SOVEREIGN AND SUPRANATIONAL

Government of Iceland - A2 positive

ISSUER IN-DEPTH
14 August 2023

Annual credit analysis
OVERVIEW AND OUTLOOKRATINGS

IcelandGov. Bond Rating
Country Ceiling

Foreign
Currency

Local
Currency

A2/POS

A2/POS

Aa2

Aa1

TABLE OF CONTENTSOVERVIEW AND OUTLOOK
1
CREDIT PROFILE
2
Economic strength score: baa1
2
Institutions and governance strength
score: aa2
7
Fiscal strength score: a2
11
Susceptibility to event risk score: a
15
ESG considerations
19
Scorecard-indicated outcome
21
Comparatives
22
DATA, CHARTS AND REFERENCES
23

Contacts
Kathrin+44.20.7772.1383
Muehlbronner
Senior Vice President
kathrin.muehlbronner@moodys.com
Lenaic Couderc+44.20.7772.1799
Associate Analyst
lenaic.couderc@moodys.com
Dietmar Hornung+49.69.70730.790
Associate Managing Director
dietmar.hornung@moodys.com
Marie Diron+44.20.7772.1968
MD-Global Sovereign Risk
marie.diron@moodys.com

The credit profile of Iceland reflects the economy's flexibility, wealth, competitiveness andfavourable demographics, all of which support its long-term growth prospects. The economy
has demonstrated its resilience to the twin shocks of the pandemic and the war in Ukraine(Ca stable), rebounding strongly on an effective policy response and a recovery in tourism.
The country has significantly strengthened its fiscal framework as well as banking supervisionand regulation, which, together with a track record of effective macroeconomic management
since 2008, demonstrates the strength of its institutions.
Iceland's main credit weaknesses are the economy's small size and concentration in a limited
number of sectors, which increase its vulnerability to sector-specific shocks. Despite theongoing diversification efforts, Iceland remains particularly vulnerable to shocks to its
tourism sector, which accounted for a third of exports and 9% of domestic employment
in 2022. Moreover, despite the recent and expected fiscal improvements, the Icelandic
government’s debt and affordability metrics compare unfavourably with those of peers.
The positive outlook reflects the government’s rapid progress in reducing its budget deficit
and bringing the public debt on a downward trajectory, which increases the probability ofa faster-than-expected rebuilding of fiscal buffers. Also, strong growth prospects of key
economic sectors and the government's ongoing efforts to further diversify the economic
base may reduce the impact of potential shocks. We could upgrade the rating if Iceland
continues to reduce its budget deficit and public debt ratio at the expected pace.
An early consensual resolution of the HF Fund (A2 positive) guarantee would help accelerate
the decline in debt and would also be credit positive. Progress in curbing inflation andre-anchoring inflation expectations while ensuring continued robust economic growthwould support our assessment of Iceland’s strong institutions. Further evidence that the
government's economic diversification efforts are helping reduce growth volatility would also
support a higher rating.
We would likely change the outlook back to stable if our expectations for rebuilding offiscal and economic buffers do not materialise. Downward rating pressure could arise if theauthorities deviated significantly from their current medium-term fiscal consolidation plans,
resulting in a substantial increase in the public debt ratio.
This credit analysis elaborates on Iceland’s credit profile in terms of economic strength,
institutions and governance strength, fiscal strength and susceptibility to event risk, which
are the four main analytic factors in our Sovereigns Rating Methodology.

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 Sovereigns Rating Methodology.

Economic strength score: baa1

+

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
Icelandbaa1

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%

MAD Volatility in real GDP growth (ppts)

Nominal GDP ($ bn)

GDP per capita (PPP, Intl$)

aaa
aa
a
baa
ba
b
caa
ca

Economic strength evaluates the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as 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, diversification, productivity and labour supply.
Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final scorewill appear in the table above.

We assess Iceland's economic strength at “baa1”, which balances the country's small size and volatile economic growth with its very
high wealth levels and strong competitiveness in its core industries. Other sovereigns with the same assessment of economic strength
include Lithuania (A2 stable) and Chile (A2 stable).
Exhibit 1Peer comparison table factor 1: Economic strength

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

A2/POS
baa1
baa1
27.8
66,512.4
2.4
1.2

baa1
Median76.5
39,490.0
2.7
1.2

Chile

Lithuania

Malta

Slovakia

A2/STA
baa1
a3
300.7
29,083.1
2.1
0.9

A2/STAbaa1
a3
70.2
47,107.3
2.7
1.1

A2/STA
baa1
baa1
17.7
58,072.1
4.1
2.1

A2/NEG
baa1
baa1
115.3
39,490.0
2.0
1.2

Czech
Republic
Aa3/NEGa3
a2
290.9
49,421.0
1.5
0.6

Kazakhstan
Baa2/STA
baa2
a2
223.6
30,543.9
3.4
0.6

Sources: National authorities, IMF and Moody's Investors Service

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Government of Iceland - A2 positive: 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 $28 billion in 2022, Iceland's economy is one of the smallest among the sovereigns we rate. Limited
diversification of exports, combined with relatively high trade openness, leads to high volatility in growth and vulnerability to sectorspecific and external shocks. Exports and imports account for over 90% of GDP, and three quarters of the country's export revenue
comes from three sectors: tourism (26% of total export revenue), marine products (20% of total export revenue) and aluminium (23%of total export revenue) (see Exhibit 2). For example, in 2020, the economy contracted more than 7% as a result of the pandemicinduced shock to the tourism industry, although the authorities' effective policy response (including a rapid vaccination rollout) helped
the economy recover swiftly.
These challenges are mitigated by very high income levels and wealth buffers, which are also comparatively evenly distributed.1 GDP
per-capita on a purchasing power parity basis was $66,512 in 2022, much higher than the median for A-rated sovereigns of $47,107 andthe 18th highest among our rated sovereigns. In addition, household assets in the form of pensions amount to around 180% of GDP,
much higher than that of most other OECD countries (see Exhibit 3). Households also reduced leverage substantially after the banking
crisis in 2008, with debt at around 79% of GDP as of 2022. Together with high income levels, household assets are an important shock
absorber, as demonstrated during the banking crisis in 2008 and again during the pandemic when the government allowed temporary
withdrawals from third-pillar pension savings.
Exhibit 2

Exhibit 3

Three sectors dominate Iceland's exports

Households have significant wealth buffers

Exports of goods and services by sector (2022)

Pension assets in 2021 (as a percentage of GDP)
250

Other
21%

Marine products
20%

200

150

Other
manufacturing
products
10%

100

50

Tourism26%

0Aluminium
23%

Sources: OECD and Moody's Investors Service
Sources: Statistics Iceland and Moody's Investors Service

Iceland's economy is also highly competitive, as demonstrated by its 16th rank in the World Competitiveness Index (see Exhibit 4).
The country fares particularly well compared with peers on institutions, technological readiness, educational environment and labour
market efficiency. Iceland’s demographic profile is more favourable than that of many advanced economies because of long working
lives, higher fertility rates, high participation of women in the labour force and high net migration. We project Iceland’s old-age
dependency ratio — defined as the ratio of population aged 65+ years divided by the population aged 20-64 years — will remain lower
than all EU (Aaa stable) sovereigns over the next two decades (see Exhibit 5).2

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14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 4

Exhibit 5

Despite its small size, Iceland is highly competitive compared withpeers

Iceland is less exposed to population ageing than peers
Old-age dependency ratio (65+/20-64)

