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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
Long-Term IDR
Short-Term IDR

Key Rating Drivers
Outlook Revision: The revision of the Outlook to Stable reflects the resilience shown by the
Icelandic economy to the Covid-19 pandemic shock and Fitch Ratings’ expectation of asustained growth recovery, which should facilitate a reduction in the fiscal deficit and debt overtime.
Recovery Ahead: We expect real GDP to grow by 4.5% in 2022 and 3% in 2023 (vs. current ‘A’peer medians of 4.3% and 3.5%). High aluminium prices will improve Iceland’s terms of trade
and the lifting of all border-containment measures in February should support the recovery inthe tourism sector. Private consumption and investment will remain the main growth drivers.
Less Impact from Energy Costs: Higher fuel and food prices represent a shock, but household
purchasing power and industry profit margins are likely to be less affected by higher energy
costs than the rest of Europe. The share of renewables in the energy mix, at above 80%, is thehighest in Europe, and Iceland does not rely on natural gas.
Gradual Deficit Reduction Ahead: We expect the deficit to narrow to 6.5% of GDP in 2022 from
8.9% in 2021 as the recovery in revenue growth strengthens and the majority of pandemicrelated fiscal support unwinds. For 2023 we expect a deficit of 4.8% of GDP, above theprojected ‘A’ median (3.3% of GDP) and the western European median (2.1% of GDP). We
expect general government debt to remain at around 75% of GDP in 2022-2023 and to decline
slowly thereafter.
The government does not intend to reinstate its own fiscal rules before 2026. In our view, thissuggests that fiscal consolidation will be gradual and that the government will likely extend
further fiscal support to the economy should the recovery be weaker than expected. This posesrisks to the fiscal adjustment.
High Financing Flexibility: The sovereign has high financing flexibility due to the extremely
large pool of private pension funds’ assets (208% of GDP), 64% of which was invested
domestically at end-2021. 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. Sales of government equity stakes could
accelerate debt reduction over the coming years.
Higher Inflation for Longer: The rate of headline consumer price inflation rose by 6.7% in
March, its highest level in nearly a decade. Inflation is being driven by domestic factors, such as
rising housing costs (which are accounted for directly in the national measure of inflation), a
more rapid rebound in economic activity, and wage growth. Increasing global commodity prices
are also contributing, but are not the main driver, due to the predominance of renewables in the
country’s energy mix.
In our view, the combination of higher interest rates, macro-prudential measures and gradualwithdrawal of fiscal support should mitigate house price pressures. Moreover, from 2023 oiland commodity prices should also start to decline. We therefore expect inflation to average
5.3% in 2022 and decline to 3.5% in 2023.

A
F1+

Local Currency
Long-Term IDR
Short-Term IDR

A
F1+Country CeilingA+

OutlooksLong-Term Foreign-Currency IDRLong-Term Local-Currency IDR

StableStableRating 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
GDP (USDbn)
Population (m)Source: Fitch Ratings

2021E
25
0.4

Applicable Criteria
Sovereign Rating Criteria (April 2021)
Country Ceilings Criteria (July 2020)

Related Research
Fitch Revises Iceland's Outlook to Stable;
Affirms at 'A' (March 2022)
Global Economic Outlook (March 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 Glowacka+49 69 768076 279
malgorzata.glowacka@fitchratings.com

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Sovereigns
Iceland

Rating Summary
Long-Term Foreign-Currency Issuer Default Rating: A
Sovereign Rating Model: Aᵃ

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.
ᵃ 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.
Source: Fitch Ratings

Sovereign Rating Model Trend

Rating Derivation History (last 10 reviews)
Review
Date

LT FC SRM
QO
IDR
Resultab S

M

PF

EF

Latest

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 2020 A

A

0

0

0

0

22 Nov 19

A

A+

0

0

0

-1

24 May 2019 A

A+

0

0

0

-1

07 Dec 18

A

A+

0

0

0

-1

08 Jun 18

A

A+

0

0

0

-1

08 Dec 17

A

A+

0

0

0

-1

a

The latest rating uses the SRM result for 2021 in the chart (this willroll forward to 2022 in July 2022).
b
Historical SRM results in this table may differ from the chart, which
is based 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

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Sovereigns
IcelandPeer Analysis―――

Iceland―――

A Median

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

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Sovereigns
IcelandPeer Analysis
2021EᵃStructural features

Iceland

A median

AA median

BBB medianGDP per capita (USD) [SRM]

