SOVEREIGN AND SUPRANATIONAL

CREDIT OPINION
23 August 2022

Government of Iceland – A2 stable
Regular update

UpdateSummary
The credit profile of Iceland is supported by its wealthy and flexible economy with favourable
demographics that support its long-term growth prospects. Current-account surpluses havecontributed to a net external creditor position and large foreign-currency reserves. The
pandemic-induced fiscal deterioration is being gradually reversed, helped by robust economic
growth. The credit profile is constrained by the economy's small size and concentration in alimited number of sectors, which increase its vulnerability to shocks and cause volatility ingrowth.

Contacts
Kathrin+44.20.7772.1383
Muehlbronner
Senior Vice President
kathrin.muehlbronner@moodys.com
Lenaic Couderc+44.20.7772.1799
Associate Analyst 1
lenaic.couderc@moodys.com
Dietmar Hornung+49.69.70730.790
Associate Managing Director
dietmar.hornung@moodys.com

Exhibit 1

Iceland's credit profile is determined by four factors
Economicstrength

Institutions andgovernance strength

Fiscalstrength

Susceptibility
to event risk

baa2

aa2

baa2

a

Economic resiliency
a2

Alejandro Olivo+1.212.553.3837
MD-Sovereign/Sub Sovereign
alejandro.olivo@moodys.com

Government financial strengtha2

CLIENT SERVICES

Scorecard-indicated outcome

Americas1-212-553-1653

Asia Pacific852-3551-3077

Japan

81-3-5408-4100

EMEA

44-20-7772-5454

A1 - A3

Source: Moody's Investors Service

Credit strengths» Very high wealth levels and labour market flexibility provide buffers to deal with shocks;» Well-funded pension system, long working lives and favourable demographics;» Very large foreign-currency reserves and net external creditor position.

Credit challenges» Volatile growth performance due to sector concentration and small currency area;» Rebuilding fiscal buffers after large pandemic-driven increase in public debt.

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Rating outlook
The stable outlook reflects our view that downside risks stemming from the economy's small size and high sector concentration
are mitigated by a robust external position as well as reduced private sector indebtedness and the improved health of the banking
sector. The economy has been recovering from the coronavirus shock broadly as expected, and we expect the fiscal deterioration of2020-2021 to be gradually reversed over the coming years, in line with the government's plans.

Factors that could lead to an upgrade
The outlook on Iceland’s rating could move to positive and the rating could eventually be upgraded in case of faster-than-expected
progress in restoring the government's fiscal buffers. Moreover, a push towards increased diversification which would lead to a lessvolatile economic performance would be positive for the rating.

Factors that could lead to a downgrade
Conversely, the outlook and subsequently the rating would come under downward pressure if the authorities deviated significantly
from their current medium-term fiscal consolidation plans that target a stabilisation of the public debt ratio by the middle of thedecade, resulting in a material increase in the public debt ratio.
An economic shock which would lead to a large and permanent damage to the tourism industry, or to substantial capital outflows,
weakening Iceland’s external position and threatening financial stability, would also be credit negative, although the latter is not a likely
scenario.

Key indicators
Iceland

2016

2017

2018

2019

2020

2021

2022F

2023F

Real GDP (% change)

6.3

4.2

4.9

2.4

-7.1

4.3

4.8

2.8

Inflation (CPI, % change, Dec/Dec)

1.9

1.9

3.7

2.0

3.6

5.1

9.8

4.7

Gen. gov. financial balance/GDP (%)[1]

12.5

1.0

0.9

-1.5

-8.7

-8.9

-4.9

-3.4

Gen. gov. primary balance/GDP (%)[1]

18.6

6.7

5.8

2.8

-4.6

-4.8

-0.9

0.5

Gen. gov. debt/GDP (%)[1]

82.4

71.6

63.1

66.2

77.4

75.0

70.2

69.4

Gen. gov. debt/revenues (%)[1]

139.6

157.9

141.1

158.2

184.1

185.6

173.0

173.8

Gen. gov. interest payment/revenues (%)[1]

10.3

12.6

11.0

10.2

9.6

10.1

9.9

9.6

Current account balance/GDP (%)[2]

8.1

4.2

3.5

5.8

0.8

-2.7

-0.2

0.1

[1] Includes public entities previously excluded from the scope of the general government[2] Excludes DMBs undergoing winding up in 2008-2015

Source: Moody's Investors Service

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for themost updated credit rating action information and rating history.