World Competitiveness Index (rank)
2022

2018

Iceland45

SwedenUS

Czech Republic

Ireland

40

40

38

35

36

30

34

25

32

20

30
28
26

2040

2039

2038

2037

2036

2035

2034

2033

2032

2031

2030

2029

2028

2027

2026

2025

2024

2023

2022

2021

2020

2019

20

2015

22

0

2018

24

5

2017

10

2016

15

Sources: United Nations and Moody's Investors Service
Sources: IMD and Moody's Investors Service

Stronger-than-expected resilience to shocks and solid growth potential
The Icelandic economy has dealt very well with the two major external shocks — the pandemic and the Russia-Ukraine war — in thepast few years, which reflects its stronger-than-expected resilience. Real GDP growth averaged 5.4% over 2021-22, supported by verystrong growth in exports, investment and private consumption. Iceland’s energy independence shielded it from the direct economic
impact of Russia’s invasion of Ukraine, although inflation accelerated on house prices.
We expect the economy to continue to grow at a robust rate of around 4% in 2023, supported by stable growth in tourism demand.
The tourism sector is on track for its strongest year ever, with a projection of up to 2.4 million visitors compared with the previous peakof 2.3 million in 2018, despite the economic slowdown in key markets. Tourist arrivals and foreign credit card spending in real terms
have exceeded their pre-pandemic levels in the first half of 2023. In contrast, fish and aluminium exports will contribute less to growthin 2023, although revenue will be strong because of high prices.
We expect private consumption to slow significantly over the course of 2023, following strong growth in the last two years driven byhigh wage increases and policy support measures. The government is tightening both monetary and fiscal policies in an effort to curb
inflation. A tighter policy should also help reduce import demand, which has been very high.
However, still-solid nominal wage growth and a strong labour market will provide a buffer to consumption. Labour demand remains
high and vacancies are near historical highs. In 2022, labour market needs were met by a substantial increase in foreign workers. The
population grew by 3.1%, marking the largest increase on record, and will expand significantly again in 2023 to meet still-strong labourdemand, in particular in the tourism sector.
For 2024, we expect growth to return closer to potential, which we estimate at around 2.5%, reflecting tighter monetary and fiscal
policies. The Central Bank of Iceland (CBI) has raised its key policy rate by a cumulative 800 basis points (bps) since May 2021 withfurther tightening likely in the coming months (see more detailed discussion in the Institutions and Governance section).

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Government of Iceland - A2 positive: Annual credit analysis

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MOODY'S INVESTORS SERVICE

Exhibit 6

Exhibit 7

Tourism activity exceeds pre-pandemic levels

Higher labour demand has been met by increased immigration

Tourist arrivals (in thousands)
2019

2020

Population (year-on-year change in percentage terms)
2021

2022

Net migration

2023

Natural growth

Population growth

4.0%

350

3.5%

300

3.0%

250
2.5%

200

2.0%

150

1.5%

100

1.0%

0.5%

50

0.0%

0

Sources: Statistics Iceland and Moody's Investors Service
Sources: Statistics Iceland and Moody's Investors Service

Economic diversification could reduce the impact of future external shocks
The Icelandic authorities have been pursuing efforts to further diversify the economy for years, in particular by offering generous tax
credits for businesses' R&D spending, which is among the highest in OECD countries (see Exhibit 8). The first results of these efforts are
becoming visible, specifically in the biotechnology, aquaculture, and information and communications technology sectors. Iceland has
a tradition in the first two, with exports growing vigorously in both sectors over the past decade (see Exhibit 9). It is also exploring new
climate mitigation technologies, with Icelandic company Carbfix operating the world’s largest carbon capture plant.
Exhibit 8

Exhibit 9

The government is supporting diversification through R&D
incentives

Some sectors offer diversification opportunities
Four-quarter rolling exports (ISK billion)

Government R&D spending as % of GDP (2021)
Direct government funding

Tax incentive support

0.45

Pharmaceuticals

120

ICT

Aquaculture

0.40
100

0.35
0.30

80

0.25
0.20

60

0.15
0.10

40

0.05

LatviaLuxembourg
Switzerland
Lithuania
Estonia
Slovakia
Germany
FinlandSpain
GreeceDenmark
Czech Republic
SwedenItaly
PolandSlovenia
IrelandOECD
NorwayHungary
Netherlands
Portugal
Belgium
Iceland
Austria
France

0.00

20

0
2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

Sources: Statistics Iceland and Moody's Investors Service

Sources: OECD and Moody's Investors Service

Icelandic and Norwegian companies are also using Iceland's already very strong competitive position to expand into farmed fish, which
will help counteract variations in fishing quotas that can affect GDP growth. The aquaculture sector, although still small, has continued
to grow in recent years, and significant investment is underway to increase the productive capacity. According to a recent study,3 thesector could grow tenfold over the next decade if the current expansion plans are successfully implemented, and contribute up to 10%
of exports (from 3% in 2022).

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Government of Iceland - A2 positive: Annual credit analysis

MOODY'S INVESTORS SERVICE

SOVEREIGN AND SUPRANATIONAL

The IMF and the OECD point to other areas that could help Iceland further raise its growth potential, in particular by further reducing
regulatory barriers, improving the business climate and ensuring that Iceland reaps the full benefits of high immigration. The OECDestimates that reducing administrative burdens would raise per capita GDP by 1 percentage point (pp) over a 10-year period.

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14 August 2023

Government of Iceland - A2 positive: 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 at “aa2” is supported by the country's strong scores in the Worldwide
Governance Indicators (WGIs), and a track record of effective macroeconomic management to restore economic and financial stability
after the banking crisis. The reforms introduced after the crisis have strengthened the macro-policy mix, and include enhanced financial
regulation and supervision in line with global best practices, abolition of all capital flow restrictions and an improved fiscal framework.
Other sovereigns with the same assessment of institutional strength include Austria (Aa1 stable) and Ireland (Aa3 stable).
Exhibit 10Peer comparison table factor 2: Institutions and governance strength

IcelandFinal 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)

A2/POS
aa2
aa2
aa
aaa
aa
a
-2.6
4.4
2.0

aa2 Median

Austria

FranceIreland

aa
aaa
aa
aa
-2.6
2.9
2.1

Aa1/STA
aa2
aa2
aa
aaa
aa
aa
-2.5
3.5
2.3

Aa2/STA
aa2
aa2
aaa
aaa
a
aa
-4.8
2.5
1.7

Aa3/STA
aa2
aa2
aa
aaa
aa
aa
1.6
2.7
2.5

Taiwan,China
Aa3/STA
aa2
aa2
aa
aa
aa
aa
-2.0
1.3
1.0

Germany

Chile

Aaa/STA
aa1
aa1
aaa
aaa
aaa
aa
-2.3
3.1
2.5

A2/STA
aa3
aa3
aa
a
a
aa
-0.7
4.4
2.9

Sources: National authorities, IMF and Moody's Investors Service

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Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Robust survey scores demonstrate strength of the institutions
Iceland ranks highly compared with A-rated peers on the WGIs, supporting our strong assessment of the country's institutions. It ranks
in the 88th percentile of the WGI measure of government effectiveness and regulatory quality, reflecting its highly professional andcapable public administration, as well as a transparent and predictable legislative framework, underpinning our “aa” assessment for thequality of legislative and executive institutions. However, key economic data series can be subject to large revisions.
Iceland's rankings in the 93rd percentile for control of corruption and 94th percentile for rule of law reflect limited instances ofcorruption and the fact that its society acts as an effective check on the exercise of government power, supporting our “aaa”
assessment for the strength of the civil society and the judiciary. Iceland also scores very strongly on political stability given its
long tradition of broad cooperation and consensus on economic matters between the government and employer and employee
associations, which supports policy effectiveness.
Exhibit 11

