromhappening again. 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.
Most capital controls were lifted in March 2019 without material disruption and exchange-rate pressures. The Foreign Exchange
Act passed in June 2021 removed the last remaining restrictions on the capital account and paved the way for increased capital
movements. The central bank’s toolkit has been expanded to limit the risks to financial stability of excessive flows, includingtransparent and clearly communicated foreign-currency interventions to smooth excessive krona volatility because of the small sizeof the foreign-currency market. Foreign-currency reserves are very large at around 25% of GDP and significantly higher than the IMF's
various reserve adequacy metrics.
A further example of Iceland's strengthened institutions is the swift reaction to the country being placed on the grey list of the Financial
Action Task Force (FATF) in October 2019 for gaps in its anti-money laundering framework. In October 2020, Iceland was removed
from the grey list, having implemented the FATF's required actions such as ensuring the availability of accurate beneficial ownership
information and strengthening the monitoring of financial institutions.

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29 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

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 governanceand decision-making structure, mostly implemented by 2012. The transparency of monetary policy decisions has been significantly
enhanced and is now on par with other advanced economies with an inflation-targeting framework.5
Like other economies, inflation has accelerated and has been above the central bank's 2.5% target since May 2020 (see Exhibit 12). The
drivers of price growth have shifted from imported inflation during the pandemic, which mostly resulted from the depreciation of thekrona, to house prices. In June 2022, consumer price inflation was 8.8%, of which about half was on account of house prices. The CBIstarted to raise its key policy rate in May 2020, one of the first central banks to do so, and has hiked by a cumulative 400 basis points
to 4.75%. We expect further interest rate hikes in the coming months, as near-term inflation expectations have recently risen (seeExhibit 13). Longer-term inflation expectations have risen as well but to a smaller extent, indicating confidence of economic actors that
inflation will be brought back to target. Iceland’s performance on inflation has materially strengthened compared to the past, when the
CBI rarely managed to hit its inflation target.
In addition, the Financial Stability Committee has recently lowered the maximum loan-to-value (LTV) ratio to 80% from 85% andto 85% from 90% for first-time buyers, capped the debt-service to income ratio at 35% and 40% for first-time buyers and restored
the countercyclical capital buffer to 2% for banks from September 2022, with the aim of dampening house price inflation. On theother hand, the strengthening of the krona could help moderate inflation in the coming months given the high pass-through from theexchange rate to inflation.6
Upcoming wage negotiations scheduled for November 2022 will be a key determinant of the monetary policy outlook. Higher wages
will support private consumption in the short term, but could also fuel already elevated inflationary pressures and lead to a tightermonetary policy stance. We expect the agreements will at least compensate for inflation to keep real wage growth positive.
Strong wage increases in the past have raised concerns over declining price competitiveness and an increasing misalignment between
wages and productivity growth (see Exhibit 7), but the latest three-year wage agreement from 2019 is generally considered to havehelped support private consumption during the pandemic. That said, both the OECD and the IMF advocate linking future wage
increases more directly to productivity growth rather than growth in per-capita income as in the 2019 wage agreement.
Exhibit 12

Exhibit 13

Inflation is mostly driven by rising house prices

Long-term inflation expectations have risen but are betteranchored than in the past%

Break-even inflation rate (%)
Other

Services

Domestic goods

Housing

1 yrPetrol

2 yr

5 yr

10 yr

Inflation target

14

9
8

12

7
10

6

5

8

4
6

3
2

4

1

0

2

-1
Q4-2021

Q1-2021

Q2-2020

Q3-2019

Q4-2018

Q1-2018

Q2-2017

Q3-2016

Q4-2015

Q1-2015

Q2-2014

Q3-2013

Q4-2012

Q1-2012

Q2-2011

Q3-2010

Q4-2009

Q1-2009

Q2-2008

Q3-2007

Q4-2006

Q1-2006

Q2-2005

Q3-2004

Q4-2003Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14Jul-14
Dec-14May-15Oct-15Mar-16Aug-16
Jan-17
Jun-17
Nov-17
Apr-18
Sep-18
Feb-19Jul-19Dec-19
May-20
Oct-20Mar-21
Aug-21
Jan-22Jun-22

Sources: Central Bank of Iceland and Moody's Investors Service

Q1-20030-2

Sources: Central Bank of Iceland and Moody's Investors Service

Strengthening of the fiscal framework supports policy credibility and effectiveness
Before the banking crisis, weaknesses in the budgetary framework resulted in an often pro-cyclical 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

929 July 2022

Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

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.7 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
independent fiscal council is tasked with assessing the compliance with the fiscal objectives and whether public finances are on a pathwhere the numerical rules can be reinstated in 2026.
The authorities have demonstrated their adherence to the rules even before the formal entry into force of the law. As a result of solid
budgetary outturns and the use of windfall profits for debt reduction, Iceland's public debt declined by more than 50 percentage
points of GDP between the peak in 2011 and 2018 (see Exhibit 15). In 2019, the central government's debt ratio stood at 29.1% ofGDP, one of the strongest ever episodes of debt reductions globally. Sizeable fiscal buffers provided space for the government's strong
fiscal response to the pandemic. The Icelandic Parliament has suspended its fiscal rules until 2025 to support the economy. The
government's Fiscal Plan presented in March 2022 aims to return to compliance with the fiscal rules from 2026 onwards and targets a
deficit of 1.5% of GDP in 2025. Net debt is expected to reach its peak at 46.5% of GDP in 2025.
Exhibit 14

Exhibit 15

Iceland has established a track record of adhering to fiscal rules

Debt reduction points to strong fiscal policy effectivenessCentral government debt targets and outturn (% of GDP)

General government debt (% of GDP)

Realised debt

2017-2021

2018-2022

2019-2023

2020-2024

2021-2025

2022-2026

2023-2027

2011

2019

2023

Change over 2011 - 2019

200

70

150

60

100

50
50

40
0

30

25.1

28.5
7.5

-50

20

5.5

2.2
-13.2

-14.8

-20.5

-53.3
-100

10

-71.9

0
2017

2018

2019

2020

2021

2022

2023

Source: Ministry of Finance and Moody's Investors Service

10

29 July 2022

2024

2025

2026

2027

Source: National authorities and Moody's Investors Service

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Fiscal strength score: baa2

ca

caa3

caa2

caa1

b3

b2

b1

ba3

Initial

ba2

Final

ba1

baa3

+

baa2

baa1

a3

a2

a1

aa3

aa2

Scale

aa1

aaa

Factor 3: Overall score-

Factor 3: Sub-scores
Icelandbaa2

Score for IcelandMedian of countries with A2 rating
DEBT AFFORDABILITY

DEBT BURDEN
weight 25%

weight 25%

General government debt (% of GDP)

General government debt (% of revenue)

weight 25%

weight 25%

General government interest payments (% General government interest payments (%of revenue)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 thanothers. Fiscal strength is adjusted for the debt trend, the share of foreign currency debt in government debt, other public sector debt and forcases 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 scorewill appear in the table above.

