Iceland: Risk Assessment

Country Risk Rating

A3 Changes in generally good but somewhat volatile political and economic environment can affect corporate payment behavior. A basically secure business environment can nonetheless give rise to occasional difficulties for companies. Corporate default probability is quite acceptable on average.

Business Climate Rating

A1 The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.
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  • Healthier banking sector
  • Gradual decline in the public debt
  • Rich and renewable energy (geothermal, hydroelectricity)
  • Oil and gas reserves
  • Strong tourism potential
  • High foreign reserves
  • Dynamic household consumption


  • Small economy
  • Growing inflammatory tensions
  • Risks associated with the lifting of capital controls
  • High external debt
  • Concentration of production and exports (aluminum and sea products)
  • Russian embargo on Icelandic seafood products
  • Arrears resulting from the collapse of the three major banks 

Current Trends

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Growth supported by household consumption

After accelerating in 2015, activity is expected to slow in 2016. Private consumption will benefit both from the strong increase in real wages observed in 2015, which helped increase household purchasing power, and the low unemployment rate (3.5%). Investment will continue to be hampered by rising wage costs (productivity is increasing more slowly than real wages). Meanwhile, exports linked to fishing (about 25% of total exports) will benefit from the free-trade agreement signed with China in July 2014. On the supply side, tourism is likely to again contribute positively to economic activity, thanks to the government's goal of increasing investment in the sector.

Inflationary tensions triggered by rising wages could also push the central bank into pursuing a more restrictive monetary policy.

Several downside risks will also hamper growth in the short term: long-term modest growth in the euro zone, an even more accommodative policy from the ECB (depreciation of the euro, appreciation of the Icelandic krona which will impact negatively on the price-competitiveness of Iceland's exports), low oil prices and the FED's raising of interest rates (portfolio investments will account for almost 8% of GDP in 2016).

It should be noted that, in October 2015, Iceland made an early repayment of the loan awarded by the IMF in 2008.

Improved budget position and announcement of capital account liberalization 

Iceland is expected to post a slight budget surplus in 2016, as in 2015. The public debt will, therefore, continue to decline but will remain well above its pre-crisis level (28.5% of GDP in 2007). Government revenues in 2016 are expected to fall due to the government's measures to support consumption (removal of customs duty on imports, cuts to income tax). With regard to spending, measures to support older people, the unemployed, the disabled and children have also been announced.

The current account surplus is expected to narrow slightly in 2016. This is explained by a slight weakening in the balance of goods and services (import values are increasing faster than those of exports thanks to lively internal demand) and the financial account (lower direct investments). Seafood products and aluminium will still account for almost 75% of total exports and European countries will continue to be the main trading partners (especially the Netherlands and the United Kingdom).

Iceland's three major banks are well capitalized, with comfortable levels of equity capital and the ratio of non-performing loans is declining (7.9% of total loans). Lending, however, remains relatively weak and central bank tightening could restrict it even further. The country's largest bank, Landsbanki, is still publicly-owned, but the government plans to sell 30% of its shares, which would help it to reduce the public debt. Finally, the central bank has high levels of foreign exchange reserves, which will ensure a more stable transition to the liberalization of the capital account, as announced by the government. Capital controls have been in force in Iceland since 2008.

Significant social mobilization 

Major strike actions took place throughout 2015, mainly over demands for wage increases. At the same time the Pirate Party became the country's most popular party in mid-2015. The governing coalition, in place since 2013 (center right and right), therefore adopted a budget for 2016 intended to boost household purchasing power with a view to stopping the rise of the Pirate Party in the run-up to the next parliamentary elections in 2017.

Iceland finally withdrew its application to join the EU in March 2015. Relations with the EU have not, however, worsened, as evidenced by its support during the Ukrainian crisis. By contrast, this support damaged relations with Russia (Iceland's fifth largest trading partner), which decided to place an embargo on Icelandic products, mainly seafood products. Meanwhile, relations with the United Kingdom and the Netherlands eased, after it reached a deal to settle the Icesave dispute, which arose after the bank was put into liquidation in 2008. The government froze the assets of the Icesave bank, many of whose clients were British and Dutch nationals.


Coface (01/2016)