Iceland's governance indicators rank above A-rated peers
Percentile rank among our rated sovereigns (2021)
IcelandDenmark

NorwayMedian - A

Political Stability
100
80
60

Regulatory Quality

Government Effectiveness

40
20
0

Voice and Accountability

Rule of Law

Control of Corruption

Sources: Worldwide Governance Indicators and Moody's Investors Service

Following the collapse of the banking system in 2008, the authorities have made significant progress in bringing the economy, 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. In 2020, the central bank andthe Financial Supervisory Authority were merged, with the aim to achieve greater efficiency, operational independence and powers infinancial oversight and, in June 2021, all restrictions on the capital account were lifted.
The authorities have expanded the central bank’s tool kit to limit the risks to financial stability from excessive flows, 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 18% of GDP in mid-2023 and in excess of the IMF's
various reserve adequacy metrics.
Monetary policy framework has become more credible
The central bank has gained significant credibility following a major revision of the monetary policy framework and its governance anddecision-making structure, mostly implemented by 2012. Iceland’s inflation performance has significantly strengthened compared withthat before the banking crisis, when the CBI rarely managed to meet its inflation target. However, as a small currency area, Iceland
remains more exposed to inflationary shocks, which can sometimes impair monetary policy effectiveness. As a result, we score Iceland's
monetary and macroeconomic policy effectiveness slightly weaker than highly rated peers at “a”.

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Government of Iceland - A2 positive: Annual credit analysis

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MOODY'S INVESTORS SERVICE

While the war in Ukraine and resulting energy price increases did not directly affect Iceland, consumer price inflation rose rapidly overthe course of 2021 on the back of surging house prices after the pandemic. Since hitting a peak of 10.2% in February 2023, inflation
started to slow thereafter; as of July 2023, consumer price inflation was 7.6%, arrested by aggressive monetary tightening.
The central bank has hiked its key policy rate by a cumulative 800 bps since May 2021 to currently 8.75%, and it maintains a tightening
bias. The Financial Stability Committee also tightened macroprudential measures, including lowering the maximum loan-to-value (LTV)
ratio on household mortgages to 80% from 85% and to 85% from 90% for first-time buyers, and capping the debt-service-to-income
ratio at 35%, with a higher ratio of 40% for first-time buyers. The countercyclical capital buffer was raised to 2% in September 2022,
and will be raised further to 2.5% in March 2024. In response to these measures, house price growth has moderated from its peaksince the beginning of 2023 and lending to households has also started to lose steam, which indicates cooling demand for housing(see Exhibit 13). Risks of a disorderly correction are limited because of strong housing market fundamentals, including high population
growth and supply shortages.
Exhibit 12

Exhibit 13

Headline inflation has started to cool, although some components
are experiencing higher inflation

Monetary policy tightening is starting to cool the housing market
House price index relative to macro fundamentals

Consumer price index (percentage change) and contributions (pps)
HousingServices

20

Imported inflation
Policy rate

Nominal house price growth (RHS)
Relative to the consumer price index
Relative to the wage index
Relative to the building cost index

Other goods

250

50%

15
40%

200

30%

10
150

20%

100

10%

5

0%

0

50

-10%

Jan-08Aug-08Mar-09Oct-09
May-10Dec-10Jul-11
Feb-12
Sep-12
Apr-13
Nov-13Jun-14Jan-15Aug-15Mar-16Oct-16May-17
Dec-17
Jul-18
Feb-19Sep-19Apr-20Nov-20Jun-21
Jan-22Aug-22Mar-23

Sources: Central Bank of Iceland and Moody's Investors Service-20%
Jan-03
Nov-03
Sep-04
Jul-05
May-06Mar-07
Jan-08Nov-08
Sep-09Jul-10May-11Mar-12
Jan-13
Nov-13
Sep-14Jul-15May-16
Mar-17Jan-18
Nov-18
Sep-19Jul-20May-21
Mar-22
Jan-230-5

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

We expect further interest rate hikes in the coming months as inflation expectations have recently risen. Another reason for thecontinued tightening bias is the risk of a wage-price spiral. In 2022, social partners agreed on an interim one-year wage agreement
given the then-high level of uncertainty. Upside surprises to inflation during the year could lead to higher wage demands in the next
round of collective bargaining, which will start this autumn.
Strong (real) wage increases in the past have raised concerns over declining price competitiveness and an increasing misalignment
between wages and productivity growth (see Exhibit 14). We generally consider the last three-year wage agreement from 2019 to havehelped support private consumption during the pandemic but also to have contributed to rising inflation. The agreement included an
innovative GDP bonus in an effort to link wage increases to per capita GDP growth, but it was poorly designed and resulted in a payout
in 2022 even though GDP per capita was still below pre-pandemic levels. Both the OECD and the IMF recommend linking future wage
increases more directly to productivity growth.
Strong fiscal framework supports policy credibility and effectiveness
Before the banking crisis, weaknesses in the budgetary framework resulted in an often procyclical fiscal stance, weak budget discipline,
and inadequate surveillance and management of fiscal risks. However, a strong set of fiscal rules has been in place since the Organic
Budget Law was passed in 2015. The rules target a balanced budget over a five-year horizon with a maximum deficit of 2.5% of GDP
in any given year and a net debt ceiling of 30% of GDP.4 The law also requires the government to publish a five-year fiscal policy
statement at the beginning of each electoral term, as well as a rolling five-year fiscal strategy plan on an annual basis. The fiscal rules
were suspended during the pandemic but will be reinstated in 2025, one year ahead of initial plans.

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Government of Iceland - A2 positive: Annual credit analysis

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MOODY'S INVESTORS SERVICE

The authorities demonstrated their adherence to the rules even before the formal entry of the law into force. As a result of solid
budgetary out-turns and the use of one-off revenue for debt reduction, Iceland's public debt declined by more than 50 percentage
points of GDP between the peak in 2011 and 2018, one of the strongest ever episodes of debt reduction globally.
Exhibit 14

Exhibit 15

Wage increases have decoupled from productivity growth, puttingpressure on inflation

Iceland has a history of procyclical budgetary policies

Index (Q1 2009 = 100)
Real wages

Real GDP per hour worked

160

20

Countercyclical easing
140

Procyclical easing

15

Real spending growht (%)

150

10

130

120
110
100

5
0
-5

90
-10

80
-15

Procyclical tightening-10

Sources: Statistics Iceland and Moody's Investors Service

10

14 August 2023

-8-6Countercyclical tightening
-4

-2
0
2
Real GDP growth (%)

4

6

8

10

Sources: OECD and Moody's Investors Service

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Fiscal strength score: a2

+

ca

caa3

caa2

caa1

b3

b2

b1

ba3

ba2

ba1

baa3

baa2

baa1

a3

a2

a1

aa3

aa2

Scale

aa1

aaa

Factor 3: Overall score

-

Final

Factor 3: Sub-scores
Icelanda2

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 at “a2”, reflecting its improving fiscal metrics, with a rapidly declining budget deficit and a firmly
established downward debt trend. Iceland has a strong track record of reducing its very high debt burden after the 2008 crisis. Debt
affordability is weaker than peers because of the large share of inflation-indexed debt as well as higher domestic funding costs.
However, we recently moved the score upward from “baa1” score to factor in some interest revenue that offsets interest expenditure.
Other sovereigns with an “a2” assessment of fiscal strength include Ireland and Poland (A2 stable).
Exhibit 16Peer comparison table factor 3: Fiscal strength

