Moody’s Ratings affirms Iceland’s A1 ratings, maintains stable outlook
Moody’s has affirmed the Government of Iceland’s domestic and foreign-currency long-term issuer and foreign-currency senior unsecured ratings at A1. The outlook remains stable.
The affirmation reflects Moody´s view that Iceland will continue to gradually diversify its export base, including through the development of new high-value sectors, although the economy will remain exposed to shocks in its three largest sectors. At the same time, proactive and well-coordinated policymaking will support macroeconomic stability and help reduce inflation. The affirmation also reflects the government’s strong commitment to fiscal consolidation, which Moody´s expects will support the continued rebuilding of fiscal buffers, albeit at a slower pace than in recent years.
The stable outlook reflects balanced risks at the A1 rating level. A stronger than expected contribution from new growth sectors could support sustainably higher growth and a faster improvement in Iceland’s fiscal prospects. Iceland has made significant progress in developing knowledge-intensive technology and health services and in shifting into higher value-added production within its traditional sectors, including aquaculture. Iceland’s proactive policymaking since the 2008 banking crisis has supported the accumulation of large macroeconomic buffers that enhance resilience to shocks. Strengthened financial sector regulation and macroprudential policy has improved banking system resilience. Households’ capacity to absorb shocks is supported by their strong balance sheets with historically low debt and very large pension assets given high mandatory funding of the system. The government’s strong commitment to fiscal consolidation will support the continued rebuilding of fiscal buffers which help to better insulate Iceland’s fiscal strength from shocks.
Iceland’s ratings could be upgraded if economic performance strengthens alongside policies which help to raise economic potential and support more stable growth over time, including through faster economic diversification which broadens the export base. Upward rating pressure could also emerge if Iceland’s fiscal metrics continue to improve, which leads to stronger fiscal buffers and a sustainable improvement in the affordability of government debt, reducing the susceptibility of fiscal strength to shocks.
Iceland’s ratings could be downgraded if a large shock caused lasting damage to key export sectors and materially weakened economic resilience. A deviation from the fiscal consolidation plans that led to a sustained deterioration in fiscal buffers, or substantial capital outflows that impaired external or financial stability, could lead to a downgrade. There could also be negative pressure on the rating if sustained high-wage growth in excess of productivity gradually eroded Iceland’s cost competitiveness and, over time, weighed on economic strength.
