Address at a conference on
"Iceland's new economy, from telecoms to genetics"
Scandinavia House, New York, November 16.
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Ladies and Gentlemen,
It is with great pleasure that I address this seminar here in New York and witness first-hand the interest that American investors have developed in the Icelandic stock market. It may not be the largest market or the biggest economy in the world, but there are interesting developments taking place in Iceland and attractive investment opportunities arising. I will take a few minutes to discuss the current economic situation and the financial environment in Iceland, as well as the Government's privatisation policy.
The Icelandic economic situation
The economic environment in Iceland has undergone dramatic changes in recent years, and enormous steps have been taken to improve the economic and financial system. A decisive policy was launched less than ten years ago towards greater liberalization and deregulation where the overriding emphasis of the Government was to strengthen the macroeconomic stability in the economy. Significant progress has been achieved during the past nine years, and those achievements have placed Iceland firmly among the most economically advanced nations. Structural reforms have also been implemented in the public sector with corporatization of public enterprises and privatisation which is well under way and has been highly successful.
The results have been impressive. Rapid economic growth, relative price stability, almost non-existent unemployment, and greatly improved living standards have all gone hand in hand. Over the past five years economic growth has been about 4S percent per year, well above the OECD average, and real disposable income per capita has risen by over twenty percent. Unemployment has been around 2 percent, the lowest rate in the OECD countries, and is in fact currently close to 1 percent. Inflation has for several years been in the range of 1.5 to 2.5 percent, although somewhat higher this year, largely due to a rise in real estate and imported oil prices. Recent inflation figures, however, indicate that this is once again on the decrease. Most importantly, the economic growth of recent years has been broadly based, and is not merely the result of a good fishing year. Our single most important economic concern at the moment is the deficit on the current account of the balance of payments. There we must do better as the stability of the exchange rate of the Icelandic krona is a prime policy objective.
Fiscal budget for the year 2001
The Government's fiscal budget for next year gives a clear view of the economic transformation that has taken place in Iceland. The budget was presented to Parliament last month with a record surplus amounting to more than 4 percent of GDP.
The net financial surplus during the past three years 1999-2001 has been even larger. Most importantly, although continued strong economic growth has been instrumental in improving Treasury finances, the so-called structural surplus, which is the surplus after the cyclical effects have been removed, has also increased from year to year, reaching 1S percent of GDP this year and is estimated to increase to 2 percent of GDP in 2001.
The large surplus has primarily been used to reduce government debt with the net debt of the Treasury expected to decline from 32S percent of GDP in 1997 to 14 percent in 2001, or by more than half.
Strong and vibrant economy.
As demonstrated by these figures, the economy of Iceland is sound with new industries flourishing. This is the result of sensible economic policies in recent years, and the measures undertaken by the Government to improve the economic and business environment both for industry and households. As a result, productivity has increased faster in most sectors in recent years than ever before. This has ensured more rapid economic growth in the country than in neighboring countries. Increased stability in the labor market has been assured by the conclusion of 3-4 year wage agreements.
Furthermore, the diversity of the Icelandic economy has increased in recent years. The fisheries sector is not as dominant in the economy as before. Although still the most important single part of the Icelandic economy, it is however by no means a single-product industry but rather a multi-faceted well managed and a highly diversified one. Other industries have also increased in both importance and volume. These include power-intensive industries based on clean hydro and geothermal energy, tourism, biotechnology, and the very rapidly growing information technology. The strong growth in the recent years has especially been in the new and dynamic industries associated with the so-called New Economy.
What are the main signs of a New Economy?
The question of the New Economy is interesting and especially relevant in Iceland right now. Although the discussion has mainly focused on the US economy, because of the exceptionally strong and long-lasting growth performance, it seems increasingly clear that these New Economy effects have been noted in other countries as well, including Iceland. We have experienced rapid productivity gains deriving from the new technology, especially in high-tech and knowledge based industries which, in turn, have been reflected in strong output growth leading to a stronger than expected overall growth in the economy.
Privatisation policy in Iceland
Let me now turn to the privatisation process in Iceland.The Government has followed a clear privatisation policy with four main objectives:
2. To increase economic efficiency by eliminating the distortions inherent in state-ownership.
3. To broaden share ownership and continue to encourage the development of the Icelandic stock market.
4. To raise capital in order to decrease Treasury debt. One of the main goals of the privatisation program is to use the income from privatisation to reduce Treasury debt and reduce the debt burden of future generations.
Past examples of privatisation
Organised privatisation in Iceland began in 1991-1992 although there had been individual sell-offs earlier. The first steps entailed disentangling the State from operations where it had no business being as there was a competitive market in the given field. The operation of a travel agency, a fertilizer plant, fish processing plants, a machine shop, a print shop, and alcohol production are clear examples of this. You can see from this list that the Icelandic state was involved in a wide array of activities behind each of which there usually were particular, political circumstances.
In the last two years, a new and long-desired chapter in privatisation opened when the State began to systematically withdraw from the financial market. Investment loan funds of the State had been merged into one limited liability bank in 1997, the FBA, or the Icelandic Investment Bank Ltd., which was later sold in two stages in 1998-1999. The newly privatized FBA then early this year merged with Islandsbanki Ltd., thus becoming the largest bank in Iceland.
The two state-owned commercial banks, the National Bank of Iceland and the Agricultural Bank of Iceland, were converted into limited liability companies, and the sale of their shares also began in 1998. Share sales continued in 1999, and the State now owns about two-thirds of the share capital in each bank. A few weeks ago the Government announced its decision to investigate the feasibility of merging these two banks, and plans call for their privatisation to continue following the possible merger. Its full privatisation can be expected to be completed during the term of the present Government, which extends until 2003. It is my belief that it would be highly beneficial for the Icelandic economy if at some part of these banks were sold to foreign investors, to diversify the Icelandic market and enhance competition. The combined market value of these two companies on the Icelandic Stock Exchange is about 50 billion ISK, or roughly 600 hundred million USD.
Future privatisation plans
The Post and Telecommunications Administration was converted to a limited liability company in 1997 and was then split into two such companies a year later. Iceland Telecom Ltd. is not only by far the biggest telecommunications company, but also one of the most profitable enterprises in the country. We are expecting a report from the Executive Committee on Privatisation soon on how the privatisation and sale of Iceland Telecom Ltd. will be organised. For this project, many factors have to be considered, such as competition, regulation and the actual sale methods. Along with the banks this is definitely one of the most interesting investment opportunities there is in Iceland. Its market value has been estimated at 5-700 million USD. I personally think it is very important to privatise the Telecom company as soon as possible before it begins to decrease in value as a result of increased competition.
Finally there are plans to sell the remaining 40 percent of government shares in Iceland Prime Contractors, a leading contracting company that is listed on the Icelandic Stock Exchange with a market value of around 40 billion USD.
Positive international verdict.
As I have pointed out, there are many interesting projects currently under way in Iceland. Iceland has joined the ranks of those nations that have been most successful in their economic and fiscal developments in recent years. Remarkable success has been achieved, as is attested to both in the assessment of the OECD and the IMF. The same verdict comes from international credit rating agencies that have assessed Iceland's credit rating, these include Moody's, Standard & Poors and Fitch IBCA. The positive verdicts of credit rating agencies have yielded tangible results in the form of lower interest rates on foreign credits in general, since the credit rating on government debt serves as a benchmark for other Icelandic debt issuers.
So, what is the conclusion of all of this? First, in the world economy you don't have to be big to be successful. You only have to do the right things. Second, Iceland is a good place to invest and do business in. That is the message that I would like to leave you with here today.