Final score
Initial score
Gen. gov. debt (% of GDP)
Gen. gov. debt (% of revenue)
Gen. gov. interest payments (% of GDP)
Gen. gov. int. payments (% of revenue)

Iceland
A2/POS
a2
a2
68.7
172.0
2.3
5.8

a2 Median

58.9
183.3
1.5
3.5

PolandA2/STA
a2
a1
49.1
123.4
1.6
3.9

FranceAa2/STA
a2
a1
111.8
209.0
1.9
3.5

Ireland
Aa3/STA
a2
aa2
44.7
194.6
0.7
2.8

Cyprus
Ba1/POS
a2
a2
86.5
206.4
1.5
3.6

Slovenia
A3/STA
a1
a1
69.9
164.7
1.1
2.5

Chile
A2/STA
a1
a1
38.0
146.4
1.0
3.9

Sources: National authorities, IMF and Moody's Investors Service

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Strong economic growth and credible fiscal framework support Iceland's fiscal metrics
In 2022, government finances benefited from strong revenue growth stemming from a robust economic performance, as well as thetermination of pandemic-related spending. The general government budget deficit declined to 4.3% of GDP from 8.4% in 2021,
far exceeding the government's original targets. Budget execution in 2023 will also likely be significantly stronger than expected,
again boosted by the strong economy and the government's recent decision to actively tighten policy in an effort to support thecentral bank's disinflation efforts. The government now expects a deficit at the central government level of just 1.3% of GDP for 2023,
compared with a target of 3% in the approved 2023 budget. It postponed several public investment projects and introduced some
additional discretionary measures on the revenue side. For the general government (including local governments and the social security
system), we forecast a budget deficit of 2% of GDP in 2023.
The government's medium-term fiscal plan for 2024-28 envisages a further gradual reduction in the central government deficit to 1.1%
and 0.8% of GDP in 2024 and 2025, respectively, with the budget targeted to return to balance in 2027 and overall surplus in 2028. To
reach the targets, the government plans to limit spending growth below nominal GDP growth while keeping revenue broadly stable asa share of GDP. Iceland’s strong track record of sustained deficit reduction and the high political acceptance of the medium-term fiscal
framework lead us to believe that the government will meet and possibly exceed the targets again.
Exhibit 17

Exhibit 18

Budget deficit is declining faster than anticipated ...

… and a balanced budget is now targeted for 2027

General government fiscal accounts (as a percentage of GDP)

Central government deficit targets and out-turn (as a percentage of GDP)

Revenue

ExpenditureRealised
2022-2026

Fiscal balance (RHS)

60

15

50

10

40

5

-2

30

0

-4

20

-5

10

-10

0

-15

2024-2028
2021-2025

2023-2027

2
0

-6

-8
-10
-12
2020

Sources: Statistics Iceland and Moody's Investors Service

2021

2022

2023

2024

2025

2026

2027

2028

Sources: Ministry of Finance and Moody's Investors Service

Downward trend in public debt is firmly established
Provided the fiscal targets are achieved as planned, government debt will decline more rapidly than we expect. In the 2021-25 fiscal
plan, the government had aimed to stabilise the public debt ratio no later than 2026, and targeted a debt-to-GDP ratio of 55% at yearend 2022. The actual debt-to-GDP ratio — as defined in the fiscal framework — was 40%, and the government will likely stabilise debt
already in 2023. Based on our definition, we expect the debt ratio to decline below 60% of GDP by 2024, supported by the narrowing
in the fiscal deficit, as well as continued strong nominal GDP growth.
Iceland's downward debt trend is also resilient to most shocks, with the exception of a severe combined fiscal and economic shock,which has low probability (see Exhibit 19). The low share of foreign-currency debt reduces risks stemming from exchange-rate
movements. The foreign-currency debt share fell to less than 10% of total debt as of June 2023 with the full repayment of a maturity
in 2022 and the buyback of 52% of the eurobond maturing in May 2024, earlier in 2023.
Our debt ratio includes 24 public-sector entities that were reclassified within the general government perimeter in 2020 by Statistics
Iceland, leading to a significant deterioration in Iceland's debt ratio and debt-affordability indicators. The debt-to-GDP ratio increased
by about 32 pps of GDP mainly as a result of the inclusion of the liabilities of the HF-Fund (24% of GDP) and, to a lesser extent, theStudent Loan Fund (2% of GDP).

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The government has started discussions with domestic pension funds, the main holders of HF-Fund bonds, about an early resolution of
the fund and the government's guarantee for its obligations. The fund is in government-mandated wind-down and, from 2035 onward,
its cash inflows will no longer be sufficient to cover its debt payments, requiring additional equity injections. The government aims foran early consensual agreement with the pension funds, but is also considering a change in legislation to place the fund into liquidation.
So far, no conclusion has been reached. An early resolution of the guarantee would help accelerate the decline in debt.5
Exhibit 19

Exhibit 20

Debt trajectory is resilient to most shocks

General government debt includes large liabilities from HF-FundGeneral government debt (as a percentage of GDP)

General government debt (as a percentage of GDP)
Central government

Central Scenario

Growth shock

Fiscal shock

Interest rate shock

FX shock

Combined shock

Other

140

80
75

120

70

100

65

80

60

60

55

40

50

20

45

0

40
2018

HFF

160

2019

2020

2021

2022

2023F

2024F

2025F

2026F

2027F

Standardised shocks are based on a 0.5 standard deviation calculated for 10 years over thecourse of the forecast period.
Sources: Moody's Investors Service

Other includes local governments, as well as public-sector entities classified under thegeneral government.
Sources: Statistics Iceland, Central Bank of Iceland and Moody's Investors Service

The government’s balance sheet is significantly stronger when taking into account its assets of 65% of GDP (see Exhibit 21). The mostimportant of these are the state's remaining equity stakes in the domestic banks, the HF-Fund's loan book and substantial cash deposits
of around 12% of GDP. The government has been gradually reducing its shareholding in the financial sector with the sale of its stakein Arion Bank hf. (A3/A3 positive, baa3)6 in 2018 and that of 57.5% of Islandsbanki in 2021 and 2022, with proceeds used to reduce
debt. The government's fiscal plan assumes full disposal of the Islandsbanki stake by 2024, which we expect to be delayed, while noplans have been made for its holding of 98.2% of Landsbankinn. The government receives dividends worth around 1% of GDP every
year from its equity participations, and is considering the establishment of a sovereign wealth fund as a contingency fund for majordisasters.
Debt affordability remains weaker than peers but is improving
The retirement of higher-cost debt and the rebuilding of the revenue base since the banking crisis have helped improve the affordabilityof government debt, although the ratio of interest payments to revenue remain significantly above that of similarly rated peers like
Poland and Slovakia (A2 negative). Domestic funding costs are higher than in EU countries and the share of inflation-indexed debt isalso higher than for most peers. At the end of May 2023, 23% of Treasury debt was linked to inflation. We now consider the interest
income of the HF-Fund when calculating debt interest payments as those are used to cover interest payments due on the fund's
obligations. We also exclude assumed interest payments on unfunded pension liabilities for state employees to ensure consistency
across countries. Following these changes, Iceland's debt affordability metrics are much closer to those of peers than before, at 5.8% in
2022. We expect debt affordability to stabilise at around current levels as inflation recedes but the cost of funding remains higher thanin the past.