69,03327,44046,55011,354

0.0

0.0

0.0

0.0

94.2

75.6

84.6

58.0

97.8

81.9

88.7

68.0

Broad money (% GDP) [SRM]

51.5

89.4

98.3

59.7

Private credit (% GDP, 3-year average)

100.7

73.8

101.8

56.4

Dollarisation ratio (% bank deposits, latest)

11.2

10.2

12.2

17.1

Bank system capital ratio (% assets, latest)

24.9

15.6

15.9

15.3

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

0.6

3.7

2.3

3.4

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

4.3

2.9

2.2

3.4

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

4.2

2.3

2.2

3.3

Unemployment rate (%)

5.9

6.4

5.0

7.6

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

-8.0

-2.2

-0.4

-2.3

Primary balance (% GDP, 3-year average)

-4.0

-0.4

1.1

-0.3

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

9.9

4.6

3.8

6.9

Gross debt (% revenue, 3-year average)

185.2

137.9

134.8

140.2

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

75.7

42.2

39.7

36.1

Net debt (% GDP, 3-year average)

60.8

37.9

29.2

30.1

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

13.9

11.0

0.8

35.2

-1.0

0.9

1.6

-1.8

Share in world GDP (%) [SRM]
Composite governance indicator (percentile, latest) [SRM]
Human development index (percentile, latest)b

Macroeconomic performance and policies

Public finances (general government)ᶜ

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

-1.9

2.4

0.9

0.6

Commodity dependence (% CXR) [SRM]

51.4

11.5

16.0

20.1

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

83.0

64.4

114.3

51.2

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

22.6

-8.1

-9.4

9.0

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

15.6

17.5

16.2

28.9

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

13.5

12.0

4.9

2.7

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

3.6

2.4

5.0

4.2

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

7.6

4.4

2.9

5.0

227.3

102.6

59.9

138.7

Liquidity ratio

ᵃ 3-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 Ratings’ 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'.

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Sovereigns
Iceland

Rating Factors
Strengths

RatingSovereign•

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

A+

China

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

A•

IsraelMalta
IcelandJapan

Pension funds’ assets accounted for 208% of
GDP at end-2021, providing support to thesovereign’s fiscal financing flexibility.

Lithuania•

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

Slovakia•

Foreign-exchange reserves were 7.6 months ofcurrent external payments in 2021, well abovethe ‘A’ peer current median (of four months).

•

Weaknesses•

Iceland is highly reliant on tourism. According to
Statistics Iceland, the sector accounted for 8% of
GDP and 13.9% of employment prior to thepandemic in 2019 (at end-2021 it accounted for
5% of GDP and 9.6% of employment).

•

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

•

Gross general government debt stood at 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. But the net international
investment position, which includes equity andinvestment fund shares, was 39% of GDP in
2021, well above the current ‘A’ median of 12%.

Ras Al Khaimah
Saudi Arabia
SloveniaA-

Chile
LatviaPolandSpain

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 slower-than-expected
recovery in tourism, a sustained correction in the real estate market and material negative impact on thebanking sector.

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

Public Finances: Greater confidence that the government debt-to-GDP ratio will be placed on a firm downward
path, for example through implementation 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.

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Sovereigns
Iceland

Forecast Summary
2018

2019

2020

2021E

2022F

2023F

Real GDP growth (%)

4.9

2.4

-7.1

4.3

4.5

3.0

Unemployment (%)

3.1

3.9

6.4

5.9

5.5

5.0

Consumer price inflation (annual average % change)

2.7

3.0

2.9

4.5

5.3

3.5

Policy interest rate (annual average, %)

4.5

3.0

0.8

2.0

3.5

4.0

Macroeconomic indicators and policy

General government balance (% GDP)

0.9

-1.5

-8.7

-8.9

-6.5

-4.8

Gross general government debt (% GDP)

63.1

66.2

77.4

75.0

74.7

74.9

ISK per USD (annual average)

108.3

122.6

135.4

127.0

129.2

126.5

Real private credit growth (%)

11.9

1.9

8.1

8.7

2.4

0.3

Merchandise trade balance (USDbn)

-1.5

-1.0

-0.7

-1.3

-1.5

-1.3

Current account balance (% GDP)

3.5

5.8

0.8

-2.8

-1.1

-0.4

Gross external debt (% GDP)

76.5

78.3

89.5

82.9

76.8

71.8

Net external debt (% GDP)

19.7

20.2

22.6

23.4

21.9

19.8

External debt service (principal + interest, USDbn)

2.6

2.1

1.7

1.2

2.2

1.3

Official international reserves including gold (USDbn)