We assess Iceland's fiscal strength as “baa2”, balancing the government's strong track record in reducing its large budget deficits
and very high debt burden after the 2008 crisis against the recent increase in the debt ratio triggered by the pandemic and the reclassification of some public-sector corporations into the general government (+32 pp) in 2020. However, the latter significantly
reduces contingent-liability risks and improves of transparency the government's balance sheet, without creating additional fiscal
risks. The final score is higher than the initial score of “baa3” because we are confident that debt will again be reduced in the coming
years. The re-classification does not fundamentally alter our view of Iceland's fiscal strength; we had previously taken the debt of thesecompanies into account qualitatively, in particular the debt of the HF-Fund (A2 stable), which benefitted from an explicit government
guarantee and is in a government-directed winding-down process.
Other sovereigns with a “baa2” assessment of fiscal strength include Cyprus, Ireland and Vietnam (Ba3 positive).
Exhibit 16Peer comparison table factor 3: Fiscal strength

IcelandFinal 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)

A2/STA
baa2
baa3
75.0
185.6
4.1
10.1

baa2
Median

47.5
197.5
1.0
3.9

CyprusIrelandVietnamJapan

Belgium

Spain

Ba1/STA
baa2
baa2
103.6
244.0
1.8
4.3

A1/POS
baa2
a2
56.0
243.2
0.8
3.4

Ba3/POS
baa2
baa1
39.1
209.5
1.3
6.8

A1/STA
baa1
a3
230.8
623.3
1.7
4.6

Aa3/STA
baa1
baa1
108.2
219.5
1.7
3.4

Baa1/STA
baa3
baa3
118.4
270.8
2.2
5.0

Source: National authorities, Moody's Investors Service

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Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

Budget deficit will start to decline in 2022
Last year's budget deficit stood at 8.9% of GDP, slightly higher than in 2020, but still 1.7 percentage points of GDP lower than thegovernment had budgeted because of less uptake of support measures as well as stronger revenue collection. Capital investment wasalso under-executed due to delays in the implementation of the government's investment plan. Expiring support measures were partly
offset by stronger government consumption and wage subsidies.
We expect Iceland's budget deficit to narrow to just below 5% of GDP in 2022 reflecting the expiration of most fiscal support measuresduring the year as well as strong economic activity. A number of expansionary measures worth 2% of GDP, mostly reflecting theinvestment plan, will remain in place this year and gradually decline until 2027. The government has also introduced measures to shieldpoorer households from higher inflation by bringing forward planned increases in social benefits and pensions. Given that the natureof inflationary dynamics mostly stems from house prices, the scale of the support package is much smaller than in other European
countries where the spike in inflation has been driven by energy prices.
Overall, we expect the budget deficit to narrow faster than the government's expectation of 7.0% in the budget because our GDP
growth forecast exceeds budget assumptions. Budget execution for the first quarter of 2021 also points to a stronger performance thanassumed in the budget, with the deficit around 67% smaller than in the first quarter of 2021. Revenues were 17.7% higher than a year
earlier, while spending growth was contained at 3.7%. The target is composed of a deficit of 6% of GDP at the central government
level and a deficit of 1% of GDP at the local government level.
Exhibit 17

Exhibit 18

The pandemic had a deep impact on fiscal accounts

Pandemic support will start to wane in 2022

% of GDP

Covid-related fiscal measures (% of GDP)
Fiscal balance (RHS)

70

60

Revenue

Expenditure

Expenditure
15

10

Revenue

4
3.5

3

50
5

2.5

40
0

30
-5

2
1.5

20
10

-10

1
0.5

0

-15
0
2020

Source: IMF and Moody's Investors Service

2021

2022

2023

2024

2025

2026

2027

Source: Ministry of Finance and Moody's Investors Service

Medium-term fiscal strategy aims to gradually rebuild buffers
The government's medium-term fiscal plan for 2023-27 does not include active fiscal-consolidation measures until 2024. According to
the Ministry of Finance, the fiscal effort required between 2024 and 2027 to achieve the targets set out in its fiscal plan is manageable
at around 0.2% of GDP per year split equally between revenue and expenditures. The fiscal targets are set so as to stabilise thedebt ratio and reduce the fiscal deficit to 1% of GDP by the end of 2026. The IMF has outlined the importance of rebuilding fiscal
buffers, while the output gap is positive to avoid overheating by saving excess revenue and implementing additional fiscal savings. The
government has announced a set of measures to this effect in May 2022 that will reduce the deficit by a further 0.7% of GDP overthe medium term, including through the introduction of a road tax, a cap on current expenditure growth (except for health, social andjustice spending) and a review of the public investment plan.
Iceland has established a solid fiscal track record over the past decade which gives a high level of confidence that the pandemicinduced fiscal deterioration will be reversed over the coming years. The fiscal rules will be in place again from 2026 onwards, requiring abudgetary surplus on average over a rolling five-year horizon and a 5% annual reduction of the debt in excess of 30% of GDP debt over