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Exhibit 21

Exhibit 22

Government assets are larger than most peers

Debt affordability has been improving, but remains weak comparedwith peers

2022 (as a percentage of GDP)

Interest payments (as a percentage of revenue)
Currency

Bonds

Loans

EquityOther

A-rated median

120

12

100

10

80

8

60

6

40

4

20

2

0
Sweden Slovenia Iceland Estonia

Latvia Lithuania

Malta

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

Slovakia Ireland

Iceland0
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023

Sources: National authorities and Moody's Investors Service

Low contingent liabilities pose limited risk to the government's balance sheet
As a result of the reclassification of public companies mentioned earlier, the number for contingent liabilities was significantly lower
at around 1% of GDP as of year-end 2022. The largest guarantees have been extended to the power company Landsvirkjun (Baa1stable), which accounts for 49% of total outstanding guarantees. The company has a stable operating performance and has been able
to raise debt without government guarantee. It has also markedly improved its equity position and become a source of revenue for thegovernment in recent years. The company agreed to pay $140 million (0.5% of GDP) in dividends to the government for 2022.

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

Scale

aa

+

a

baa

ba

b

caa

ca
-

Final

Factor 4: Sub-scores
Icelandaa

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 toevent 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.

We assess susceptibility to event risk at “a”, driven by banking sector considerations. However, risks emanating from the sector are wellcontained as Icelandic banks have large capital and liquidity buffers to weather any shocks. Large foreign-currency reserves and a net
creditor position are reflected in a “aa” score for external vulnerability risks, similar to government liquidity and political risk scores.
Broad-based consensus on economic policy direction and low geopolitical risks
Political event risk, which we assess at “aa”, is low in Iceland, reflecting relatively consistent policies in key areas that are important insafeguarding the credit profile irrespective of the government composition. Iceland's geographical location insulates the country fromthe current geopolitical risks stemming from the Russia-Ukraine war. Peers sharing this assessment include Australia (Aaa stable) andCanada (Aaa stable).
Exhibit 23
Peer comparison table factor 4a: Political risk

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

aa MedianAustralia

BahamasCanadaSingapore

0.9
1.0

Aaa/STAaa
1.4
0.9

B1/STAaa
0.9
0.9

Aaa/STAaa
1.5
0.9

Aaa/STA
aa
-0.1
1.5

CaymanIslands
Aa3/STAaa
0.8
1.7

Uruguay
Baa2/POS
aa
1.3
1.0

[1] Composite index with values from about -2.50 to 2.50: higher values correspond to better governance.
Sources: National authorities, IMF and Moody's Investors Service

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The coalition government of Left-Green Movement and centre/centre-right Progressive and Independence parties was confirmed in the2021 parliamentary elections, although the relative shares of the parties has shifted somewhat. This was the first time since 2009 thata coalition government has been renewed, with Prime Minister Katrín Jakobsdóttir continuing her term. The government coalition holds
38 out of 63 seats in the Alþingi, the Icelandic Parliament. Consensus on the direction of economic policies is broad, and political risk islow.
In contrast to most other European countries, we have not adjusted Iceland's score for political risk for geopolitical risks even though
the country is a founding member of NATO, and thus in principle exposed to a potential conflict between NATO and Russia. Iceland
has no standing army and contributes only on a civilian basis to NATO's operations. Besides Korea (Aa2 stable), Iceland is the only
country with a Bilateral Defence Agreement with the US (Aaa stable), in force since 1951.
Low government liquidity risk because of strong fiscal credibility, a sizeable cash buffer and a large domestic investor baseWe assess government liquidity risk at “aa”, reflecting relatively modest borrowing needs, prudent liquidity management including
significant cash buffers, and a large domestic investor base. Other sovereigns sharing a “aa” assessment including Poland and Slovakia.
Exhibit 24Peer comparison table factor 4b: Government liquidity risk

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

Iceland
A2/POS
aa
aa
aa
6.6

aa Medianaa
6.6

BermudaA2/STA
aa
aa
aa
-0.5

Malta
A2/STA
aa
aa
aa
11.6

PolandA2/STA
aa
aa
aa
13.8

Slovakia
A2/NEG
aa
aa
aa
12.2

Malaysia
A3/STA
aa
aa
aa
11.7

Slovenia
A3/STA
aa
aa
aa
11.0

Sources: National authorities, IMF and Moody's Investors Service

Iceland's gross borrowing requirements are moderate at 7% of GDP in 2023, which include our estimate for the budget deficit andmaturing debt. Refinancing risks are also low with an average maturity of central government debt of 5.6 years as of May 2023.
The Treasury borrows mostly domestically and benefits from a large domestic investor base, including a large pension fund sector that
holds around 40% of total Treasury bonds. Pension funds are required to invest at least 50% of their assets in local currency assets,
but this threshold will be gradually lowered to 35% by 2036, which could reduce demand for government bonds. Foreign investors
are much less present than in the past, holding just 6.7% of Icelandic government bonds as of June 2023, compared with 30% as of
year-end 2009 (see Exhibit 26). The full lifting of capital controls since 2021 could allow inflows of foreign investors to offset the lower
participation of pension funds, especially given Iceland's relatively favourable interest rate differential compared with most advanced
economies.
International bonds serve as benchmark issuances for local issuers but are kept as reserve at the central bank, helping mitigate liquidity
risks. The government repurchased 51% of the 2024 maturities in May 2023 and plans to issue a sustainable bond, which would not
be placed with the central bank but spent to fund environmentally friendly projects. In addition, the government keeps at least ISK40
billion in deposits at the central bank. At the end of June 2023, deposits were ISK67 billion (2% of GDP), with an additional ISK199
billion held as foreign-exchange deposits.

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Exhibit 25

Exhibit 26

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

Foreign investors
Pension funds

Non-marketable debt

300

Other residents
Nonresident holdings (% of total)
70%

1000
900

250

60%

800
50%

700

200

600

40%

500

150

30%

400
300

100

20%

200
10%

100

50

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

The 2023 maturities include the early buyback of around half of the 2024 eurobond
maturity, executed in May 2023.
Sources: Government debt management and Moody's Investors Service0%

Sep-08Apr-09
Nov-09Jun-10Jan-11
Aug-11Mar-12Oct-12
May-13
Dec-13
Jul-14Feb-15
Sep-15
Apr-16
Nov-16Jun-17Jan-18Aug-18Mar-19Oct-19
May-20Dec-20Jul-21
Feb-22
Sep-22
Apr-2300

Sources: Government debt management and Moody's Investors Service

Strong capitalisation and liquidity help alleviate concentration risks in the banking system
We assess Iceland’s banking sector risk at “a”, reflecting the sizeable capital and liquidity buffers of the three large domestic banks.
Other peers with a similar assessment of banking sector risk include Bermuda (A2 stable), Estonia (A1 stable) and Ireland.
Exhibit 27
Peer comparison table factor 4c: Banking sector risk

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

Iceland
A2/POS
a
a
baa3
baa3
141.6

a Median

baa2
baa2
170.6

BermudaA2/STA
a
baa
baa2
baa2
334.6

Chile
A2/STA
a
a
baa1
baa1
151.1

Lithuania
A2/STA
a
a
baa3
baa3
85.4

PolandA2/STA
a
a
baa3
baa3
92.4

Estonia
A1/STA
a
a
baa3
baa3
105.4

Ireland
Aa3/STA
a
a
baa1
baa3
111.1

[1] BCA is an average of Baseline Credit Assessments (BCAs) for rated domestic banks, weighted by bank assets.
[2] Where we have no or small rating coverage in a system, we estimate the risk of Banking Sector Credit Event (BSCE) based on available data for aggregate banking system.
Sources: National authorities, IMF and Moody's Investors Service