6.3

6.8

6.4

7.1

6.7

6.9

Gross external financing requirement (% int. reserves)

18.2

3.5

16.5

25.2

28.8

14.9

US

2.9

2.3

-3.4

5.7

3.5

1.6

China

6.7

6.0

2.2

8.1

4.8

5.1

Eurozone

1.9

1.3

-6.4

5.3

3.0

2.3

External financeReal GDP growth (%)

World

3.2

2.6

-3.3

5.9

3.5

2.8

Oil (USD/barrel)

71.5

64.1

43.3

70.6

100.0

80.0

2021

2022

Source: Fitch Ratings

Sources and Uses
Public Finances

External Finances(General government)(ISKbn)

2021

2022

(USDbn)

Uses

662.9

613.6

Uses

1.6

2.0

Budget deficit

288.3

231.1

Current account deficit

0.7

0.3

MLT amortisation

374.6

382.4

MLT amortisation

0.9

1.7

Domestic

291.5

297.4

Sovereign

0.0

0.6

External

83.1

85.0

Non-sovereign

0.9

1.1

Sources

662.9

613.6

Sources

1.6

2.0

Gross borrowing

Gross MLT borrowing

533.0

613.6

Domestic

351.7

442.3

2.6

1.7

Sovereign

0.8

0.5

Non-sovereign

External

181.3

171.2

1.8

1.2

Privatisation

55.0

0.0

FDI

0.2

-0.1

Other

61.9

-0.0

Other

-0.9

-0.0

Change in deposits

12.9

-0.0

Change in FX reserves

-0.3

0.3

(- = increase)(- = increase)

Source: Fitch Ratings

Source: Fitch Ratings

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Sovereigns
Iceland

Credit Developments
Sustained Macro Recovery Ahead
The Icelandic economy has proved more resilient to the pandemic shock relative to our initial expectations. Real GDP
grew by 4.3% in 2021, following a contraction of 7.1% in 2020. This was slightly better than our forecast at theprevious review (4%) but weaker than the ‘A’ peer current median. The recovery is underpinned by a rebound in
tourism flows facilitated by very high Covid-19 vaccination rates, solid performance of the aluminium sector
supported by high aluminium prices, steady improvement of the labour market and sizeable fiscal policy support.
Private consumption and investment have been the main growth drivers; net trade detracted from growth as imports
grew at a faster pace than exports particularly in 4Q21 due to strong domestic demand.
We expect real GDP to grow by 4.5% in 2022 and 3% in 2023 (versus the ‘A’ peer current medians of 4.3% and 3.5%).
High aluminium prices will continue to support Iceland’s terms of trade and the re-opening of the border should
support a strengthening in the recovery of the tourism sector. Private consumption and investment will remain themain growth drivers, supported by further declines in unemployment and the government’s “Investment andConstruction” initiative. We expect the level of real GDP to surpass pre-pandemic level in 3Q22.
Foreign tourist arrivals swiftly recovered in 2021. Between August and November 2021 foreign tourist arrivals wereabove 60% of the 2019 level and tourism receipts peaked at above 80% of the 2019 level. The positive trend wasinterrupted by the emergence of the Omicron variant. For 2021 as a whole, foreign arrivals were 38% of the 2019
level up from 21% in 2020. Covid-19 containment measures and travel restrictions lifted in February 2022, so we
expect the recovery in foreign tourist flows to continue and foreign arrivals to reach 50% of the 2019 level. This will
underpin services’ exports and private consumption growth. In January 2022, foreign arrivals in hotels were 48% of
the January 2019 level, up from 1.6% in January 2021.
The other two key sectors of the economy, aluminium and fishing, have been resilient throughout the pandemic. Bothsectors should continue to benefit from improving terms of trade. The prices of aluminium and some fish have risen
strongly recently. In particular, the aluminium sector should fare well as the price in February reached its highest level
since 2008. However, the high cost of energy can have a negative impact on the production capacity of the aluminium
smelters. Marine products’ export volumes are set to rise, mainly owing to the increase in the quota for capelin, which
will be the largest since 2003. Iceland’s aquaculture sector is small but expanding fast, with significant investment toincrease output.
In our view, the Icelandic economy should be partly insulated from the impact of the Ukraine-Russia war. The share of
renewables in the energy mix at above 80% is the highest in Europe, and gas is only a very small portion of it. As aresult, household purchasing power and industry profit margins are likely to be 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 could have a negative effect on Iceland’s
export performance.

