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Moody’s affirms Iceland’s rating at A2, stable outlook

Moody’s Investors Service (“Moody’s”) has today affirmed Iceland’s local and foreign-currency issuer rating at A2. The senior unsecured foreign-currency rating has also been affirmed at A2, and the foreign-currency senior unsecured MTN program has been affirmed at (P)A2. The outlook on the ratings remains stable.

The rating affirmation at A2 balances the following key drivers: 1. The Icelandic economy is expected to post a solid recovery helped by a strong and pro-active policy response; over the coming years economic growth will be supported by strong investment and the continuing recovery in the tourism sector; 2. Institutions have been strengthened significantly and their credibility has materially improved over the past years; Moody’s considers this driver to be a Governance consideration under its ESG framework; 3. The limited diversification of the economy due to its small size implies, in Moody’s view, a high growth volatility and exposure to sector-specific shocks; while diversification efforts are ongoing this is unlikely to materially change over the coming years, in Moody’s view.

The stable outlook reflects broadly balanced risks. Apart from a solid economic recovery and a robust growth outlook, the government’s strong track record on debt reduction gives confidence that it will manage to reverse the pandemic-induced fiscal deterioration over the coming years. Last year’s contraction was less severe than initially feared also because other key sectors beyond tourism of the economy proved more resilient. Iceland’s relatively high public debt level is partly the result of an accounting reclassification in late 2020, which does not change the government’s fundamental fiscal profile.

The local-currency ceilings remain unchanged at Aa1, set at four notches above the sovereign rating. Moody’s has raised Iceland’s foreign-currency ceilings to Aa2 from Aa3, to reflect the full abolition of capital controls with the updated Foreign Currency Act No 70/2021 in late June 2021.

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 less volatile economic performance would be positive for the rating.

Conversely, outlook and 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 the decade, 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.


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