The Icelandic banking sector poses limited risks to the government's balance sheet because of its strong liquidity and capital buffers:
the average Common Equity Tier 1 capital ratio was 20.4% at the end of the first quarter of 2023, significantly higher than that of mostrating peers. The banking sector is now entirely domestically focused and concentrated in three large banks, which together account for
close to 95% of the system's assets.
Our outlook for the banking system is stable. Higher interest rates support Icelandic banks' core profitability. Asset quality might
deteriorate but the starting position is solid, with average nonperforming loan (NPL) ratios at just 1.4% in March 2023. The authorities
have put in place a number of borrower-based measures to reduce the risks related to high house prices. The measures have started
to rein in house price inflation (see Exhibit 13), and relatively low average loan-to-value ratios and a strong labour market help protect
the quality of the banks' mortgage book. Icelandic borrowers facing difficulties also have the option of switching to inflation-linked
mortgages, which will lower their interest payments in the coming years.
While banks’ exposure to the commercial real estate sector is sizeable (accounting for 17% of gross loans), it is low as a share of theircapital base. In addition, limited supply in recent years still supports price developments although activity is expected to slowdown due
to the high level of interest rates.

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Large foreign-currency reserves and net external creditor limit external risks
We have set external vulnerability risk at “aa”, reflecting Iceland's net external creditor position and very large foreign-currency
reserves, which help buffer external shocks. Peers sharing the same risk assessment include Malta (A2 stable) and Finland (Aa1 stable).
Exhibit 28
Peer comparison table factor 4d: External vulnerability risk

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

aa Median

Lithuania

Malta

Finland-0.8
0.6

A2/STA
aa
aa
-5.1
-6.6

A2/STA
aa
aa
-5.8
52.3

Aa1/STA
aa
aa
-3.9
-2.7

A2/POS
aa
aa
-1.6
24.6

Saudi
ArabiaA1/POS
aa
aa
13.6
64.4

Hong Kong
SAR, China
Aa3/STA
aa
aa
10.5
488.0

BermudaA2/STA
aaa
aaa
13.5
70.4

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

Helped by the tourism sector Iceland posted large current account surpluses until 2020. Since then, the impact of the pandemic, strong
domestic demand and large dividends to foreign companies have turned the current account into deficit. We expect the deficit tonarrow significantly to around 0.6% of GDP in 2023, backed by the strength in tourism demand and other exports as well as lower
profits of foreign companies, particularly in the aluminium sector.
Iceland’s net international investment position (NIIP) has improved significantly since the banking crisis, helping buffer shocks to thesmall open economy. The resolution of the failed bank estates in 2015, coupled with the increase in pension funds' foreign investments,
mainly drove the return into a net external creditor position. Valuation effects on the pension funds' portfolio investments resulted
in a reduction in the NIIP to 25% of GDP at the end of 2022 compared to 38% in 2021, a still-solid position (see Exhibit 30). Iceland
has also substantially reduced its external debt stock, to 75% of GDP at the end of 2022 from more than 500% in 2007. Banks andcorporates are the main borrowers abroad, but they tend to hold large foreign-currency assets or earn foreign-currency earnings.
Exhibit 29

Exhibit 30

Current account is gradually improving towards a balanced position

Pension funds' external assets drive net external creditor position

Current account as a percentage of GDP (four-quarter rolling sum)

As a percentage 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%

Sources: Central Bank of Iceland, Statistics Iceland and Moody's Investors Service-50%
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
2022-Q2
2022-Q3
2022-Q4

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
2022-Q2
2022-Q3
2022-Q4
2023-Q1-10Sources: Central Bank of Iceland, Statistics Iceland and Moody's Investors Service

External surpluses have allowed the central bank to build substantial foreign-currency reserves, which it uses to smooth excessive
volatility in the exchange rate. Reserves were $4.9 billion at the end of May 2023, equivalent to 18% of GDP or 23% of the country's
total external debt. Reserves declined since 2021 as the Treasury used its account at the central bank to repay foreign debt, but using
the IMF's reserve-adequacy metrics, reserves remain adequate, equivalent to 1.23x the recommended level at the end of 2022.

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ESG considerations
Iceland's ESG Credit Impact Score is Neutral-to-Low CIS-2
Exhibit 31

ESG Credit Impact Score

Source: Moody's Investors Service

Iceland's ESG Credit Impact Score is neutral to low (CIS-2), reflecting neutral-to-low exposure to environmental and social risks, andvery strong institutions.
Exhibit 32

ESG Issuer Profile Scores

Source: Moody's Investors Service

Environmental
Iceland's exposure to environmental risks is neutral to low (E-2) as nearly all of its energy generation and consumption are covered byrenewable sources, in particular hydroelectric power and geothermal energy. Iceland's unique geological features imply some exposure
to physical climate risks but also offer opportunities for the country's key sectors.
The impact of warming seas on fish stocks in Icelandic waters is not yet clear; while some varieties may migrate out of Iceland's waters
as illustrated by the decline in capelin fish stocks in 2019, other species have migrated into Icelandic waters. Also, the sector has
considerable flexibility to adapt to changing stocks, which it has proved multiple times. Warmer temperatures are favourable for plant
productivity and agriculture. Around 11% of Iceland's land mass consists of glaciers; while the melting of glaciers raises the risk oflandslides, it also increases availability of hydropower, at least for several decades.
SocialSimilarly, Iceland faces neutral to low social risks (S-2). Iceland's demographic profile is more favourable than in many other countries
because of long working lives, high participation rates of women and the flexibility of the labour force. Strong inward migration further
supports the economy, as immigrants’ participation rate exceeds that of the domestic population. In contrast to some of the Nordic
countries, immigrants and refugees are widely perceived to benefit the Icelandic economy and society.
Iceland also benefits from high-quality education, access to basic services and housing availability, similar to other Scandinavian
countries. Indicators for access to healthcare are very strong, in line with the fast response to the coronavirus pandemic. While wage
negotiations between employers and trade unions can affect Iceland's competitiveness, the highly coordinated collective bargaining has

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generally been a stabilising factor, ensuring relatively contained wage differentials and contributing to limited income disparities andsocial peace.
Governance
Iceland's very high institutions and governance strength is reflected in a positive G issuer profile score (G-1). This is underpinned by its
strong scores in most of the WGIs, which reflect the high credibility of its institutions and the country's well-developed macroeconomic
policy environment. This contributes to its relatively strong resilience to E and S risks, along with very high wealth levels.
All of these considerations are further discussed in the “Credit profile” section above. Our approach to ESG is explained in our report on
how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector methodology General Principles forAssessing Environmental, Social and Governance Risks Methodology.

