Fitch Affirms Iceland at ‘A’; Outlook Stable

Fitch Ratings has affirmed Iceland´s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’ with a Stable Outlook.

According to Fitch, Iceland's ‘A’ rating is underpinned by its very high income per capita and governance indicators that are more consistent with those of 'AAA' and 'AA' rated sovereigns. The country has built sizeable buffers, which help mitigate its vulnerability to external shocks and balance of payments' risks; including ample foreign reserves, and a comfortable fiscal cash buffer. Strong credit fundamentals also include the country's sizeable pension fund assets, sound banking sector, and strong private sector balance sheets. The rating however remains constrained by Iceland’s small size economy with its limited export diversification and high level of public debt. Fitch’s assessment is principally based on gross debt, i.e. not accounting for the government’s ample deposits that are reflected in the organic budget law’s definition of government debt.

In Fitch‘s view, high inflation and tight financial conditions have started to weigh on economic activity. Fitch forecasts real GDP growth of 3.5% in 2023, a downward revision of 0.6pps from its June forecast. Partly offsetting the cooling domestic economy has been a robust recovery of the tourism sector, where the number of foreign passengers is expected to easily achieve its 2019 figure this year. Expanding capacities of Iceland’s export industries and diversification of domestic sectors will help reduce the country’s vulnerabilities to external shocks. Already, there are early signs of investment into higher productivity and less cyclically sensitive sectors, such as biotechnology and ICT. Iceland is also well positioned to increase its global competitive advantage in fish farming.

In June, the Icelandic government announced new measures to counter inflation, adopting a tighter fiscal stance to support the Central Bank of Iceland’s disinflation efforts. Fitch expects general government debt to fall to 62.9% of GDP this year, after 68.2% in 2022.

A sharp and sustained decline in the government debt/GDP ratio, higher trend growth and/or evidence of economic diversification that reduces Iceland's vulnerability to external shocks could, individually or collectively, lead to a positive rating action/upgrade.

A marked deterioration in the debt/GDP ratio, for example from a sustained period of fiscal loosening, or a severe economic shock, for example due to a sharp correction in the real estate market, could, individually or collectively, lead to a negative rating action/downgrade.

Fitch Rating Action Commentary