2021 Growth Recovery

Foreign Tourist Arrivals
Index 2019=100
Foreign tourist arrivals

Real GDP growth
(%)
30

2020

2021

120

20

100

10

80

0
-10

60

-20

40

-30

20

Jan 22

Nov 21

Sep 21

Jul 21Mar 21

May 21

Jan 21

Nov 20

Sep 20Jul 20

May 20Mar 200

Jan 20G&S imports

Source: Fitch Ratings, Statistics Iceland

G&S exports

GFCF

Gov cons

Pvt cons

RGDP

-40

Source: Fitch Ratings, Statistics Iceland

Gradual Deficit Reduction Ahead
The general government deficit widened to 8.9% of GDP in 2021 from 8.7% in 2020, although this was a better outturn
relative to our previous review (10% of GDP) but worse than the ‘A’ peer current median (7% of GDP). We expect the
deficit to decline to 6.5% of GDP as the recovery in revenue growth strengthens and the majority of pandemic-related
support unwinds. For 2023, we expect a deficit of 4.8% of GDP, above the projected ‘A’ median (3.3% of GDP) and the

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Sovereigns
Icelandwestern European median (2.1% of GDP). The government does not intend to reinstate its own fiscal rules before
2026. In our view, this suggests that it will withdraw fiscal support gradually and that it will likely extend further fiscal
support to the economy should the recovery be weaker than expected.
We expect general government debt to remain around 75% of GDP in 2022-2023 and to decline slowly thereafter.
The sovereign has high financing flexibility due to the extremely large pool of private pension funds’ assets (208% of
GDP at end-2021), 64% of which was invested domestically. The government also has strong access to theinternational 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. On 23 March 2022, the Treasury sold 22.5% of its stake in
Islandsbanki, raising ISK53 billion (1.5% of 2021 projected GDP), which is earmarked for public debt reduction1. This
follows the sale of the first 35% stake in June 2021 (ISK55 billion, 1.7% of GDP) Further sales of government equity
stakes could accelerate debt reduction in the coming years.
Iceland’s debt structure has improved in recent years. Around 89% of central government debt is held by residents
while only 11% is denominated in foreign currency. Since the start of the pandemic, the government has financed thebudget 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 estimate that around 21% of the 2021 financing requirement was financedby the use of HFF assets. Following a comprehensive revision of the public finance statistics in 2019, the HFF is within
the general government scope. As the HFF assets wind down, general government debt should decline. As HFF assets
become liquid either because mortgages are amortised or paid in advance, they will become a source of funding thatwill either lower the borrowing requirements or allow to retire other government debt.

Higher Inflation for Longer
Headline consumer price inflation rose by 6.7% in March, its highest level in nearly a decade. Inflation dynamics aredifferent relative to the rest of western Europe. In Iceland they are mostly driven by domestic factors, such as a rapid
rebound in economic activity, rising house prices and wage growth. The increasing global commodity prices also
contribute, but are not the main driver due to the predominance of renewables in the country’s energy mix.
The strong labour market performance and steady growth in nominal wages have contributed to higher inflation. The
unemployment rate was 4.5% in February 2022, down from the April 2021 peak of 8.4%. We expect unemployment
to fall further as the tourism recovery gathers pace. The swift recovery in the labour market has been accompaniedby steady wage growth. Nominal wages rose by 7.3% in the 12 months to February 2022; however, real wage growthhas declined sharply since June 2021 as consumer price inflation picked up. A large number of collective wage
agreements in the private sector expire in November and the trade unions will likely push for pay settlements well
above inflation. Our inflation forecasts assume that nominal wages will grow by 7%.
The Central Bank of Iceland (CBI) has withdrawn its pandemic-related accommodative policies and since April 2021
has raised the key policy rate to 2.75% from 0.75%. It has also adopted a raft of macro-prudential measures. These
include the lowering of the maximum loan-to-value ratio (LTV) on new mortgages to 80% from 85%, an increase in the
countercyclical capital buffer to 2% from 0% (effective from September 2022) and the introduction of a debt serviceto-income (DSTI) limit of 35% on new mortgages.
The housing market has been buoyant since the start of the pandemic. Prices rose by nearly 16% in 2021 in nominal
terms, and just above 10% in real terms. Despite rising interest rates and tighter macro-prudential measures, housing
demand remains buoyant and nominal prices rose by 3% in January-February 2022. Fitch’s Macro-Prudential Risk
Monitor indicates that real house prices are above their long-term trend. Housing market turnover has eased in recent
months as well as the number of purchase contracts made. According to the Housing and Construction Authority, arecord 40% of flats in December 2021 were sold at above the asking price.
Housing supply lags significantly behind the level of demand, with very few flats currently listed for sale. By February2022, the number of flats advertised for sale in the capital area had fallen by 69% since January 2020. The averagetime to sale has also fallen to an historical low. However, the construction sector appears to be picking up: the numberof flats in the first stage of construction has increased from around 1,400 at the end of 2020 to 3,000 by the end of2021, according to data from the Federation of Icelandic Industries (SI). This suggests that supply should rise in 2022.
In our view, the combination of higher interest rates, macro-prudential measures, some pick-up in housing supply andgradual withdrawal of fiscal support should mitigate housing price pressures. Moreover, from 2023, oil andcommodity prices should also start to decline. We therefore expect the rate of inflation to average 5.3% in 2022 anddecline more markedly to 3.5% in 2023, still above the CBI target.

