ICELANDIC ECONOMIC SITUATION OVERVIEW. March 2015

ICELANDIC ECONOMIC SITUATION OVERVIEW March 2015 ICELAND AT A GLANCE Republic, written constitution, parliamentary form of government State and Gov...
Author: Albert Hudson
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ICELANDIC ECONOMIC SITUATION OVERVIEW March 2015

ICELAND AT A GLANCE Republic, written constitution, parliamentary form of government

State and Government

Coalition: Independence Party and Progressive Party, formed in May 2013 Parliament: Althingi established in 930, currently 63 members

Capital

Reykjavik

Population

329,040 as of 4th quarter 2014 (Source: Statistics Iceland) Icelandic Krona (ISK) February ‘15 monthly average (source CBI)

Currency

USD = ISK 132

Location

Northern Europe Flying time: 5.5 and 3 hours from New York and London respectively

Area

103,000 km2 / 39,756 sq. miles

EUR = ISK 150 USD 45,137 in 2013 (Source: Statistics Iceland)

GDP per capita Long term credit ratings

Moody’s: Baa3 / Stable S&P: BBB- / Positive Fitch: BBB / Positive

Political Milestones Member of OECD 1948

Full independence in 1944 1944

2

1945

1946

1947

Member of UN 1946 *Membership application put on hold in June 2013

1948

Started EU membership application*

Joined EFTA in 1970

1949

Member of NATO 1949

1970

1994

Access to EEA in 1994

2009

2014

THE ICELANDIC ECONOMY Export of goods and services by type 2013 Other Service Sectors 10%

Facts     

Iceland is emerging steadily from a recession caused by the 2008 collapse of its economy and banking system Inflation (2014): 2% GDP growth (2014): 1,9% Unemployment (2014): 3,6% Life expectancy (2012): Men: 81,6, women: 84,3

Agricultural Products 1%

GDP per capita, USD PPP

9%

330,000

8%

320,000

7%

310,000

6%

300,000

5%

290,000

4%

280,000

3%

270,000

2%

260,000

1%

250,000

0%

240,000 2000

2002

2004 2006 2008

Total inhabitants 3

2010

Aluminium and Ferrosilicon 23%

Other Manufactured Goods and Products 9%

Icelandic population

1998

Marine Products 27%

Tourism and Transportation 32%

2012

2014

% of foreign citizens

50,000 45,000 40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 2000

2002

2004

2006

Iceland

2008 EU 28

2010

2012

2014

WITH LOW UNEMPLOYMENT AND STRONG EXPORT SECTOR... %

%

Inflation

9 8 7 6 5 4 3 2 1 0

14 12 10 8 6 4 2 0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Statistics Iceland

Index, 2008=100

Statistics Iceland - Forecast

Directorate of Labour

%

Exports

140 120 100 80 60 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Goods and services export Service exports Imports

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IMF - Forecast

160

4

Unemployment

Goods exports GDP

Statistics Iceland - Forecast

IMF - Forecast

Real wages

8 6 4 2 0 -2 -4 -6 -8 -10 2007

2008

2009

2010

2011 Real wages

2012

2013

2014

2015

ICELAND IS RECOVERING FASTER THAN OTHERS... Real GDP growth - volume EU memebers 12

12

10

10

8

8

6

6

4

4

2

2

0

0

-2

-2

-4

-4

-6

-6

-8

-8

-10

-10 2007 UK

5

Other IMF program countries

2008 France

2009

2010

2011

Netherlands

2012 Germany

2013

2014 Iceland

2007 Ireland

2008

2009 Greece

2010

2011

Cyprus

2012 Portugal

2013

2014 Iceland

STRONG GROWTH CLOSES THE OUTPUT GAP...