12

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Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICEa three-year period for as long as the public debt ratio is above 30% of GDP. The fiscal rules provide an important medium-term policy
anchor and are firmly embedded and accepted across the political spectrum.
Debt will continue to decline, helped by further asset sales
Despite a sizeable fiscal deficit, the public debt ratio declined 2.4 percentage points of GDP in 2021 to 75% of GDP, helped by solid
nominal GDP growth and proceeds from the sale of public assets. In June 2021, the government listed 35% of its stake in Islandsbanki,raising ISK55.3 billion (1.7% of GDP) and valuing the company at ISK158 billion. The government's medium-term plan assumes that the
debt ratio (as per its definition) will peak at 44% of GDP in 2025. This is significantly lower than the government's expectation from ayear earlier, when it forecast that debt would reach 51.5% of GDP in 2026. Based on our definition, we expect the debt ratio to decline
to 70% of GDP in 2022, supported by the narrowing in the fiscal deficit as well as strong nominal GDP growth. We also include thelisting of a further 22.5% of the government's stake in Islandsbanki in March 2022, which raised ISK53 billion (1.6% of GDP). However,plans to complete the sale of the remaining 42.5% of Islandsbanki by the end of 2023 may face delays due to an ongoing investigation.
Iceland's debt burden will remain above the median for A-rated sovereigns in the foreseeable future (see Exhibit 19). A fiscal shockaside, Iceland's debt trend is relatively resilient to shocks, with debt stabilising below 75% of GDP under most scenarios. The low shareof foreign-currency debt reduces risks stemming from exchange-rate movements.
Exhibit 19

Exhibit 20

Iceland's debt burden has declined rapidly over past years but
remains higher than peers

Debt trajectory is resilient to most shocks
General government debt (% of GDP)

General government debt (% of GDP)
A-rated medianCentral Scenario
Fiscal shock
FX shock

Iceland

160
140
120

Growth shock
Interest rate shock

80
78
76

100

74

80

72
70

60
40

68

66
64

20
62

0

Source: National authorities and Moody's Investors Service

60
2017

2018

2019

2020

2021

2022F

2023F

2024F

2025F

2026F

Note: Standardized 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

The re-classification of 24 public-sector entities within general government accounts led to a significant deterioration in Iceland's debt
ratio and debt-affordability indicators. The debt-to-GDP ratio increased by about 32 percentage points of GDP mainly as a result of the
inclusion of the liabilities of the HF-Fund and to a lesser extent the Student Loan Fund. However, its obligations have not materiallychanged on a net basis because assets have increased by a similar amount. Therefore, the government’s balance sheet is stronger thanpeers when taking assets of 75% of GDP into account (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, with the latter amounting to around 15% of GDP.
The government has been gradually reducing its shareholding in the financial sector with the sale of Arion Banki in 2018 and the initialpublic offering of Islandsbanki in 2021 that we expect to be fully privatised in the coming years. The government still owns 98.2% ofLandsbankinn, valued at around ISK196 billion (6.6% of GDP), but for which no privatisation plans have been made. The government
receives dividends worth around 1% of GDP every year from its equity participations.

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MOODY'S INVESTORS SERVICE

Debt affordability remains weaker than with peers but is expected to improve
The retirement of higher-cost debt and the rebuilding of the revenue base since the banking crisis have helped to improve theaffordability of government debt. After more than doubling to 27% of government revenue in 2009 from 12.7% in 2007, interest
payments dropped to 10.1% of revenue in 2021 (see Exhibit 22). However, debt affordability remains weaker than in many similarly
rated peers like Poland (A2 stable) and Slovakia (A2 stable). In addition, the revision of the fiscal accounts in 2020 led to a material
weakening of debt affordability, mostly as a result of the outstanding HFF bonds which carry high annual interest costs of currently
around ISK50 billion (4% of revenue). Iceland's debt-affordability metrics are also weaker than peers, because we do not take into
account the sizeable interest receipts that the Icelandic government receives from its large assets. On a net basis, interest paymentsto-revenue stand at around 6%, a ratio that is much more comparable to peers.
Exhibit 21

Exhibit 22

Government assets are much larger than peers

Debt affordability has been improving, but remains weak comparedto peers

2021 (% of GDP)

Interest payments (% of revenue)
Currency

Bonds

Loans

EquityOther

90

A-rated median

Iceland

25

80

20

70
60

15

50
40

10
30

20

5

10
0

0
Iceland Slovenia Estonia

Latvia Lithuania Poland

Malta

Source: Eurostat, Statistics Iceland and Moody's Investors Service

Slovakia Ireland2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Source: National authorities, Moody's Investors Service

We expect a tighter monetary policy stance as well as the significant share of inflation-indexed debt will keep interest payments ataround 10% of revenue in 2022. At the end of May 2022, 22% of Treasury debt was linked to inflation (see Exhibit 23). That said, we
expect debt affordability to remain much more favourable than in the past and for it to continue to improve again over the coming
years as inflation recedes and HFF bonds amortise; this will mitigate the impact of higher government debt on our assessment of
Iceland's fiscal strength.
Contingent liabilities are low and pose limited risk to the government's balance sheet
As a result of the reclassification, contingent liabilities are now materially lower at around 1.3% of GDP as of April 2022. HF-Fund is anasset management vehicle in wind-down overseen by the Ministry of Finance and Economic Affairs, responsible for legacy mortgages
and the servicing of the remaining outstanding HFF bonds (ISK865 billion or 27% of GDP outstanding at end-2021). HF-Fund faces
a significant maturity mismatch between its assets and liabilities, as borrowers are prepaying mortgages, while the Fund cannot
accelerate repayment of its bonds, which have long maturities up to 2044. Currently, cash inflows and HF-Fund's cash position are
more than sufficient to cover its debt repayments. Although this favourable position will start to reverse in the early 2030s, we expectthat the government will have returned its debt burden on a steady downward trajectory by that time, providing ample room to coverannual payments of around 1% of GDP.
The largest guarantees have been extended to the power company Landsvirkjun, which accounts for 49% of total outstanding
guarantees. The company has a stable operating performance and has been able to raise debt without government guarantees. It has
also markedly improved its equity position and has become a source of revenue for the government in recent years. The company paid
ISK6.5 billion (0.2% of GDP) in dividends to the government in 2021.