1

As the sale happened after the week of the rating committee, the privatisation revenues are not included in our fiscal projections
and do not appear in the Sources & Uses table on page 6.

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Sovereigns
Iceland

Stable External Finances
External finances have been broadly resilient throughout the pandemic despite the collapse in tourism receipts.
Following a surplus in 2020, the current account swung into a deficit of 2.8% of GDP in 2021. This was due mainly toimports of goods growing at a much faster pace than exports. Investment grew strongly (by 13.6%) in 2021 and isimport-intensive. Moreover, the primary income balance worsened markedly (to 0.4% from 2.4% of GDP in 2020.)
The CBI said this is due to the improved performance of foreign-owned companies in Iceland. The services’ balance
recorded another surplus, supported by the exports of digital services, intellectual property rights and the partial
recovery of tourism receipts. As the tourism sector recovery gathers pace, we expect the current account deficit tonarrow to 0.4% of GDP by 2023.
The krona was broadly stable in 2021, depreciating only marginally against the US dollar (2.5%) and the euro (5.4%).
The net international investment position improved despite the current account deficit and was at 39% of GDP at end2021. Pension funds dominate in the domestic financial market and their activities have a strong impact on the NIIP
and on the currency. In 2021, pension funds’ net purchases of foreign assets totalled 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 destabilise excessively the krona.
Among other things, a weaker currency would hurt their stock market value and inflate their own pension liabilities.

s

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Sovereigns
IcelandPublic Debt Dynamics
According to Fitch’s baseline projections, GGGD should remain at around 75% of GDP in 2022-2023 and decline
slowly thereafter. In a scenario of looser fiscal policy, the debt ratio would rise to 95% of GDP by 2026. A low-growthscenario would see debt continuing to rise and reach 82% of GDP by 2026. Conversely, further sales of government
equity stakes could accelerate debt reduction in the coming years.

Debt Dynamics – Fitch’s Baseline Assumptions
2020

2021

2022

2023

2024

2025

2026

Gross general government debt (% of GDP)

77.4

75.0

74.7

74.9

74.9

74.7

74.2

Primary balance (% of GDP)

-4.6

-4.8

-2.5

-0.8

0.0

0.0

0.0

Real GDP growth (%)

-7.1

4.3

4.5

3.0

2.5

2.3

2.3

Average nominal effective interest rate (%)

5.9

5.8

5.8

5.7

5.0

4.6

4.2

135.4

127.0

129.2

126.5

130.4

130.4

130.4

GDP deflator (%)

3.6

5.8

5.3

3.5

2.5

2.5

2.5

Stock-flow adjustments (% of GDP)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

ISK/USD (annual avg)

Source: Fitch Ratings

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

Interest rate

Marginal interest rate 250bp higher

FiscalStable primary deficit of 4.8% of GDP at 2021 level

Source: Fitch Ratings

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

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Sovereigns
Iceland

Data Tables
General Government Summary
% GDP

2015

2016

2017

2018

2019

2020 2021E 2022F 2023F

Revenue

43.1

59.0

45.4

44.8

41.9

42.1

40.4

40.2

40.2

Expenditure

43.5

46.4

44.4

43.8

43.4

50.7

49.3

46.7

45.0

o/w interest payments

6.8

6.1

5.7

4.9

4.3

4.0

4.1

4.0

4.0

Interest payments (% revenue)