 %

5

20

0

4% 3% 2% 1% 0%

-10

-40

-1%

-15

-60

-2%

Private consumption

Government consumption

GDP

Gross fixed capital formation

-3% -4% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

2014

2013

2012

2010

2009

2008

2007

2006

2005

2004

2003

2011

GDP

Output gap

-20

1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018

6

2002

Gross domestic final expenditure

0

-5

2001

80

40

Proj

10

100

%

Real annual growth

15

120

2000



140

1999



160

1998



GDP and final expenditure

1998=100

GDP grew by 1,9% in 2014, year on year (3.6% growth in 2013) The growth is mainly driven by a large increase in the gross domestic final expenditure (5.3%) Growth prospects are good with average around 3% Private consumption has been growing steadily since 2011. Last year it grew by 3.7% Investment, which is quite volatile, grew by 13.7% in 2014



AND FALL IN EXCHANGE RATE HAS TRIGGERED CURRENT ACCOUNT TURNAROUND Real exchange rate

Underlying Current Account Balance

120

10

100

5

80

0

60

-5

40

-10

20

-15

0

-20 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 Labour cost

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Consumer prices

CentralBankofIceland

Trade balance

CentralBankofIceland-Forecast

Rising share of tourism

80

1,400

30%

60

1,200

40

25%

1,000

20

800

0

20% 15%

600

-20

10%

400

-40

5%

200

-60

0%

0

-80 2007

2008

2009 Imports

7

IMF-Forecast

2010

2011 Exports

2012

2013

2014

Trade Balance

2015

2009 Tourism

2010

2011

TotalExportofgoodsandservices

2012

2013 ShareofTourism(R-axis)

LABOUR MARKET HAS RECOVERED %

Proj

8 7 6 5 4 3 2 1 0 2000

2002

Unemployment by education 12

2006

2008

2010

2012

2014

2016

2018

Net immigration and population growth 10,000 8,000

10

6,000 4,000

8

2,000

6

0 -2,000

4

-4,000

2

ISCED 1, 2

ISCED 3, 4

ISCED 5, 6

Icelandic citizens

Foreign citizens2

Total net immigration

Net population growth

2014

2013

2011

2012

2010

2009

2008

2007

2005

2006

2004

2003

2002

2001

1996

-6,000

0

8

2004

1999



9

2000



Unemployment (registered)

1998



Registered unemployment was 3.6% in 2014. It is projected to be around 3% until 2019 Unemployment was around 8% in 2009 and 2010 Unemployment has decreased fastest among the least educated (ISCED 1,2) but increased recently for those with tertiary education (ISCED 5,6) Net immigration fell in 2009 and 2010 but has since then picked up

1997



AND PRODUCTIVITY IS STABLE Labor productivity

Productivity, GDP per hour worked

140

80 70 60 50 40 30 20 10 0

120 100 80 60 40 20 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

0

General government debt and deficit, %GDP 200

Greece

180 160 140

Ireland

120 Iceland100

France

80

Germany

60 40 20

Maastricht

-14 9

-13

-12

-11

-10

-9

-8

-7

-6

-5

-4

-3

-2

0 -1

0

1

2

BUT CHALLENGES REMAIN Total Balance (excl. Irregular items)



 

The overriding objective of the fiscal plan has 36% 34% been to achieve a substantial surplus in the 32% primary balance to counteract the deficit in the 30% interest balance and produce a surplus in the 28% overall balance of the Treasury 26% Interest expenditure is a significant burden for 24% 22% the Treasury One of the main challenges is to reduce total 20% debt in the coming years

ISK billion

% of GDP

10% 8% 6% 4% 2% 0% -2% -4% -6% -8% 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Total balance (R. axis)

Revenue

ISK billion

Expenditure

% of GDP

120

6.0

2,000

100

100

5.0

1,500

80

80

4.0

1,000

60

3.0

500

40

2.0

0

20

1.0

0

0.0

60 40 20

-500 -1,000

0 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Interest expenditure, nominal (l-axis) Interest exp. % of GDP (r-axis) 10

Gross debt (l-axis)

Net fin. pos. (l-axis)