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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 Sovereigns Rating Methodology.
Exhibit 33

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, foreign
currency debt burden, contingent liabilities, fiscal reserves+-

Scorecardindicatedoutcome:Aa2 - A1

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

21

14 August 2023

Government of Iceland - A2 positive: 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.
Close peers are other small countries, such as Lithuania, Malta and Slovenia (A3 stable). Iceland's higher institutional and governance strength is the main differentiating factor.
Exhibit 34

Iceland's key peers
Year

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

2022
2022
2018 - 2027F
2013 - 2022
Latest available
Latest available
Latest available
Latest available
2022 - 2024F
2018 - 2027F
2013 - 2022
2022
2022
2022
2022
Latest available
Latest available
2023F
Latest available
Latest available
2022
Latest available
2022
2024F
2022
2022

IcelandIsraelSlovenia

Lithuania

Malta

Slovakia

A2 MedianWestern Europe
MedianA2/POS
Aa2 - A1
baa1
27.8
66,512
2.4
1.2
aa2
aa
aaa
aa
a
-2.6
4.4
2.0
a2
68.7
172.1
6.6
2.7
a
aa
aa
6.6
a
baa3
141.6
aa
-1.6
-147.6
24.6

A1/STAA1 - A3
aa3
522.0
52,349
3.8
0.3
a2
a
a
baa
aa
-0.7
2.0
1.5
a3
60.7
162.2
6.8
2.5
baa
baa
aaa
6.2
a
baa2
147.4
aaa
3.8
-76.2
32.1

A3/STAA1 - A3
baa1
62.0
50,059
2.7
1.3
a2
a
a
a
a
-3.3
3.3
2.7
a1
69.9
164.7
2.5
1.1
baa
baa
aa
11.0
baa
ba1-ba2
88.0
a
-0.4
-92.9
-0.6

A2/STA
Aa3 - A2
baa1
70.2
47,107
2.7
1.1
a1
a
a
aa
a
-1.8
5.0
5.6
aa2
38.4
107.2
1.0
0.4
ba
ba
a
5.8
a
baa3
85.4
aa
-5.1
-71.9
-6.6

A2/STAA1 - A3
baa1
17.7
58,072
4.1
2.1
a3
baa
baa
a
a
-5.2
2.5
1.6
a1
53.4
152.2
2.8
1.0
baa
a
aa
11.6
baa
baa3
189.1
aa
-5.8
-285.5
52.3

A2/NEGA1 - A3
baa1
115.3
39,490
2.0
1.2
a2
a
a
a
a
-4.4
5.4
3.6
a1
57.8
143.6
2.6
1.0
baa
baa
aa
12.2
a
baa2
104.0
a
-8.2
---61.0

A2
A1 - A3
baa1
70.2
47,107
2.4
1.2
a2
a
a
a
a
-2.6
4.4
2.9
a1
49.1
146.4
3.9
1.0
baa
a
aa
6.6
a
baa3
141.6
aa
-5.1
135.6
169.6
-6.6

Aa3
Aa2 - A1
a2
528.5
64,656
1.5
0.9
aa2
aa
aaa
aa
aa
-2.0
2.7
2.3
a1
66.1
152.2
2.1
0.8
baa
baa
aaa
9.3
a
baa1
232.3
aa
0.6
-285.5
24.6[1] BSCE is our estimate of the risk of a Banking Sector Credit Event (BSCE), which we use for sovereigns where we have no or very limited rating coverage of a system. Otherwise, we use the Baseline Credit Assessment (BCA) for rated domestic banks,
weighted by bank assets.
Sources: National authorities, IMF and Moody's Investors Service

22

14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

DATA, CHARTS AND REFERENCES
Chart pack: Iceland
Exhibit 35

Exhibit 36

Economic growth

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

Gross investment/GDP

Gross domestic saving/GDP

30

8.0

3.5

6.0

3.0

4.0

2.5

25
20

2.0
2.0

0.0

15

1.5
-2.0

10

1.0
5

Source: Moody's Investors Service

Source: Moody's Investors Service

Exhibit 37

Exhibit 38

National income

Population

GDP per capita ($)

Population (Mil.) (LHS)

GDP per capita (PPP basis, $)

90000

0.39

80000

0.38

2024F

2023F

2022

2021

2020

2019

2018

2017

2016

2015

0
2013

2024F

2023F

2022

2021

2020

2019

2018

2016

2017

0.0
2015

-8.0
2014

0.5

2013

-6.0

2014

-4.0

Population growth (% change) (RHS)
3.5
3.0

0.37

70000

2.5

0.36

60000

0.35
50000

2.0

0.34

40000

1.5

0.33

1.0
0.5

Source: Moody's Investors Service

Source: Moody's Investors Service

Exhibit 39

Exhibit 40

Global Competitiveness Index

Inflation and inflation volatility

2024F

2023F

2022

2021

2020

2019

2018

2017

2016

2015

2014

0.0

2013

2024F

2023F

2022

2021

2015

2020

0

0.29
2019

0.30
2018

10000

2017

0.31

2016

20000

2014

0.32

2013

30000

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

Israel (A1/STA)

Iceland (A2/POS)

10.0

4.5

9.0

4.0

8.0

3.5

7.0

3.0

6.0

Slovenia (A3/STA)

2.5

5.0
2.0

4.0

Malta (A2/STA)

1.5

3.0

0

5

10

15

20

25

30

35

40

45

2024F

2023F

2022

2021

2020

2019

2018

2017

0.0
2016

Slovakia (A2/NEG)

2015

0.5

0.0
2014

1.0

1.0
2013

Lithuania (A2/STA)

2.0

Source: Moody's Investors Service

Source: World Economic Forum

23

14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Exhibit 41

Exhibit 42

Institutional framework and effectiveness

Debt burden
Gen. gov. debt/GDP (%) (LHS)
Gen. gov. debt/gen. gov. revenue (%) (RHS)

150

40

100

20

50

0

0
2013

2021

2020

2019

2018

2017

2016

2015

2014

2013

2012

0.0

[1] Composite index with values from about -2.50 to 2.50: higher values suggest greater
maturity and responsiveness of government institutions.
Source: Worldwide Governance Indicators

Source: Moody's Investors Service

Exhibit 43

Exhibit 44

Debt affordability

Financial balance

Gen. gov. interest payment/GDP (%) (LHS)
Gen. gov. interest payment/gen. gov. revenue (%) (RHS)

2022

0.5

2020

1.0

2024F

200

60

2023F

80

1.5

2021

250

2019

300

100

2018

120

2017

2.0

350

2016

2.5

140

2015

Rule of Law[1]Voice & Accountability[1]2014

Government Effectiveness[1]Control of Corruption[1]Regulatory Quality[1]Gen. gov. financial balance/GDP (%)
Gen. gov. primary balance/GDP (%)

4.5

12.0

20

10.0

15

4.0
3.5

3.0

8.0

10
5

2.5
6.0
2.0

0

1.5

4.0

-5

Source: Moody's Investors Service

Exhibit 45

Exhibit 46

Government liquidity risk

External vulnerability risk

2024F

2023F

2022

2021

2020

2019

2013

Source: Moody's Investors Service

2018

-15

2024F

2023F

2022

2021

2020

2019

2018

2017

2016

2015

2014

2013

0.0

2017

0.0

0.5

2016

-10

2015

2.0

2014

1.0

Current account balance/GDP (%) (LHS)
Net international investment position/GDP (%) (RHS)

Gen. gov. debt/GDP (%) (RHS)
Gen. gov. external debt/total gen. gov. debt (%) (LHS)
50