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Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

Exhibit 23

Exhibit 24

About a fifth of government debt is linked to inflation

The reclassification exercise in 2020 has reduced the government's
contingent liabilities

Net central government debt (June 2022)% of GDP
Guaranteed debt

Foreign loans
3%

Reclassified

80%
70%
60%

50%

Fixed-rate debt
48%
Inflation-linked
49%

40%
30%

20%
10%
0%

Source: Ministry of Finance and Moody's Investors Service

15

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Source: Ministry of Finance and Moody's Investors Service

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Susceptibility to event risk score: aFactor 4: Overall score
aaa

Scale

aa

+

a

baa

ba

b

caa

ca
-

Final

Factor 4: Sub-scores
Icelanda

Score forIcelandMedian of countries with A2 rating

Overall adjustment to Factor 4 Susceptibility to Event Risk:

0

MIN. EXTERNAL VULNERABILITY RISKPolitical Risk

Government Liquidity Risk

Banking Sector Risk

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 thecountry’s probability of default. Such risks include political, government liquidity, banking sector and external vulnerability risks. Susceptibility ofevent 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 willappear in the table above.

Our assessment of susceptibility to event risk is set at “a”, driven by banking system and external vulnerability risk. Icelandic banks havesuccessfully emerged as healthy financial institutions since the economic crisis and with their large capital and liquidity buffers are able
to weather shocks. Large foreign-currency reserves and a net creditor position limit external vulnerability risk at “a”, while government
liquidity and political risks are even lower at “aa”.
Frequent elections over the past decade have not impacted policy continuity, geopolitical risks are low
Political event risk, which we assess at “aa”, is low in Iceland, which reflects relatively consistent policy in key areas important tosafeguarding the credit profile despite several changes in government since 2008. Iceland's geographical location insulates the country
from the current geopolitical risks linked to the Russia-Ukraine conflict. Peers sharing this assessment include Australia (Aaa stable) andCanada (Aaa stable).
Exhibit 25
Peer comparison table factor 4a: Political risk

IcelandFinal score
Voice & accountability, score[1]Political stability, score[1]A2/STAaa
1.4
1.4

aa MedianAustralia

Canada

Mauritius

0.9
1.0

Aaa/STAaa
1.3
0.8

Aaa/STAaa
1.5
1.1

Baa2/NEG
aa
0.7
0.9

New
Zealand
Aaa/STA
aaa
1.6
1.5

Ireland

Malta

A1/POSa
1.4
1.0

A2/NEGa
1.1
1.0[1] Composite index with values from about -2.50 to 2.50: higher values correspond to better governance.
Source: Worldwide Governance Indicators, Moody's Investors Service

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Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

The coalition government of Left-Green Movement and center/centre-right Progressive and Independence Parties has been confirmedin last September's parliamentary elections, although the relative shares of the parties has shifted somewhat. This was the first timesince 2009 that a coalition government has been renewed, with Prime Minister Katrín Jakobsdóttir remaining in her position. The
government coalition holds 37 out of 63 seats in the Alþingi, the Icelandic parliament.
In contrast to most other European countries we have not adjusted our score for political risk driven by geopolitical risk for Iceland eventhough the country is a founding member of NATO, and thus in principle exposed to a potential conflict between NATO and Russia.
However, 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, in force since 1951.
Government liquidity risk is low given strong fiscal credibility, sizeable cash buffer and large domestic investor baseWe assess government liquidity risk as “aa”. The previous marked reduction in government debt, prudent liquidity management, withsignificant cash buffers, and a large domestic investor base have mitigated the risks posed by markedly higher borrowing requirementsin the context of the pandemic. Other sovereigns sharing a “aa” assessment are Estonia (A1 stable), Saudi Arabia (A1 stable) and
Slovakia.
Exhibit 26
Peer comparison table factor 4b: Government liquidity risk

IcelandFinal score
Initial score
Ease of access to funding
Gross borrowing requirements (% of GDP)

A2/STA
aa
aa
aa
11.7

aa MedianEstoniaaa
8.0

A1/STA
aa
aa
aa
5.3

Saudi
ArabiaA1/STA
aa
aa
aa
-3.8

Slovakia

Chile

IrelandLithuania

A2/STAaaaaaa--

A1/NEG
aaa
aaa
aaa
3.0

A1/POS
aaa
aaa
aaa
--

A2/STAaaa
6.4

Source: National authorities, IMF, Moody's Investors Service

Iceland's gross borrowing requirements are relatively modest at 11.7% of GDP in 2022, which includes our estimate for the budget
deficit and maturing debt. We also assume that the Islandsbanki sale receipts of around 1.6% of GDP will be used for debt-reduction
purposes. Refinancing risks are relatively moderate with an average maturity of central government debt of 6 years as of May 2022 (seeExhibit 27).
Iceland has strong market access and a large domestic investor base, in the form of the pension funds which hold around 40% of total
Treasury bonds. The Treasury borrows mostly domestically, with around 80% of funding needs planned to be raised domesticallyin 2022. Foreign investors are much less present than they used to be, holding just 6.7% of Icelandic government bonds in June,
compared to 30% at end-2009 (see Exhibit 28). Pension funds are required to invest at least 50% of their assets domestically but a billcurrently discussed in Parliament to lower this threshold and allow the large pension fund system to increase their foreign assets could
reduce demand for government bonds. The full lifting of capital controls since 2020 could allow inflows of foreign investors to offset
the lower participation of pension funds, especially given Iceland's relatively favourable interest rate differential to most advanced
economies.
International bonds serve as benchmark issuances for local issuers but are kept in reserve at the central bank, helping to mitigate
liquidity risks. In addition, the government set guidance in 2017 to keep at least ISK40 billion in deposits at the central bank. At theend of May 2022, the total balance stood at ISK103 billion (3.2% of GDP) with an additional ISK269 billion held as foreign-exchange
deposits.