Gross debt (r-axis)

WITH HIGH DEBT LEVELS % of GDP

% of GDP

Corporate Debt Outstanding

140

350

120

300

100

250

80

200

60

150

40

100

20

50

0

0 2004

2006

ISK million

2008

2010

2012

Indexed

2014Q2

Total External Debt

16,000,000 14,000,000 12,000,000 10,000,000 8,000,000 6,000,000

ISK billion

Exchangerate-linked

Non-Indexed

Overdraft

Assetfinancingagreements

FX Borrowing by Households

30%

300

25%

250

20%

200

15%

150

10%

100

5%

50

0%

0 1.2006 6.2006 11.2006 4.2007 9.2007 2.2008 7.2008 12.2008 5.2009 10.2009 3.2010 8.2010 1.2011 6.2011 11.2011 4.2012 9.2012 2.2013 7.2013 12.2013 5.2014 10.2014

4,000,000 2,000,000 0 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 11

Total Household Debt

Total household foreign-denominated borrowing from deposit money banks Foreign denominated borrowing as a % of household's borrowing (L-axis)

AND CAPITAL CONTROLS NEED TO BE LIFTED Estimated domestic/foreign breakdown of assets and claims of DMBs in winding-up proceedings

Conditioned based removal of controls:  macroeconomic developments  potential balance of payments and foreign exchange effects  financial stability

100 90 80 70 60 50 40 30 20 10 0

Foreign Domestic in FX Domestic in ISK Domestic

Claims

Assets

Off shore ISK 700

Authorities have expressed preference for:  simplicity over complexity  time efficiency for liberalization for the real economy  minimizing legal risks  finality of the crisis related legacies

600 500 400 300 200 100 0 HFF bonds

12

Treasury notes and bills

Deposits

* Foreign-denominated loans of domestic parties, excl. Landsbankinn, to the failed banks

BUT ICELAND´S BANKS ARE ON A RIGHT TRACK Commercial Banks´Capital Adequacy Ratios 35% 30% 25% 20% 15% 10% 5% 0% Dec-2011

Jun-2012

Dec-2012

Landsbankinn

Commercial Banks´s Funding

Jun-2013

Islandsbanki

Jun-2014

MP Bank

Loans and assets of the banking system (ISK millions)

100%

5,000,000

80%

4,000,000

60%

3,000,000

40%

2,000,000

20%

1,000,000 0

0% Dec-2009

Deposits

13

Arion Bank

Dec-2013

Dec-2011

Other Borrowings

Dec-2012

Dec-2013

Subordinated Loans

Equity

2013 Q1 2013 Q2 2013 Q3 2013 Q4 2014 Q1 2014 Q2 2014 Q3 2014 Q4 Assets of the banking system Loans of deposit instituions (homes)

Loans of deposit instituions

AND KEY SECTORS REMAIN STRONG Catch Value as a % of GDP 10 8 6 4 2 0 2005

2007

2009

2011

1.2 1 0.8

150

0.6

100

0.4

50

0.2

0

0 2005

2007

2009

ISK Price Index (L) 14

2011

1,200

2013

XDR Price index (r)

Tourists to Iceland

1,000 800 600 400 200 0 2005 2007

2009

2011

20,000 15,000 10,000 5,000 0

2007

2009

Tourists via airports

2013

Electricity Capacity and Generation 1.4

200

18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2005

1.6

250

Thousand

2013

Price indices of Marine Products 300

GWh Energy Transmitted by Landsnet

3,000

1,500 1,000

2013

Tourists via cruise ships

Foreign Passengers through Keflavik Airport 2014 Canada 4%

2,500 2,000

2011

Sweden 4% Denmark 5%

Netherl. 3% Other 29%

Norway 6% France 6%

500 0

Germany 9%

Annual generation of energy (GWh Left axis) Installed capacity at end of period (MW Right Axis)2

USA 16%

UK 19%

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