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Government of Iceland – A2 stable: Regular update

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ESG considerations
Iceland's ESG Credit Impact Score is Neutral-to-Low CIS-2
Exhibit 3

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 4

ESG Issuer Profile Scores

Source: Moody's Investors Service

Environmental
Iceland's exposure to environmental risks is neutral to low (E-2) as the country derives nearly all of its energy generation and use fromrenewable sources, in particular hydroelectric power and geothermal energy. Iceland's unique geological features imply some exposure
to physical climate risks but also offer opportunities for the country's key sectors. The impact of warming seas on fish stocks in Icelandic
waters is not yet clear; while some varieties may migrate out of Iceland's waters as seen with the decline in capelin fish stocks in 2019,other species have migrated into Icelandic waters. Also, the sector has considerable flexibility to adapt to changing stocks and has
proven so many times. Warmer temperatures are favourable for plant productivity and agriculture. Around 11% of Iceland's land massconsists of glaciers; while the melting of glaciers increases the risk of landslides it also increases availability of hydropower, at least forseveral decades.
Social
We assess its S issuer profile score as neutral to low (S-2). Iceland's demographic profile is more favourable than in many othercountries because of long working lives, high participation rates of women and the flexibility of the labour force. Iceland also benefits
from high-quality education, access to basic services and housing availability. Indicators for access to healthcare are very strong, as seenin the fast response to the coronavirus pandemic. Social risks exert themselves through intensive wage negotiations between employers
and trade unions every four years which can impact on Iceland's competitiveness.
Governance
Iceland's very high institutions and governance strength is reflected in a positive G issuer profile score (G-1). This is underpinned by its
strong scores in most of the Worldwide Governance Indicators, which reflects the high credibility of its institutions and the country's

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well-developed macroeconomic policy environment. This contributes to its relatively strong resilience to E and S risks, along with very
high wealth levels.
ESG Issuer Profile Scores and Credit Impact Scores for the rated entity/transaction are available on Moodys.com. In order to view thelatest scores, please click here to go to the landing page for the entity/transaction on MDC and view the ESG Scores section.
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.

Detailed credit considerations
We assess Iceland's economic strength at “baa2” which balances the country's small size and associated history of economic boom
and bust episodes with very high wealth levels and strong competitiveness. Iceland's GDP per-capita is - at an estimated $59,792
in 2021 - the 15th highest in our sovereign rating universe, having recovered the significant losses registered during the country's
2008 banking and currency crisis. Iceland's economy is highly competitive, as evidenced by its ranking at 16th globally in the World
Competitiveness Index in 2021, – standing out compared with close peers.
Growth is also volatile, reflecting limited diversification and relatively high openness, which increases the economy's vulnerability tosector-specific and external shocks. More than 70% of the country's export revenues come from three sectors: tourism (23% of total
in 2021), marine products (24% of total) and aluminum (23% of total). The coronavirus pandemic and its impact on tourism caused
one of the largest economic contractions among advanced economies in 2020 but the recovery is well underway, helped by a pickup in
tourism and significant government support.
We assess Iceland's institutions and governance strength as “aa2”, reflecting the country's solid track record in restoring economic
and financial stability after the banking crisis. For example, the considerable strengthening in supervision and regulation of the banking
sector has helped to improve the resilience of the system. The authorities achieved a careful liberalisation of the capital account withminimal disruption. The monetary policy framework has gained credibility, following a major revamp, and the central bank has beensuccessful in reducing traditionally high and volatile inflation despite a recent spike driven by housing prices.
Our assessment also takes into account Iceland's high-quality education system, an innovative business sector, an efficient and flexible
labour market and well-developed infrastructure. Iceland has a long tradition of broad cooperation and consensus on economic matters
between the government, employer and employee associations, which contributes positively to policy effectiveness. The score has beenraised last year from “aa3” to reflect our view that the strength of civil society and the judiciary is on par with the strongest sovereigns
at “aaa”. Iceland also scores strongly in the Worldwide Governance Indicators.
We assess Iceland's fiscal strength as “baa2”, reflecting the government's strong track record in reducing its large budget deficits andvery high debt burden after the 2008 crisis. Between the peak in 2011 and 2018 general government debt more than halved, and stoodat 66% of GDP in 2019. The re-classification of 24 public-sector corporations into the general government sector in 2020, in line with
Eurostat statistical rules, raised the government debt ratio by around 32 percentage points of GDP for the past years but also implies
much smaller contingent liabilities. As such, the reclassification does not fundamentally alter our view of Iceland's fiscal strength. We
had previously taken the debt of these companies into account qualitatively, in particular the debt of the HF-Fund (A2 stable), which
benefitted from an explicit government guarantee and is in a government-directed winding-down process.
We expect that general government debt will continue to decline thanks to strong GDP growth, declining budget deficits and asset
sales. The Icelandic government still holds significant equity stakes in two of the three largest domestic banks, and sale proceeds will
likely continue to serve debt reduction purposes. Iceland's multi-year fiscal framework with clear and credible fiscal rules is on par withthe best practices among highly rated sovereigns and is accepted across the political spectrum, giving high confidence that debt willagain be reduced in the coming years. The final score is therefore higher than the initial score of “baa3”.
We assess Iceland's susceptibility to event risk as “a”, driven by our banking system and external vulnerability risk assessments. As
for the banking sector, the three large banks have solid levels of capitalisation and liquidity. The sharp rise in house prices has beenaccompanied by an increase in household indebtedness, which could pose risks to financial stability but the authorities have put inplace a number of macroprudential measures to reduce risks.