160

10

45

140

8

50

40
30

40

120
35
30

100

25

80

20

20

6

10

4

0

2

-10
-20

60

0

15

-30

40

Source: Moody's Investors Service

24

14 August 2023

-40

-2

-50
2022

2021

2020

2019

2018

2017

2016

2015

2014

-60

2013

-4

2012

2022

2021

2020

2019

2018

2017

2016

2015

2014

0

2013

0

2012

20

2011

5

2011

10

Source: Moody's Investors Service

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Rating history
Exhibit 47

Iceland[1]Long Term Ratings
Foreign
Currency

Local

Review Action

Outlook

Currency

Foreign

Currency

Short Term Ratings
Local
Currency

Foreign
Currency

Local
Currency

Action Date

A2

A2

POS

-

-

-

-

Jul-23

A2

A2

STA

-

-

-

-

Nov-19

A3

A3

POS

-

-

-

-

Jul-18

A3

A3

STA

-

-

-

-

Sep-16

Baa2

Baa2

RUR

Possible Upgrade

Possible Upgrade--Jun-16

Baa2

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

25

14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Annual statistics
Exhibit 48

Iceland
Economic structure and performance
Nominal GDP (US$ bil.)
Population (Mil.)GDP per capita (US$)
GDP per capita (PPP basis, US$)
Nominal GDP (% change, local currency)
Real GDP (% change)
Inflation rate (% change average)
Unemployment rate (%)
Gross investment/GDP
Gross domestic saving/GDP
Nominal exports of G & S (% change, US$ basis)
Nominal imports of G & S (% change, US$ basis)
Real exports of G & S (% change)
Real imports of G & S (% change)
Net exports of goods & services/GDP
Openness of the economy[1]Government Effectiveness[2]Government financeGen. gov. revenue/GDP
Gen. gov. expenditures/GDP[3]Gen. gov. financial balance/GDP[3]Gen. gov. primary balance/GDP[3]Gen. gov. debt (US$ bil.)[3]Gen. gov. debt/GDP[3]Gen. gov. debt/gen. gov. revenue[3]Gen. gov. interest payments/gen. gov. revenue
External payments and debt
Nominal exchange rate (local currency per US$, Dec)
Real eff. exchange rate (% change)
Relative unit labor cost
Current account balance (US$ bil.)[4]Current account balance/GDP[4]Net foreign direct investment/GDP
Net international investment position/GDP[4]Official forex reserves (US$ bil.)

2013

2014

2015

2016

2017

2018

2019

2020E

2021E

2022E

2023F

2024F

16.1
0.3
50,07844,673
6.8
4.6
3.9
5.8
15.6
23.2
6.0
1.3
6.8
0.1
7.7
98.8
1.5

17.9
0.3
54,80946,239
5.9
1.7
2.0
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
1.6
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
1.7
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
1.8
3.3
21.8
26.2
14.5
20.1
5.1
11.8
4.5
87.0
1.4

26.3
0.3
75,46259,392
7.6
4.9
2.7
3.1
21.8
25.6
6.9
9.7
0.4
-0.9
3.5
88.6
1.5

24.7
0.4
69,08660,076
6.3
1.8
3.0
3.9
20.9
25.2
-10.9
-13.6
-5.5
-9.1
4.5
82.9
1.5

21.6
0.4
59,212
55,345
-3.5
-7.2
2.8
6.4
21.3
19.8
-33.5
-22.4
-31.1
-20.6
-1.6
68.0
1.5

25.6
0.4
69,24859,575
11.2
4.3
4.5
6.0
22.2
20.3
33.3
34.3
14.7
19.9
-2.0
76.8
1.6

27.8
0.4
74,04766,512
16.1
6.4
8.3
3.8
22.4
21.9
35.0
30.0
20.6
19.7
-0.7
93.4
--

27.4
0.4
71,978
-9.2
4.0
8.7
3.2
20.6
20.2
0.1
-6.1
5.7
-0.8
2.2
91.9
--

30.5
0.4
79,156
-6.3
2.5
5.7
3.5
21.1
19.3
14.9
13.0
6.0
4.2
3.1
94.3
--

41.3
42.5
-1.2
3.0
20.8
122.0
295.6
10.3

43.9
43.6
0.3
4.5
19.0
115.3
262.4
9.6

40.8
41.2
-0.4
3.7
17.4
97.3
238.3
10.1

57.0
44.4
12.5
16.1
18.4
82.5
144.8
6.3

43.6
42.6
1.0
4.4
18.2
71.7
164.6
8.0

42.9
42.0
0.9
3.5
15.5
63.2
147.5
6.1

40.6
42.1
-1.5
0.8
16.6
66.6
164.2
5.8

41.1
50.1
-9.0
-6.6
17.8
77.8
189.2
5.9

40.2
48.6
-8.4
-6.2
18.8
75.6
187.9
5.3

40.0
44.2
-4.3
-2.0
18.2
68.7
172.0
5.8

39.9
42.0
-2.1
0.1
18.1
63.8
160.1
5.7

39.4
41.1
-1.7
0.5
17.9
58.2
148.0
5.7

115.6
4.2
89.8
1.2
7.7
-0.3
-9.7
4.1

126.9
6.8
94.0
1.0
5.4
4.1
-3.7
4.1

129.6
2.4
100.0
1.0
5.7
4.0
-5.2
4.8

112.8
13.0
105.3
1.7
8.1
3.5
2.0
6.9

104.4
12.1
111.0
1.0
4.2
0.7
2.0
6.2

116.3
-2.6
116.7
1.1
4.3
-1.7
8.6
6.0

121.1
-7.0
118.1
1.6
6.5
-2.9
20.3
6.4

127.2
-8.1
123.3
0.2
0.9
-2.3
36.7
6.0

130.4
4.0
128.6
-0.6
-2.4
0.7
38.3
6.3

142.0
2.8
139.2
-0.5
-1.6
2.9
24.6
5.1

145.0
---0.2
-0.6
0.5
-5.5

142.1
--0.0
-0.1
1.2
-5.6

Source: Moody's Investors Service

26

14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Related websites and information sources» Sovereign risk group webpage» Sovereign ratings list
MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services.
The websites reached through these Links or References have not necessarily been reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control.
Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised on
any third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services provided
by any third party.

Endnotes
1 Iceland has the lowest Gini coefficient of all OECD countries, implying the most even distribution of wealth among this group of countries.
2 According to forecasts from the 2021 Ageing Report and Statistics Iceland.
3 Conducted by the Icelandic Food and Veterinary Authority in collaboration with Boston Consulting Group.
4 The government defines net general government debt as gross debt excluding pension liabilities and accounts payable, and also net of currency anddeposits. The definition excludes the public-sector companies that were included in the general government perimeter in 2020. These are, however,included for information purposes in future budgets and financial plans.
5 For more details, please see the Credit Analysis published on 29 July 2022.
6 The ratings shown are Arion Bank’s deposit rating, senior unsecured debt rating and Baseline Credit Assessment.

27

14 August 2023

Government of Iceland - A2 positive: Annual credit analysis

MOODY'S INVESTORS SERVICE

SOVEREIGN AND SUPRANATIONAL© 2023 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
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REPORT NUMBER

28

14 August 2023

1372468

Government of Iceland - A2 positive: Annual credit analysis

SOVEREIGN AND SUPRANATIONAL

MOODY'S INVESTORS SERVICE

Contacts

29

Kathrin Muehlbronner+44.20.7772.1383
Senior Vice President
kathrin.muehlbronner@moodys.com

Marie Diron
MD-Global Sovereign Risk
marie.diron@moodys.com

Lenaic Couderc
Associate Analyst
lenaic.couderc@moodys.com

Dietmar Hornung+49.69.70730.790
Associate Managing
Director
dietmar.hornung@moodys.com

14 August 2023

+44.20.7772.1799+44.20.7772.1968

Government of Iceland - A2 positive: Annual credit analysis