15.7

10.3

12.6

11.0

10.2

9.6

10.1

10.0

10.0

Primary balance

6.4

18.6

6.7

5.9

2.8

-4.6

-4.8

-2.5

-0.8

Overall balance

-0.4

12.5

1.0

0.9

-1.5

-8.7

-8.9

-6.5

-4.8

Gross government debt

97.2

82.4

71.6

63.1

66.2

77.4

75.0

74.7

74.9

% of government revenue

225.7

139.6

157.9

141.1

158.2

184.1

185.6

185.8

186.4

Domestic debt

83.9

74.3

67.2

58.8

60.1

69.0

64.4

62.6

62.8

External debt

13.3

8.1

4.4

4.4

6.1

8.4

10.6

12.1

12.1

Local currency

83.9

74.3

67.2

58.8

60.1

69.0

64.4

62.6

62.8

Foreign currency

13.3

8.1

4.4

4.4

6.1

8.4

10.6

12.1

12.1

Central government deposits

18.9

11.4

7.2

7.9

8.4

16.7

14.7

13.4

12.6

Net government debt

78.3

71.0

64.5

55.3

57.9

60.7

60.3

61.3

62.4

Financing

-12.5

-1.0

-0.9

1.5

8.7

8.9

6.5

4.8

Domestic borrowing

-2.9

-3.4

-3.7

5.2

6.5

1.9

4.1

4.0

External borrowing

-4.1

-3.3

0.3

2.0

2.0

3.0

2.4

0.8

Other financing

-5.5

5.7

2.5

-5.7

0.1

4.0

-0.0

-0.0

Change in deposits (- = increase)

6.0

3.6

-1.2

-1.0

-8.0

0.4

-0.0

-0.0

Privatisation

0.0

0.0

0.0

0.0

0.0

1.7

0.0

0.0

-11.5

2.1

3.7

-4.7

8.1

1.9

-0.0

0.0

Other
Source: Fitch Ratings, Ministry of Finance

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Sovereigns
Iceland

Balance of Payments(USDbn)Current account

2015

2016

2017

2018

2019

1.0

1.7

1.0

0.9

1.4

2020 2021E 2022F 2023F
0.2

-0.7

-0.3

-0.1

% GDP

5.6

8.1

4.2

3.5

5.8

0.8

-2.8

-1.1

-0.4

Goods

-0.2

-0.8

-1.5

-1.5

-1.0

-0.7

-1.3

-1.5

-1.3

Services

1.6

2.2

2.6

2.4

2.1

0.5

0.7

1.0

1.0

Primary income

-0.0

0.4

0.1

0.3

0.5

0.5

0.1

0.3

0.3

Secondary income

-0.3

-0.1

-0.2

-0.2

-0.2

-0.2

-0.3

-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

0.8

1.9

0.3

1.4

1.5

1.4

0.3

0.7

0.9

Direct investment

-0.7

-0.7

-0.2

0.5

0.7

0.7

-0.2

0.1

0.1

Portfolio investment

3.9

1.9

2.3

1.0

0.6

0.9

0.1

0.9

0.7

Derivatives

0.0

0.0

0.1

0.0

0.0

0.0

0.0

0.0

0.0

Other investments

-3.5

-1.8

-1.1

-0.1

-0.5

-0.0

-0.0

-0.0

-0.0

Net errors and omissions

-0.1

0.2

-0.7

0.5

0.0

1.2

1.0

1.0

1.0

Change in reserves (+ = increase)

1.1

2.4

-0.8

0.0

0.6

-0.2

0.3

-0.3

0.1

International reserves, incl. gold

5.0

7.2

6.6

6.3

6.8

6.4

7.1

6.7

6.9

Liquidity ratio (%)

13.5

54.7

191.5

167.1

190.1

209.1

227.3

192.7

220.4

Current external receipts (CXR)

10.1

11.1

12.3

13.2

12.0

8.2

10.4

11.9

13.1

Current external payments (CXP)

9.1

9.5

11.3

12.3

10.6

8.0

11.1

12.2

13.2

CXR growth (%)

-2.0

10.8

10.7

7.3

-9.3

-31.6

27.0

14.1

10.6

CXP growth (%)

-4.3

4.3

19.3

9.0

-14.2

-23.9

38.6

9.5

8.7

Memo

Gross external financing requirement

23.9

-0.9

-0.0

1.2

0.2

1.1

1.6

2.0

1.0

% International reserves

573.4

-17.6

-0.5

18.2

3.5

16.5

25.2

28.8

14.9

-6.2

-5.5

-5.9

-1.3

-0.9

-1.0

1.7

0.0

0.4

Net external borrowing
Source: Fitch Ratings, IMF

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Sovereigns
IcelandExternal Debt and Assets(USDbn)