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Political event risk is low, and scored at “aa” given consistent policy in key areas important to safeguarding the government's credit
profile. Political consensus on the economic and fiscal direction for the country is strong.
We assess government liquidity risk as “aa”. The previous marked reduction in government debt, prudent liquidity management, withsignificant cash buffers, and a large domestic investor base have mitigated the risks posed by markedly higher borrowing requirementsin the context of the pandemic.
Iceland's external vulnerability risk assessment at “a” , reflects Iceland's net external creditor position and very large foreign-currency
reserves, which help to buffer external shocks. The current account has slipped into a deficit since 2020 because of weaker tourism
demand and large dividend payments of foreign-owned companies, but is expected to return close to balance again this year. External
surpluses have allowed the central bank to build substantial foreign-currency reserves equivalent to around 25% of GDP or 29% of thecountry's total external debt, a large buffer to help limit exchange rate volatility and support the country's external position.
All of these considerations are further discussed in the “Detailed credit considerations” section above. Our approach to ESG is
explained in our report on how the scores depict varied and largely credit-negative impact of ESG factors and our cross-sector
methodology General Principles for Assessing Environmental, Social and Governance Risks Methodology.

Recent developments
Strong recovery under way thanks to tourism reboundThe economic recovery has been accelerating in early 2022, with real GDP growth of 7.3% year-on-year in the first quarter, helpedby domestic demand and strong export growth, in particular of services, which were up nearly 70% year-over-year. We expect thecontinued recovery in tourism alongside strong consumption and investment will lead to real GDP growth of 4.8% for the year as awhole. Although the omicron variant dented the recovery at the beginning of the year, tourist arrivals surpassed their 2019 levels in Julyand foreign credit card spending in real terms is now higher than before the pandemic (see Exhibit 5). Export growth of marine products
and aluminium will also be strong, both supported by strong demand and favourable price dynamics. Higher aluminum and fish prices
will more than offset higher input costs, leading to an improvement in Iceland's terms of trade.
The economic recovery as well as the significant support that the government provided to businesses and households during the
pandemic has led to a sharp drop in unemployment, which stood at 4% in June (seasonally adjusted terms). Labour shortages,
particularly in the tourism industry, may somewhat hold back the pace of the recovery but immigration has picked up and is expected
to help fill some of the increased demand for labour.
The good labour market performance will continue to support domestic demand. Although most of the pandemic-related support
will be phased out this year, positive real wage growth of around 0.7% on average in the first six months of the year will continue
to support private consumption. That said, the import content of domestic demand is high in Iceland and imports will also increasematerially.
Russia's invasion of Ukraine (Caa3 negative) has a minimal direct impact on Iceland. Domestic energy prices have not been affectedby the spike in commodity prices given that most of Iceland's energy is generated from domestic geothermal and hydropowersources. Iceland also has one of the highest shares of electric cars in Europe, reducing the impact of higher fuel costs. In addition, thegovernment has put in place measures in response to higher inflation targeted to poorer households such as bringing forward increases
in housing, social and child benefits as well as pension increases. Overall trade exposure to Russia and Ukraine accounts for only 1% of
total exports and 0.5% of imports. Iceland will be more affected by the slowdown in growth in its key trading partners, particularly inEurope.

