S&P Global Ratings has upgraded Iceland ´s long-term foreign and local currency credit ratings to 'A+' from 'A'. The outlook is stable.
The upgrade reflects Iceland's continued strong growth momentum, despite the economy already surpassing its pre-pandemic peak in the first quarter of 2022. S&P forecasts a growth of 3.8% in Iceland for 2023, which is stronger than for other sovereigns rated by S&P in Europe.
The key tourism sector, which represents around 30% of exports, is performing well and most indicators, including arrivals, have surpassed the 2019 levels. S&P expects domestic demand to take over as a key growth driver from 2024, backed by Iceland's strong natural population growth and continued expansion of new economic sectors, including biotechnology, aquafarming, IT, and business services. S&P also notes that Iceland remains self-sufficient in meeting its domestic energy needs, mainly through local hydropower and geothermal sources.
Meanwhile, the government is accelerating its fiscal consolidation plans, not least to support monetary policy in efforts to bring down inflation, which S&P expects will average 8% in 2023. Net general government debt is reducing and S&P forecast it will reach 41% of GDP by 2026, down from 46% of GDP at the end of 2023. In S&P‘s view, Iceland's low net external leverage and strong central bank international reserves provide further economic buffers. Iceland's stable institutional framework and effective policymaking also support the ratings.
Nevertheless, the ratings remain constrained by the volatile nature of Iceland's small, open economy and the limited effectiveness of its monetary policy given the strong influence external developments can have on domestic inflation trends.
The stable outlook reflects S&P‘s view that Iceland's economy will continue to expand over the next two years, while recording only modest fiscal and current account deficits.
According to S&P, Iceland´s ratings could be raised if public finances strengthened significantly more than the rating agency currently anticipates, for instance, as a result of stronger growth outcomes or additional measures adopted by the government.
S&P could lower the ratings if Iceland's fiscal or external performance worsened significantly compared to forecasts. This could happen, for example, if an unanticipated shock hampered the country's key tourism sector.