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Government of Iceland - A2 Stable: Annual credit analysis

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MOODY'S INVESTORS SERVICE

Exhibit 27

Exhibit 28

Favourable maturity profile limits refinancing risks

The government can rely on a large domestic investor base

ISK billion

Domestic debt by owner (ISK billion)
Bonds

Bills

External debt

Pension funds
Foreign investors

Non-marketable debt

250

Other residents
Nonresident holdings (% of total)
70%

1000
900

200

60%

800

50%

700
600

150

40%

500
30%

400

100

300

20%

200

50

10%

100

Jul-21

Feb-22

Dec-20

Oct-19

May-20Mar-19Jan-18Aug-18Jun-17

Apr-16

Nov-16

Sep-15

Jul-14Feb-15

Dec-13Oct-12

May-13Mar-12

Jan-11

Aug-11

Jun-10

Apr-09

Nov-092022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033

Source: Government Debt Management, Moody's Investors Service0%

Sep-0800

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, Estonia, and Ireland.
Exhibit 29Peer comparison table factor 4c: Banking sector risk

IcelandFinal score
Initial score
BCA[1]
BSCE[2]
Total domestic bank assets (% of GDP)

A2/STA
a
a
ba1
baa3
152.2

a Median

BermudaEstonia

Ireland

baa1
baa2
141.0

A2/STA
a
baa
baa2
baa2
368.9

A1/STA
a
a
baa3
baa3
124.6

A1/POS
a
a
baa1
baa3
117.2

CaymanIslands
Aa3/STA
aa
aa
-baa2
43.2

Malta

Slovenia

A2/NEG
baa
baa
-baa2
--

A3/STAbaa
baa
ba1
ba1-ba2
95.0[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.
Source: National authorities, IMF, Moody's Investors Service

Icelandic banks are now healthy – and much smaller – financial institutions than before the 2008 financial crisis, underpinned by a
rapid economic recovery and greater maturity of the regulatory framework under the supervision of the Financial Supervisory Authority
and the Central Bank of Iceland (see F2: Institutional Strength for more details). Some of the key measures undertaken under the IMFsupported programme were the introduction of strict limits on banks’ scope of activity and high capital requirements including the
introduction of a countercyclical capital buffer, which helped increase the resilience of the system.
Banks have very strong capital and liquidity buffers: the average CET1 capital ratio stood at 26.7% at the end of 2021, significantly
higher than most rating peers. The pandemic has resulted in limited pressure on banks’ asset quality thanks to the significant policy
support that was provided to the economy and the rebound in activity. That said, loans in sectors that have been most impacted by the
pandemic have become more risky.
The sharp rise in house prices has been accompanied by an increase in household indebtedness, which could pose risks to financial
stability. The high share of variable rate loans exposes households to rising interest rates and persistent inflation could impair theirability to repay. That said, the authorities have put in place a number of borrower-based measures to reduce riskier loans and increased
the countercyclical capital buffer to 2%.

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Government of Iceland - A2 Stable: Annual credit analysis

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Iceland benefits from strong external buffers, including a net external creditor position and large foreign-currency reserves
External vulnerability risk is set as “a”, reflecting Iceland's net external creditor position and very large foreign-currency reserves, which
help to buffer external shocks. Peers sharing the same risk assessment include Estonia, Poland and Slovakia.
Exhibit 30
Peer comparison table factor 4d: External vulnerability risk

Final score
Initial score
Current account balance (% of GDP)Net IIP (% of GDP)[1]

Iceland
A2/STA
a
a
-2.7
38.9

a Median

-1.2
-37.2

Estonia
A1/STA
a
a
-1.1
-12.2

PolandA2/STA
a
a
-0.6
-37.9

Slovakia
A2/STA
a
a
-2.0
-61.9

Peru
Baa1/STA
aa
aa
-2.3
-38.6

Lithuania
A2/STA
aa
aa
1.4
-7.2

Chile
A1/NEG
baa
baa
-6.4
-4.9

[1] Net international investment position (% of GDP).
Source: National authorities, IMF, Moody's Investors Service

Iceland recorded current-account surpluses between 2012 and 2020, mainly driven by the development of the tourism sector. The
bankruptcy of WowAir in 2019 and the pandemic materially reduced the size of the surplus to 0.8% in 2020 from a peak of 8.1% in
2016. The strong rebound in domestic demand in 2021 pushed the current-account into a deficit of 2.7% of GDP while large profits
of foreign companies weighed on the primary income balance. We expect the current-account deficit to narrow materially this year,
helped by the recovery in tourism and other exports. That said, elevated profits in foreign companies, particularly in the aluminium
sector, as well as a rebound in tourism imports from Icelanders travelling abroad will keep the current account in modest deficit ofaround 0.2% of GDP.
Iceland’s net international investment position (NIIP) has improved significantly since the banking crisis, helping to buffer shocks to
its small open economy. The resolution of the failed bank estates in 2015 led to a sharp improvement in Iceland’s NIIP, which stoodat -5.1% of GDP in 2015 versus -373% a year earlier. The gradual lifting of capital controls has resulted in a further improvement of
Iceland's net creditor position reflecting an increase in the pension funds’ foreign investments and substantial returns earned abroad.
The NIIP stood at 38.9% of GDP at the end of 2021 (see Exhibit 32).
Exhibit 31

Exhibit 32

The current account has remained in surplus since 2012

Large pension fund holds large assets abroad

Current account as % of GDP (4-quarter rolling sum)% of GDP

Goods
Secondary income

Services
Current accountPrimary income

15

FDI

Portfolio investment

Deposits

Loans

Other

Net IIP

50%
40%

10

30%

20%

5

10%
0%

0

-10%

-20%
-5

-30%
-40%

2022-Q1

2021-Q4

2021-Q3

2021-Q2

2021-Q1

2020-Q4

2020-Q3

2020-Q2

2020-Q1

2019-Q4

2019-Q3

2019-Q2

2019-Q1

2018-Q4

2018-Q3

2018-Q2

2018-Q1

2017-Q4

2017-Q3

2017-Q2

2017-Q1

2016-Q4

2016-Q3

2016-Q2

2015-Q4
2016-Q1
2016-Q2
2016-Q3
2016-Q4
2017-Q1
2017-Q2
2017-Q3
2017-Q4
2018-Q1
2018-Q2
2018-Q3
2018-Q4
2019-Q1
2019-Q2
2019-Q3
2019-Q4
2020-Q1
2020-Q2
2020-Q3
2020-Q4
2021-Q1
2021-Q2
2021-Q3
2021-Q4
2022-Q1

Note: Excludes banks undergoing winding up. Moody's forecasts
Source: Central Bank of Iceland, Statistics Iceland and Moody's Investors Service

2016-Q1-50%-10Source: 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 are actively being used to smoothexcessive volatility of the exchange rate. Reserves stood at $6 billion at the end of May 2022 up from less than $5 billion in 2015
and equivalent to around 25% of GDP or 29% of the country's total external debt. Using the IMF's reserve-adequacy metrics, thereserves are at ample levels, equivalent to 1.46 times the recommended level at the end of 2021. According to a sensitivity analysis

19

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Government of Iceland - A2 Stable: Annual credit analysis

MOODY'S INVESTORS SERVICE

SOVEREIGN AND SUPRANATIONAL

performed by the central bank at the beginning of 2021, they would still remain more than adequate even if reserves were needed tocover outflows of króna assets held by nonresidents which amounted to ISK113 billion (3.5% of GDP) at the end of May 2022.

