Fitch Affirms Iceland at ‘A’; Outlook Stable

Fitch Ratings has affirmed Iceland’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at ‘A’ with a Stable Outlook.

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 high but declining public debt burden, the small size of the economy and limited export diversification that result in vulnerability to external shocks and balance of payments’ risks.

The economic recovery has strengthened over the course of 2022, underpinned by domestic demand and solid export growth. Iceland has been resilient to the global energy shock and Fitch expects this to continue to be the case. Higher fuel and food prices represent a shock, but household purchasing power and industry profit margins are less affected by higher energy costs than the rest of Europe. There are signs that inflation is moderating across the board following a period of aggressive rate hikes by the central bank and active use of macroprudential tools. Fitch expects the general government deficit to decline due to stronger than expected revenue growth and unwinding of the majority of pandemic related support, and general government debt to decline to 2024 as a share of GDP.

Iceland has an ESG Relevance Score (RS) of ‘5[+]’respectively for both Political Stability and Rights and for the Rule of Law, Institutional and Regulatory Quality and Control of Corruption.

Factors that could, individually or collectively, lead to positive rating action/upgrade -

Public Finances: A sharp and sustained decline in the government debt to GDP ratio, 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, individually or collectively, 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 sharp slowdown in the tourism sector, a sustained correction in the real estate market and material negative impact on the banking sector.