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Exhibit 5

Exhibit 6

Tourism activity has surpassed pre-pandemic levels

House prices are the main driver of accelerating inflation

Foreign tourist arrivals ('000)

CPI and components (year-on-year % change)

2019

2020

2021

300

250
200
150

2022

PetrolHousing

Domestic goods

Services

Other

10
8
6
4

100

2
50

0
0

Jan-12
Jun-12
Nov-12
Apr-13
Sep-13
Feb-14Jul-14
Dec-14May-15Oct-15Mar-16Aug-16
Jan-17
Jun-17
Nov-17
Apr-18
Sep-18
Feb-19Jul-19Dec-19
May-20
Oct-20Mar-21
Aug-21
Jan-22Jun-22-2

Source: Statistics Iceland and Moody's Investors Service

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

Inflation far exceeds expectations and target, triggering swift monetary policy action
Like other economies, inflation has accelerated and has been above the central bank's 2.5% target since May 2020 (see Exhibit 6).
The drivers of price growth have shifted from imported inflation during the pandemic, which mostly resulted from the depreciationof the krona, to house prices. In July 2022, consumer price inflation was 9.9%, of which about half was on account of house priceincreases. We expect inflation will continue to increase in the coming months before slowing to a still high 9.8% by the end of 2022.
The strength of the krona will reduce the contribution of imported inflation somewhat. As stated above, Iceland remains relatively
insulated from rising energy prices, and a strengthening of the krona could help moderate inflation in the coming months given thehigh pass-through from the exchange rate to inflation.
The CBI started to raise its key policy rate in May 2020, one of the first central banks to do so, and has hiked by a cumulative 400
basis points to 4.75%. Longer-term inflation expectations have risen as well but to a smaller extent, indicating confidence of economic
actors that inflation will be brought back to target within 2-5 years. Iceland’s performance on inflation has materially strengthened
compared to the past, when the CBI rarely managed to hit its inflation target.
In addition, the Financial Stability Committee has lowered the maximum loan-to-value (LTV) ratio to 80% from 85% and to 85%
from 90% for first-time buyers, capped the debt-service to income ratio at 35% and 40% for first-time buyers and restored thecountercyclical capital buffer to 2% for banks from September 2022, with the aim of dampening house price inflation.
Upcoming wage negotiations scheduled for November 2022 will be a key determinant for the monetary policy outlook. Higher wages
will support private consumption in the short term, but could also fuel already elevated inflationary pressures and lead to a tightermonetary policy stance. We expect the agreements will at least compensate for inflation to keep real wage growth positive. Strong
wage increases in the past have raised concerns over declining price competitiveness and an increasing misalignment between wages
and productivity growth, but the latest three-year wage agreement from 2019 is generally considered to have helped support private
consumption during the pandemic. That said, both the OECD and the IMF advocate linking future wage increases more directly to
productivity growth rather than growth in per-capita income as in the 2019 wage agreement.

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Government of Iceland – A2 stable: Regular update

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Moody's rating methodology and scorecard factors: Iceland - A2 stable
Factor / Sub-Factor

MetricIndicator Year

Indicator

2017-2026F
2012-2021
2021
2021

2.4
3.8
25.5
59,791.5

Factor 1: Economic strength
Growth dynamics
Scale of the economy
National income
Adjustment to factor 1

Average real GDP growth (%)
Volatility in real GDP growth (%)
Nominal GDP ($ billion)
GDP per capita (PPP, Intl$)