20

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Government of Iceland - A2 Stable: Annual credit analysis

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ESG considerations
Iceland's ESG Credit Impact Score is Neutral-to-Low CIS-2
Exhibit 33

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 andvery strong institutions.
Exhibit 34

ESG Issuer Profile Scores

Source: Moody's Investors Service

Environmental
Iceland's exposure to environmental risks is neutral to low (E-2) as the country derives nearly all of its energy generation and use fromrenewable 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 seen with 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 and has
proven so many times. Warmer temperatures are favourable for plant productivity and agriculture. Around 11% of Iceland's land massconsists of glaciers; while the melting of glaciers increases the risk of landslides it also increases availability of hydropower, at least forseveral decades.
Social
We assess its S issuer profile score as neutral to low (S-2). Iceland's demographic profile is more favourable than in many othercountries because of long working lives, high participation rates of women and the flexibility of the labour force. Iceland also benefits
from high-quality education, access to basic services and housing availability. Indicators for access to healthcare are very strong, as seenin the fast response to the coronavirus pandemic. Social risks exert themselves through intensive wage negotiations between employers
and trade unions every four years which can impact on Iceland's competitiveness.
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 Worldwide Governance Indicators, which reflects the high credibility of its institutions and the country's

21

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Government of Iceland - A2 Stable: Annual credit analysis

MOODY'S INVESTORS SERVICE

SOVEREIGN AND SUPRANATIONAL

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 reporton how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector methodology antaGeneral
Principles for Assessing Environmental, Social and Governance Risks Methodology.

22

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Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

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 isdeliberative 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 Sovereign Ratings Methodology.
Exhibit 35

Sovereign rating metrics: Iceland
Economicstrength

How strong is the economic structure?

ca

+

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

How robust are the institutions and how predictable
are the policies?

aa2

-

+

-

+

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

ca

aaa

Government financial strength
caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

aa1

aaa

Sub-factors: quality of the institutions, policy effectiveness,government default history and track record of arrears

aa1

Institutions
andgovernancestrength

Economic resiliency

-

aaa

+

aa1

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

aa1

aaa

Sub-factors: growth dynamics, scale of the economy, wealth-

How does the debt burden compare with thegovernment's resource mobilization capacity?

Fiscalstrength

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

aa1

aaa

Sub-factors: debt burden, debt affordability, debt trend, share of foreign
currency debt, contingent liabilities, fiscal reserves+-

Scorecardindicatedoutcome:A1 - A3

Susceptibility What is the risk of a direct and sudden threat to debt
to event risk repayment?

+

ca

caa

b

ba

baa

a

aa

aaa

Sub-factors: political risk, government liquidity risk, banking
sector risk, external vulnerability risk

Assignedrating:
A2-

Source: Moody's Investors Service

23

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Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

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 scorecardindicated outcome and shows the relevant credit metrics and factor scores.
Icelands' close peers are similarly small countries, such as Lithuania, Malta and Slovenia, with Iceland's high institutional and governance strength the main differentiating factor.
Ireland is a much larger economy but otherwise shares many similarities with Ireland, in particular the strength of its institutions and relatively low susceptibility to event risks. Fiscal
strength is also comparable.
Exhibit 36

Iceland's key peers
Year

Rating/outlook
Scorecard-indicated outcome
Factor 1
Nominal GDP ($ bn)
GDP per capita (PPP, Intl$)
Avg. real GDP (% change)
Volatility in real GDP growth (ppts)
Factor 2
Quality of legislative & executive institutions
Strength of civil society & judiciary
Fiscal policy effectivenessMonetary & macro policy effectivenessGen. 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)

2021
2021
2017 - 2026F
2012 - 2021
Latest available
Latest available
Latest available
Latest available
2021 - 2023F
2017 - 2026F
2012 - 2021
2021
2021
2021
2021
Latest available
Latest available
2022F
Latest available
Latest available
2021
Latest available
2021
2023F
2021
2021

Iceland

Slovenia

Malta

Lithuania

IsraelChile

A2 MedianWestern Europe
MedianA2/STAA1 - A3
baa2
25.5
59,792
2.4
3.8
aa2
aa
aaa
aa
a
-5.7
3.8
1.2
baa2
75.0
185.6
10.1
4.1
a
aa
aa
11.7
a
baa3
152.2
a
-2.7
-201.7
38.9

A3/STAA2 - Baa1
baa1
61.5
44,067
3.1
3.7
a2
a
a
a
a
-4.0
2.2
1.1
a2
74.7
170.1
2.9
1.3
baa
baa
aa
-baa
ba1-ba295.0
a3.3-104.1-7.1

A2/NEGA2 - Baa1
baa1
17.2
49,560
4.3
5.4
a3
baa
baa
a
a
-6.1
1.5
0.8
a2
57.0
151.9
3.1
1.2
baa
a
aa
-baa
baa2
-aa
-5.9
-320.6
44.4

A2/STA
Aa3 - A2
baa1
65.5
42,944
3.1
1.5
a1
a
a
aa
a
-2.8
4.3
1.7
aa2
44.3
117.5
1.2
0.4
ba
ba
a
6.4
a
baa3
77.3
aa
1.4
-87.2
-7.2

A1/POS
Aa2 - A1
aa3
476.2
45,750
3.8
2.6
a1
aa
a
baa
aa
-3.6
1.5
0.9
a3
69.2
186.2
5.4
2.0
baa
baa
aaa
10.3
a
baa2
-aaa
4.7
----