2015

2016

2017

2018

2019

2020

2021E

2022F

2023F

Gross external debt

30.5

26.0

22.5

20.1

19.4

19.3

21.1

21.1

21.5

% GDP

174.2

125.2

91.1

76.5

78.3

89.5

82.9

76.8

71.8

% CXR

303.6

233.8

182.8

152.0

161.9

235.8

202.5

177.9

163.6

Short-term debt (% GXD)

37.5

6.4

6.9

7.1

6.8

7.5

7.5

7.5

7.5

Sovereign

4.6

4.0

2.8

2.6

3.0

2.8

3.5

3.4

3.5

Monetary authorities

0.3

0.4

0.4

0.4

0.5

0.4

0.8

0.8

0.9

General government

4.3

3.6

2.5

2.2

2.5

2.4

2.8

2.5

2.5

By debtor

Banks

2.2

4.2

5.8

5.9

5.5

5.9

6.3

6.6

6.9

Other sectors

23.7

17.8

13.9

11.6

10.8

10.7

11.3

11.1

11.2

Gross external assets (non-equity)

23.6

19.3

14.6

14.9

14.4

14.5

15.1

15.1

15.6

Sovereign

5.0

7.2

6.6

6.3

6.8

6.4

7.1

6.7

6.9

International reserves, incl. gold

5.0

7.2

6.6

6.3

6.8

6.4

7.1

6.7

6.9

Other sovereign assets

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Banks

2.8

2.3

3.1

3.6

3.1

3.4

3.3

3.3

3.3

Other sectors

15.9

9.8

5.1

5.1

4.6

4.7

4.6

4.5

4.4

Net external debt

7.0

6.8

7.9

5.2

5.0

4.9

6.0

6.0

5.9

% GDP

39.7

32.6

31.8

19.7

20.2

22.6

23.4

21.9

19.8

Sovereign

-0.4

-3.2

-3.7

-3.7

-3.8

-3.7

-3.2

-3.0

-3.0

Banks

-0.5

2.0

2.8

2.3

2.5

2.6

2.5

2.4

2.2

Other sectors

7.9

8.0

8.8

6.6

6.2

6.0

6.7

6.6

6.8

Assets

38.0

35.0

29.2

29.2

32.1

35.1

39.1

-

-

Liabilities

38.9

34.6

28.7

26.9

27.2

27.3

29.2

-

-

Net

-0.9

0.4

0.5

2.3

4.9

7.7

10.0

-

-

Net sovereign

0.4

3.2

3.7

3.7

3.8

3.7

3.2

3.0

3.0

% GDP

2.4

15.6

15.1

14.2

15.1

17.0

12.5

10.9

10.0

External debt service (principal + interest)

25.9

1.5

1.6

2.6

2.1

1.7

1.2

2.2

1.3

Interest (% CXR)

9.3

5.9

4.6

3.4

3.7

4.8

2.5

3.6

3.3

International investment position

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

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Sovereigns
Iceland

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

AApplied Ratingd

Sovereign Rating Model

A

Model Result and Predicted Rating
Input Indicator

Weight (%)

2020

2021 2022

Governance indicators (percentile)

20.0

n.a.

94.2

GDP per capita (USD)

13.3

Nominal GDP (% world GDP)

10.21 = A-

Adjustment to Final Data

Final Data

Coefficient

Output (notches)

n.a.

-

94.2

0.073

n.a. 69,033

n.a.

Percentile

95.8

0.042

4.04

12.8

n.a.

0.03

n.a.

Natural log

-3.6

0.583

-2.10

Most recent default or restructuring

5.4

n.a.

None

n.a.

Inverse 0-1a

0.0

-2.1080

Broad money (% GDP)

1.3

n.a.

51.5

n.a.

Natural log

3.9

0.175

0.69

n.a.

4.3

n.a.

Natural log

1.5-0.886

-1.30

b

-0.22

Structural features

9.53

Macroeconomic performance, policies and prospects
Real GDP growth volatility

5.5

6.90

-1.47

Consumer price inflation

3.0

2.9

4.5

5.3

3-yr avg.

4.2-0.053

Real GDP growth

2.6

-7.1

4.3

4.5

3-yr avg.

0.6

0.084

Public finances

0.05
-2.60

Gross general govt debt (% GDP)

8.3

77.4

75.0

74.7

3-yr avg.

75.7-0.022-1.64

General govt interest (% revenue)

4.9

9.6

10.1

12.2

3-yr avg.

10.6-0.047-0.50

General govt fiscal balance (% GDP)

2.5

-8.7

-8.9

-6.5

3-yr avg.