Policy effectivenessFinal Factor
Score

Weights

baa2

baa2

50%

0

25%
10%
30%
35%
max ±9

aa2

50%

baa3
caa1
b2
aaa

# notches

Factor 2: Institutions andgovernance strength
Quality of institutions

Initial Factor
Score

aa2
Quality of legislative and executive institutions
Strength of civil society and the judiciary
Fiscal policy effectivenessMonetary and macroeconomic policy effectiveness

aa
aaa
aa
a

20%
20%
30%
30%

Specified adjustment

Government default history and track record of arrears

0max -3

Other adjustment to factor 2# notches0

max ±3F1 x F2: Economic resiliency

Factor 3: Fiscal strength
Debt burden
Debt affordability
Specified adjustments

General government debt/GDP (%)
General government debt/revenue (%)
General government interest payments/revenue (%)
General government interest payments/GDP (%)
Total of specified adjustment (# notches)
Debt trend
Foreign currency debt/general government debt
Other non-financial public sector debt/GDP
Public sector assets/general government debt

Other adjustment to factor 3

2021
2021
2021
2021

75.0
185.6
10.1
4.1

2017-2022F
2021
2021
2021

-1.4
14.7
0.0
0.0

a2

a2

baa3

baa2

ba3
a3
baa1
b1
0
0
0
0
0

# notches

F1 x F2 x F3: Government financial
strengtha2

Factor 4: Susceptibility to eventriskaDomestic political risk and geopolitical risk

aa
aa
aa

Government liquidity risk
Ease of access to funding
High refinancing risk
Risk of banking sector credit event (BSCE)
Total domestic bank assets/GDP
Adjustment to F4 BSR
External vulnerability risk

F1 x F2 x F3 x F4: Scorecard-indicatedoutcome

Latest available
2021

baa3
152.2

a
baa3
80-180# notches
External vulnerability risk

Adjustment to F4 EVR
Overall adjustment to F4

max ±3

a2

a

Min

aa

Political risk

Specified adjustment
Banking sector risk

0
0
0
0
0
1

25%
25%
25%
25%
max ±6aa# notches# notches
A1 - A3aa
0amax -20a

max ±200

max ±2max -2A1 - A3

Note: While 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 thescorecard-indicated outcome. Thus, the rating process is deliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into accountthat may result in an assigned rating outside the scorecard-indicated outcome. For more information please see our Sovereign Ratings Methodology.
Footnotes: (1) Initial factor score: scorecard indicators combine with the automatic adjustments to produce an initial factor score for every rating factor, as detailed in Moody's Sovereign Ratings Methodology.
(2) Final factor score: where additional analytical considerations exist, initial factor scores are augmented to produce a final factor score. Guidance on additional factors typically considered can be found in
Moody's Sovereign Ratings Methodology; details on country-specific considerations are provided in Moody's research. (3) Scorecard-indicated outcome: Factor 1: Economic Strength, and Factor 2: Institutionsand Governance Strength, combine with equal weight into a construct we designate as Economic Resiliency (ER). An aggregation function then combines ER and Factor 3: Fiscal Strength, following a non-linear
pattern where Fiscal Strength has higher weight for countries with moderate ER and lower weight for countries with high or low ER. As a final step, Factor 4, a country's Susceptibility to Event Risk, is a constraint
which can only lower the government financial strength as given by combining the first three factors. (4) There are 20 ranking categories for quantitative sub-factors: aaa, aa1, aa2, aa3, a1, a2, a3, baa1,
baa2, baa3, ba1, ba2, ba3, b1, b2, b3, caa1, caa2, caa3, ca and 8 ranking categories for qualitative sub-factors: aaa, aa, a, baa, ba, b, caa, ca (5) Indicator value: if not explicitly stated otherwise, the indicatorvalue corresponds to the latest data available.

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Moody's related publications» Issuer In-Depth: Government of Iceland – A2 stable: Annual credit analysis, 29 July 2022
» Sector in-Depth: Banking - Iceland: Iceland Macro Profile: Strong -, 24 May 2022
» Credit Opinion: Government of Iceland - A2 stable: Regular update, 22 February 2022
» Outlook: Sovereigns – Global: Stable 2022 outlook as economic recovery eases credit pressures, but long-term costs of thepandemic weigh on sovereigns, 3 November 2021
» Sector Comment: Banking – Iceland: Iceland restores countercyclical buffer and introduces debt service cap in mortgages, a credit
positive for banks, 6 October 2021
» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. All
research may not be available to all clients.

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Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s
Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by anentity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registeredwith the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferredstock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services
rendered by it fees ranging from JPY100,000 to approximately JPY550,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

REPORT NUMBER

9

23 August 2022

1339434

Government of Iceland – A2 stable: Regular update