International rating agency S&P Global Ratings has affirmed Iceland’s sovereign ratings at A/A-1 with a stable outlook. The rating agency assumes a mild contraction in GDP in 2019 due to declining tourist arrivals, but growth is set to resume in 2020. Iceland's external and fiscal buffers remain sound.
The ratings reflect Iceland ‘s very high GDP per capita, its stable institutional framework, and effective policymaking. The ratings also take into account Iceland's sound fiscal position following the sizable reduction in government debt in recent years and the country's structurally constrained monetary policy flexibility, which still is considered to have improved following the lifting of capital controls.
The stable outlook balances Iceland's strong fiscal and external buffers against risks stemming from the inherent volatility of Iceland's small open economy and a potentially stronger-than-expected slowdown in tourism.
S&P could raise the ratings on Iceland if its fiscal performance and external position significantly strengthen beyond the firm ‘s current projections over the next two years.
The ratings could be lowered if signs of increasing balance of payments pressures or risks to the stability of the financial sector arise over the next two years. These could emerge if this year's reduction in tourism flows had greater economic impact than expected, putting pressure on the balance of payments and the financial system, including the lending activities of pension funds via an impact on the housing market.