Fitch Ratings has affirmed Iceland’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’ with a Negative Outlook.
The 'A' rating is driven by Iceland’s very high income per capita, very strong governance, human development and doing business indicators that are more consistent with those of ‘AAA’ and ‘AA’ rated countries. The rating is constrained by the small size of the economy and limited export diversification that result in vulnerability to external shocks and capital account risks.
The Negative Outlook reflects the uncertainty around the path of the public finances following the Covid-19 shock, which has left the public debt ratio substantially higher than pre-pandemic, and at risk of rising further over the medium-term. Although there is uncertainty around fiscal policy settings post-elections, Fitch thinks that broad political support for rebuilding fiscal buffers and strong record of public debt reduction of 70pp of GDP in 2011-18 supports fiscal-policy credibility over the long-run.
Future developments that could result in a positive rating action are greater confidence that the government debt to GDP ratio will decline over time once the Covid-19 crisis has subsided; and sustained economic recovery, for example supported by evidence that the export-oriented sectors, particularly tourism, have been resilient to the pandemic shock.
Factors that could lead to a negative rating action are evidence that the government’s economic and fiscal strategy will fail to arrest the increase in government debt/GDP ratio over time; and renewed economic weakness or an adverse shock, for example due to a slower-than-expected recovery in tourism, a sustained correction in the real estate market and material negative impact on the banking sector.