Fitch Revises Iceland’s Outlook to Stable; Affirms at ‘A’
Fitch Ratings has affirmed Iceland’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’ and revised the Rating Outlook to Stable from Negative.
The revision of the Outlook to Stable reflects the resilience shown by the Icelandic economy to the pandemic shock and Fitch‘s expectation of a sustained growth recovery which should facilitate fiscal deficit and debt reduction over time.
The Icelandic economy has proved more resilient to the pandemic shock relative to Fitch‘s initial expectations. The recovery is underpinned by a rebound in tourism flows, solid performance of the aluminium sector supported by high aluminium prices, improvement of the labour market and sizeable fiscal policy support. Private consumption and investment will remain the main growth drivers, supported by further declines in unemployment and the government’s “Investment and Construction” initiative.
Iceland’s ‘A’ rating is driven by its very high income per capita and very strong governance and human development indicators that are more consistent with those of ‘AAA’ and ‘AA’ rated countries. A favourable demographic composition (the share of people of working age was 65% in 2020) supports growth potential. The rating is constrained by the small size of the economy and limited export diversification that result in vulnerability to external shocks and capital account risks.
Factors that could lead to positive rating action/upgrade:
- Public Finances: Greater confidence that the government debt to GDP ratio will be placed on a firm downward path, for example through implementation of a fiscal consolidation strategy or sustained GDP growth over time.
- Macro: Sustained economic recovery beyond 2022, for example supported by a diversification of the export base and without generating macroeconomic imbalances.
Factors that could lead to negative rating action/downgrade:
- Public Finances: Evidence that the government’s economic and fiscal strategy will lead to a resumption of an upward trajectory of the government debt/GDP ratio over time.
- Macro: Renewed economic weakness or an adverse shock, for example due to a slower-than-expected recovery in tourism, a sustained correction in the real estate market and material negative impact on the banking sector.
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