The speed and progress of Iceland’s recovery from its 2008 banking crisis has led Moody’s to upgrade the country’s ratings.
Moody’s says it has upgraded Iceland’s government bond and issuer ratings from Baa2 to A3 with a ratings outlook of ‘stable’.
The credit ratings agency says the two-notch upgrade follows a review that started on June 10th.
Moody’s cites sustained growth and fiscal restraint as driving a “very sizeable” reduction in government debt over the past year and contributing to the decision.
The agency says Iceland’s general government debt-to-GDP ratio should fall to less than 50% by the end of next year. By 2020 it expects the ration to fall to around 40%, down from 68.5% at the end of this year. That would equate to a fall of around 75 percentage points from its 2011 peak.
The favourable debt-to-GDP ratio is expected to continue to benefit from strong economic growth, which Moody’s forecasts at 5% in 2016 and 3.9% next year, driven by domestic demand.
Moody’s also expects debt reduction to be sustained with the deployment of proceeds from the failed banks’ estates over the next few years.
“Cautious but steady progress in addressing the problems in the banking sector and in relaxing capital controls has considerably reduced the risks to economic and financial stability from the final stages of capital account liberalisation,” says Moody’s.
It says the stable outlook speaks to the balance of risks that the agency foresees for the rating over the next two years.
“It balances the positive impact of moderate but sustained growth and continued fiscal consolidation against, for example, the residual risks from capital account liberalisation, the potential economic and financial pressures associated with substantial capital inflows and tight labour markets, and finally the evolving political dynamics,” says the firm.
Meanwhile, Moody’s also raised Iceland’s foreign and domestic currency country ceilings. Ceilings on local currency debt and deposits have climbed from Baa1 to A1, while the ceilings on long-term foreign currency debt and deposits have been raised to A3 from Baa2. The ceilings on short-term foreign currency debt and deposits remain the same P-2.
Moody’s says it could upgrade Iceland’s ratings again once the relaxation of controls on capital outflows, including the liberalisation of offshore krónur, is completed. Another factor would be if that is accompanied by an improvement in government debt and debt service metrics by the end of 2018 that is “materially beyond” current expectations.
This all depends, says Moody’s however, on the assumption that the government’s management of the economy and banking system ensures the boom and bust cycles and macro imbalances of the past will be avoided.
Conversely, Iceland could see its ratings fall if economic or financial volatility comes back onto the horizon and threatens debt sustainability, especially if Iceland needs to resort to capital controls again.
Interest rate cut
The country is expected to survive the review, which it must do to retain its place in the European Central Bank’s asset purchase programme.
The bank believes that the battered UK currency, recently only just holding above the US$1.20 level, could be trading at US$1.36 by this time next year.
The group reports that currency fluctuations were less of a challenge to multinationals in the second quarter of 2016, but Brexit has since spelt a return to volatility.
The business group says that the UK’s withdrawal from the EU puts nearly US$600bn of investment at risk, according to a Financial Times report.