Moody’s changes outlook on Iceland’s ratings to positive, affirms A2 ratings

Moody’s Investors Service (Moody’s) has today changed the outlook on Government of Iceland’s ratings to positive from stable and affirmed the local and foreign-currency issuer ratings at A2.

The key drivers for the outlook change to positive are:

1. The government’s rapid progress in reducing its budget deficit and bringing the public debt ratio onto a declining trend which increase the probability of a faster-than-expected rebuilding of fiscal buffers; and

2. The increased chances that strong growth prospects of key economic sectors and the ongoing efforts to further diversify the economic base will reduce the impact of shocks on the economy in the future.

According to Moody´s, the affirmation of the A2 ratings balances the very high wealth levels and very strong institutions with the small size of the economy and elevated volatility of growth as a consequence. Despite the ongoing diversification efforts Iceland remains vulnerable to key sector-specific shocks, in particular to those that affect the tourism sector. Also, despite the recent and expected fiscal improvements, the Government of Iceland's debt metrics still compare unfavorably to peers.

The rating could be upgraded if fiscal consolidation continues at the expected pace and the public debt is reduced further in line with expectations. An early consensual resolution to the HF Fund guarantee would help accelerate the declining debt trend and would also be positive for the rating. Progress in reducing inflation and re-anchoring inflation expectations while ensuring continued robust economic growth would support Moody’s assessment of Iceland’s strong institutions and would be credit positive. Further evidence that the economic diversification efforts are contributing to reduced growth volatility would also support a higher rating.

The outlook would likely be returned to stable if Moody’s expectations for the rebuilding of fiscal and economic buffers did not materialise. The rating could face downward pressure if the authorities deviated significantly from their current medium-term fiscal consolidation plans, resulting in a material increase in the public debt ratio.

Moody's press release (pdf)