-8.0

0.047

-0.38

FC debt (% of total general govt debt)

2.5

11.5

13.8

9.1

3-yr avg.

11.5-0.007-0.08c

External finances

0.17

Reserve currency (RC) flexibility

7.6

n.a.

0.0

n.a.

RC score 0 - 4.5

0.0

0.542

0

SNFA (% of GDP)

7.1

17.0

12.5

10.9

3-yr avg.

13.5

0.012

0.16

Commodity dependence

1.1

n.a.

51.4

n.a.

Latest51.4-0.004-0.21

FX reserves (months of CXP)

1.5

n.a.

7.6

n.a.

n.a. if RC score> 0

7.6

0.032

0.25

External interest service (% CXR)

0.4

4.8

2.5

3.6

3-yr avg.

3.6-0.006-0.02

CAB + net FDI (% GDP)

0.1

-2.3

-2.2

-1.3

3-yr avg.

-1.9

0.002

-0.00

Intercept Term (constant across all sovereigns)

4.58

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.

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Sovereigns
Iceland

Supplementary Ratings
Local-Currency Rating
Iceland’s credit profile does not support uplift of the Long-Term Local-Currency IDR above the Long-Term ForeignCurrency IDR. In Fitch’s view, neither of the two key factors supporting upward notching of the Long-Term LocalCurrency IDR cited in the criteria is present: strong public finance fundamentals relative to external financefundamentals; and previous preferential treatment of local-currency creditors relative to foreign-currency creditors

Country Ceiling
Fitch lifted Iceland’s Country Ceiling to ‘A+’ at the May 2019 rating review, one notch above Iceland’s Long-Term
Foreign-Currency IDR. This reflects the record of liberalisation of capital controls since 2016. In March 2019, theremaining offshore Icelandic krona assets that were restricted from conversion into foreign-currency assets at
marker 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 2022

A

F1+

StableA

F1+

StableA+

22 May 2020

A

F1+

Negative

A

F1+

NegativeA+

24 May 2019

A

F1+

StableA

F1+

StableA+

08 Dec 2017

A

F1

StableA

F1

StableA

07 Jul 2017

A-

F2

Positive

A-

F1

PositiveA-

13 Jan 2017

BBB+

F2

Positive

BBB+

F2

Positive

BBB+

22 Jul 2016

BBB+

F2

StableBBB+

F2StableBBB+

24 Jul 2015

BBB+

F2

StableA--

StableBBB+

30 Jan 2015

BBB

F3

Positive

BBB+-

Positive

BBB

14 Feb 2013

BBB

F3

StableBBB+-

StableBBB

17 Feb 2012

BBB-

F3

StableBBB+-

StableBBB-

16 May 2011

BB+

B

StableBBB+-

StableBB+

05 Jan 2010

BB+

B

Negative

BBB+-

NegativeBB+

23 Dec 2009

BBB-

F3

Negative

A--

Negative

BBB-

08 Oct 2008

BBB-

F3

Watch Negative

A--

Watch Negative BBB-

30 Sep 2008

A-

F2

Watch NegativeAA-

Watch Negative A

01 Apr 2008

A+

F1

NegativeAA+-

NegativeAA-

15 Mar 2007

A+

F1

StableAA+-

StableAA-

21 Feb 2006

AA-

F1+

Negative

AAA-

NegativeAA

17 Jun 2004

AA-

F1+

StableAAA-

StableAA

31 Mar 2003

AA-

F1+

StableAAA-

Stable-15 Feb 2002

AA-

F1+

Negative

AAA-

Negative-

26 Feb 2001

AA-

F1+

Stable

AAA

-

-

-

21 Sep 2000

AA-

F1+

StableAAA-

Stable-03 Feb 2000

AA-

F1+

-

AAA

-

-

-

Source Fitch Ratingsuu

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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 organisations, 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’ is comprised of 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 score of‘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’).

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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 driverwith a high weight. As Iceland has a percentile rank above 50 for the respective Governance Indicator, this has apositive 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 and Accountability
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 the credit profile.
Iceland has an ESG Relevance Score of ‘4[+]’ for Creditor Rights as willingness to service and repay debt is relevant to
the rating and is a rating driver for Iceland, as for all sovereigns.
Except for the matters discussed above, the highest level of ESG credit relevance, if present, is a score of ‘3’. This means
ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or to theway in which they are being managed by the entity. For more information on Fitch’s ESG Relevance Scores, visit
www.fitchratings.com/esg.

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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 the Peer
Analysis table on page 4 are long-term historical medians. These are based on actual data since 2000 for all sovereignyear 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.

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