A1/NEGA1 - A3baa1
317.1
26,713
2.2
4.4
aa3
aa
a
a
aa
-4.6
3.0
1.1
a1
36.3
150.8
3.6
0.9
baa
a
aaa
3.0
a
baa2
150.2
baa
-6.4
142.4
216.6
-4.9

A2
A1 - A3baa1
45.5
46,252
2.8
3.0
a2
a
a
a
a
-4.4
3.5
1.4
a2
55.4
153.5
2.9
1.1
baa
a
aa
10.2
a
baa2
109.8
aa
-1.3
81.6
201.7
15.8

Aa3
Aa2 - A1
a2
482.4
58,380
1.8
3.0
aa2
aa
aaa
aa
aa
-3.4
2.0
0.9
a2
65.8
151.9
2.2
0.8
baa
baa
aaa
12.0
a
baa1
248.8
aa
1.7
-334.617.8[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, Moody's Investors Service

24

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Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

DATA, CHARTS AND REFERENCES
Chart pack: Iceland
Exhibit 37

Exhibit 38

Economic growth

Investment and saving
Real GDP volatility, t-9 to t (ppts) (RHS)
Real GDP (% change) (LHS)

Gross investment/GDP

Gross domestic saving/GDP

30

8.0

6.0

25

6.0

5.0

4.0
4.0

2.0
0.0

3.0

-2.0

2.0

20
15
10

Source: Moody's Investors Service

Source: Moody's Investors Service

Exhibit 39

Exhibit 40

National income

Population

GDP per capita ($)

Population (Mil.) (LHS)

GDP per capita (PPP basis, $)

90000

0.4

80000

0.4

70000

0.4

Population growth (% change) (RHS)
3.50
3.00
2.50

0.4

60000

0.4

50000

2023F

2022F

2021

2020

2019

2018

2017

2016

0
2015

0.0

2014

5

2023F

2022F

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

-8.0

1.0

2012

-6.0

2013

-4.0

2.00

0.3

40000

1.50

0.3

30000

0.3

1.00
0.50

Source: Moody's Investors Service

Source: Moody's Investors Service

Exhibit 41

Exhibit 42

Global Competitiveness Index

Inflation and inflation volatility

2023F

2022F

2021

2020

2019

2018

2017

2016

2015

2014

2013

0.00

2012

2023F

2022F

2021

2020

2019

2018

2017

0.3

2016

0

2015

0.3

2014

10000

2013

0.3

2012

20000

Rank 26 out of 141 countries
Inflation rate volatility, t-9 to t (ppts) (RHS)
Inflation rate (CPI, % change Dec/Dec) (LHS)

Israel (A1/POS)

12.0

6.0

Iceland (A2/STA)

10.0

5.0

Chile (A1/NEG)

8.0

4.0

6.0

3.0

4.0

2.0

2.0

1.0

0.0

0.0

25

29 July 2022

45

2023F

40

2022F

35

2021

30

2020

25

2019

20

2018

15

2017

10

2016

5

2015

0

Source: World Economic Forum2014

Lithuania (A2/STA)

2013

Malta (A2/NEG)

2012

Slovenia (A3/STA)

Source: Moody's Investors Service

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 43

Exhibit 44

Institutional framework and effectiveness

Debt burden

Government Effectiveness[1]Rule of Law[1]Control of Corruption[1]Voice & Accountability[1]Gen. gov. debt/GDP (%) (LHS)
Gen. gov. debt/gen. gov. revenue (%) (RHS)

2.5

160

350

140

300

120

2.0

250

100
1.5

200

80
150

60

1.0

100

40

2021

2020

2019

2018

2017

2023F

Exhibit 46

Debt affordability

2022F

Exhibit 45

2022F

Source: Moody's Investors Service

2021

Notes: [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

2016

2015

2014

0

2012

50

0
2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

0.0

20

2013

0.5

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 (%)

10.0

25.0

9.0

20

15

8.0

20.0
10

7.0
6.0

15.0

5

10.0

0

5.0
4.0
3.0

-5

2.0

5.0

-10

Source: Moody's Investors Service

Exhibit 47

Exhibit 48

Government liquidity risk

External vulnerability risk

2023F

2020

2019

2018

2017

2016

2014

2012

Source: Moody's Investors Service

Current account balance/GDP (%) (LHS)

Gen. gov. debt/GDP (%) (RHS)
Gen. gov. external debt/total gen. gov. debt (%) (LHS)

Net international investment position/GDP (%) (RHS)

50

160

10

45

140

8

40

120

6

20

4

0

2

-20

0

-40

40
35
30

100

25

80

20

60

15

40

10

60

29 July 2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2021

2020

2019

2018

2017

-80

2016

-4

2015

0

2014

0

2013

-60

2012

-2

2011

20
2010

5

Source: Moody's Investors Service

26

2015

-15

2023F

2022F

2021

2020

2019

2018

2017

2016

2015

2014

2013

0.0

2012

0.0

2013

1.0

Source: Moody's Investors Service

Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Rating history
Exhibit 49

Iceland[1]Long Term Ratings
Foreign
Currency

Local
Currency

A2

A2

A3

A3

A3

A3

Baa2
Baa2

Review Action

Outlook

Short Term Ratings

Action Date

Foreign
Currency

Local
Currency

Foreign
Currency

Local
Currency

STA

-

-

-

-

Nov-19

POS

-

-

-

-

Jul-18

STA

-

-

-

-

Sep-16

Baa2

RUR

Possible Upgrade

Possible Upgrade--Jun-16

Baa2

STA

-

-

-

-

Jun-15

Baa3

Baa3

STA

-

-

-

-

Feb-13

Baa3

Baa3

NEG

-

-

-

-

Jul-10

Baa3

Baa3

STA

-

-

-

-

Apr-10

Baa3

Baa3

NEG

-

-

-

-

Apr-10

Baa3

Baa3

STA

-

-

-

-

Nov-09

Baa1

Baa1

NEG

-

-

-

-

Dec-08

A1

A1

RUR

Possible Downgrade

Possible Downgrade--Oct-08

Aa1

Aa1

RUR

Possible Downgrade

Possible Downgrade--

Sep-08

Aa1

Aa1

STA

-

-

-

-

May-08

Aaa

Aaa

NEG

-

-

-

-

Mar-08

Aaa

Aaa

STA

-

-

-

-

Nov-03

Aaa

Aaa

-

-

-

-

-

Oct-02

Aa3

Aaa

-

-

-

-

-

Jul-97

A1--

Possible Upgrade

-

-

-

Jun-97

A1

-

-

-

-

-

-

Jun-96

A2--

Possible Upgrade

-

-

-

Apr-96

A2

-

-

-

-

-

-

May-89Notes: [1] Table excludes rating affirmations and ceilings. Please visit the issuer page for Iceland for the full rating history.
Source: Moody's Investors Service

27

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Government of Iceland - A2 Stable: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

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Annual statistics
Exhibit 50

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 (CPI, % change Dec/Dec)
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 financeGen. gov. revenue/GDP[3]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[3]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.)

