S&P Global Ratings affirms Iceland at 'A+/A-1'; Outlook Stable
May 10 2024 - 4:44PM
S&P Global Ratings affirms Iceland at 'A+/A-1'; Outlook Stable
S&P Global Ratings has affirmed 'A+/A-1' long- and
short-term foreign and local currency sovereign credit ratings on
Iceland. The outlooks on the long-term ratings are stable.
The stable outlook reflects the view that Iceland's economy will
continue to expand over the next two years, while recording only
modest fiscal and external deficits. It also reflects S&P´s
assumption that volcanic activity will remain contained and not
have a significant adverse effect on the country's economic,
fiscal, and balance-of-payments performance.
The rating reflects Iceland's more robust GDP growth than in
most other sovereigns that S&P rates in Western Europe. The key
tourism sector, which represents about 30% of exports, has been
performing well and most indicators, including arrivals, have
surpassed pre-pandemic levels. Alongside tourism, the rating agency
expect domestic demand to drive growth from 2024 onward, supported
by Iceland's strong population growth rate and the continued
expansion of new economic sectors. These include biotechnology,
onshore and offshore fish farming, IT, and business services, as
well as traditional sectors such as marine products and aluminum
smelting. S&P also note that Iceland remains largely
self-sufficient in meeting its domestic energy needs, mainly
through local hydropower and geothermal sources.
The government continues to make progress on its fiscal
consolidation plans, which should also support monetary policy in
efforts to bring down inflation. Iceland's low net external
leverage and relatively strong central bank international reserves
relative to the size of the economy 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, which is vulnerable to natural events, including volcanic
activity, as well as limitations to monetary policy effectiveness
due to external influences on domestic inflation trends
According to S&P, the credit ratings could be raised if
Iceland's public finances strengthened significantly more than the
rating agency currently anticipate, either from narrower deficits
and lower net public debt, or a decrease in the government's
contingent liabilities. The ratings could also be raised if
economic diversification increases and makes the economy more
resilient to external shocks.
S&P could lower the ratings if Iceland's fiscal or
balance-of-payments performance worsened significantly compared to
forecasts. This could happen, for example, if persistently
disruptive volcanic activity hampered the country's tourism sector,
with repercussions affecting growth and fiscal prospects.
Further information at www.government.is