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022F

2023F

14.8
0.3
46,09842,154
4.5
1.1
4.2
6.6
16.0
21.8
-2.4
1.7
3.6
4.6
5.8
104.1
1.5

16.1
0.3
50,07844,673
6.8
4.6
4.1
5.8
15.6
23.2
6.0
1.3
6.8
0.1
7.7
98.8
1.5

17.9
0.3
54,80946,239
5.9
1.7
0.8
5.4
17.2
23.6
7.2
9.8
3.9
10.0
6.4
96.7
1.5

17.5
0.3
53,24449,471
10.8
4.4
2.0
4.5
19.3
26.9
-1.7
-4.1
8.9
13.5
7.5
95.8
1.5

20.8
0.3
62,442
53,943
8.7
6.3
1.9
3.3
20.9
27.7
9.1
9.8
11.0
14.6
6.6
88.3
1.4

24.7
0.3
73,161
56,945
5.2
4.2
1.9
3.3
21.8
26.2
14.5
20.1
5.1
11.8
4.5
87.0
1.5

26.3
0.3
75,472
59,383
7.7
4.9
3.7
3.1
22.0
25.6
8.3
11.6
1.7
0.9
3.3
90.0
1.5

24.8
0.4
69,52360,428
7.0
2.4
2.0
3.9
21.3
25.6
-10.1
-13.1
-4.7
-8.5
4.5
84.2
1.5

21.6
0.4
59,40955,717
-3.8
-7.1
3.6
6.4
21.2
20.6
-32.5
-23.2
-30.2
-21.6
-0.8
69.5
1.5

25.5
0.4
68,994
59,792
10.4
4.3
5.1
6.0
22.9
20.9
30.6
35.0
12.3
20.3
-2.1
78.4
--

27.6
0.4
73,896
-12.6
4.8
9.6
3.8
23.7
20.9
31.6
27.5
25.8
21.9
-1.0
93.5
--

29.2
0.4
76,812
-7.2
2.8
4.7
4.0
24.3
20.6
10.9
9.3
6.0
4.5
-0.4
97.5
--

45.1
47.7
-2.6
6.3
19.2
133.9
296.9
19.8

44.7
46.0
-1.2
6.9
20.8
122.0
272.7
18.1

46.1
45.8
0.3
7.1
18.9
115.2
249.8
14.7

43.1
43.5
-0.4
6.4
17.3
97.2
225.7
15.7

59.0
46.4
12.5
18.6
18.3
82.4
139.6
10.3

45.4
44.4
1.0
6.7
18.1
71.6
157.9
12.6

44.8
43.8
0.9
5.8
15.4
63.1
141.1
11.0

41.9
43.4
-1.5
2.8
16.6
66.2
158.2
10.2

42.1
50.7
-8.7
-4.6
17.8
77.4
184.1
9.6

40.4
49.3
-8.9
-4.8
18.6
75.0
185.6
10.1

40.6
45.5
-4.9
-0.9
19.2
70.2
173.0
9.9

39.9
43.3
-3.4
0.5
20.2
69.4
173.8
9.6

129.0
-1.1
98.4
0.2
1.4
28.7
-24.9
4.0

115.6
4.2
99.5
1.2
7.7
-0.3
-9.7
4.1

126.9
6.9
100.0
1.0
5.4
4.1
-3.7
4.1

129.6
2.6
100.0
1.0
5.7
4.0
-5.2
4.8

112.8
12.5
102.6
1.7
8.1
3.5
2.0
6.9

104.4
12.0
106.7
1.0
4.2
0.7
2.0
6.2

116.3
-2.6
109.2
0.9
3.5
-1.7
8.6
6.0

121.1
-6.7
105.3
1.4
5.8
-2.8
19.7
6.4

127.2
-7.6
107.4
0.2
0.8
-2.5
35.8
6.0

130.4
4.2
106.6
-0.7
-2.7
0.0
38.9
6.3

133.0
---0.1
-0.2
-2.0
-6.3

134.3
--0.0
0.1
-1.8
-6.4

[1] Sum of Exports and Imports of Goods and Services/GDP[2] Composite index with values from about -2.50 to 2.50: higher values suggest greater maturity and responsiveness of government institutions[3] Includes public entities previously excluded from the scope of the general government[4] Excludes DMBs undergoing winding up in 2008-2015
Source: Moody's Investors Service
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MOODY'S INVESTORS SERVICE

SOVEREIGN AND SUPRANATIONAL

Moody's related publications» Credit Opinion: Government of Iceland – A2 stable: Regular update, 22 February 2022
» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All
research may not be available to all clients.

Related websites and information sources» Sovereign risk group web page
» 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 coefficent 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 Statistics Iceland estimates the contribution to Gross Value Added (at basic prices) to be smaller at 10.3%. Direct employment stood at 13.9% of the total
in 2019.
4 See OECD, 2020 and IMF, 2022
5 For more detail, see Post-crisis monetary policy reform, 2018
6 The IMF estimates the exchange rate pass through at 10-30%, implying that a 1% depreciation of the ISK raises inflation by 0.1-0.3ppt.
7 The government defines net general government debt as gross debt excluding pension liabilities, accounts payable and also net of currency and deposits.
The definition also excludes the newly reclassified entities, which will however, be included for information purposes in future budgets and financial plans.

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MOODY'S INVESTORS SERVICE

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REPORT NUMBER

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Government of Iceland - A2 Stable: Annual credit analysis