The Republic of Iceland is a large volacanic land mass domiciled in the North Atlantic home to 300,000 citizens over an approximate area of 40,000 square miles. As a European country, Iceland resembles many Scandinavian countries with a flair of free market capitalism mixed in with a generous welfare state resulting in an excellent quailty of life and long life spands. The country is stunningly beautiful with glaciers, ice fields, geysers surrounded by the ocean providing for a very temperate climate.
The Icelandic economy is transforming in a postive way since the currency crisis of the 1980ís from the old collective institutions to government now privatizing sectors and implementing free market reforms opening up this small economy. During the 1980ís, less than satisfactory political management resulted in a currency collapse for the Icelandic krona in that era. The people of Iceland today are young for the most part who hold an immense intellectual and entrepreurial talent. A benefit to the Icelandic society is the low crime rate, if any at all. If the government is committed to opening up foreign investment more, especially in areaís like energy, Icelandís futuire looks tremendously prosperous.
POLITICS: Prime Minister Halldor Asgrimsson has been in power since September 2004. Free market reforms under former Prime Minister Oddsson led Iceland from 1991-2004 who spearheaded this economic transformation. Independence was achieved in 1944 from Denmark.
ECONOMY: transition to a knowledge-based economy, steady GDP growth rates. During the 1990ís, the Icelandic economy strengthened as deregulation and privatization policies were implemented replacing the former slow growth protectionist and a highly regulated economy hiding behind capital controls. The economy historically has relied heavily on the fishing industry of which currently represents 10 percent of national output and 65 percent of exports. Currently, Iceland has resumed whaling after it was halted in 1986. Iceland has the potential to be an energy rich resource nation as it has large natural energy resources with geysers, natural steam and hot water. In order to capitalize on this wealth, the Icelandic government must allow foreigners to invest in their energy sector similar to what happened in Kuwait.
Another important industry of importance is the eco-tourism industry. At present, upwards of 350,000 tourists a year are arriving to Iceland to take advantage of its eco-tourism. The United States is now Icelandís number one tourism market. The tourism industry is now Icelandís largest industry and foreign exchange earner. This island nation is getting a great reputation for its exciting nightlife, more than 60 clubs in Reykjavik alone. Other economic segments include agriculture and ferrosilicon production.
The key difficulty for Iceland in the past is that they restricted foreign investment into the economy. Iceland is becoming more competitive globally with its economic transformation which has several Icelandic companies successfully investing abroad. New knowledge-based industries for Iceland include a vibrant biotechnology - pharmaceuticals industry, financial services, telecommunications, improved geothermal power capabilities including the construction of a new dam, software, tourism coupled with its mega billion USD equivalent capital projects which includes an expansion for a modern smelter for its domestic alumina production.
The current account is in serious difficult running at 12 to 13 percent of GDP forecasted for 2005, only modestly declining to 12 percent for 2006 and narrow significantly in 2007. This large economic imbalance is temporary as large capital investment projects are distorting this figure. However, the high world oil price is aiding to this shortfall as Iceland has no oil production. Prior to 1995, the current account was in surplus. By 2000, the shortfall reached 10 percent of GDP with the beginning of large capital intensive projects.
Total GDP as measured by purchasing power parity stands at $9.4 billion USD (2004) with corresponding GDP/Capita at $32,000 USD. GDP growth for year 2005 is estimated at 6 percent, year 2006 at 5 percent while GDP growth for 2004 came in at 5 percent, year 2002 was in recession. Inflation for 2005 is forecasted at 3.4 percent, year 2006 at 3.5 percent while other figures include year 2004 at 4 percent, 2003 at 2.3 percent, 2002 at 4.8 percent, 2001 at 6.6 percent. The budget is forecasted to be in surplus at 2.5 percent of GDP for 2005. Current account in deficit for year 2000 and 2001 at 9 percent of GDP. 2003 external debt at 110 percent of GDP. Unemployment is low at 3.1 percent (2004). Services represent 80 percent of economic output.
POSITIVE: public finances are healthy as public debt to GDP is declining standing at 36 percent of GDP, sound pension system, substantial geothermal power, advanced telecommunications systems. CONCERN: current account deficit, negative international investment position, declining fish resources & fishing terroritory disputes.
BANKING SYSTEM: privatization of the banks was completed in 2003. Over the last few years, Icelandic banks have expanded abroad amongst Nordic countries seeking new markets primarily via acquisitions. Icelandís official reserve assets as of May 2005 stand at $954 million USD. The Central Bank of Iceland (CBI) aims for price stability at 2.5 percent inflation with a band of 1 percent on either side (ie. 1.5 to 3.5 percent). CBI overnight loan interest rate is at 11 percent while the main central bank rate stands at 9 percent, rates started to rise since May 2004..
REGIONAL ANALYSIS: Europe Union
After 1994 when Iceland was accepted into the European Economic Area with access to European markets, this cocktail mix of EEA market access and domestic deregulation propelled Iceland to many strong years of economic growth leading to an economic boom. However, Iceland opposed outright European membership as it wished to remain outside the EU for the time being as Iceland believes it would expose their mainstay fishing industry to foreign fleets and harm their economy. In the future, there is the possibility to expand its geothermal energy for exports to the European Economic Area.
KNOWLEDGE: Debt Bubble to Burst?
The Icelandic economy has enjoyed a long positive economic growth period from 1990 to present. But particularly over the last few years, Icelandís economy has experienced tremendous GDP growth partly attributed to a credit boom, similar to what has taken place within the United Kingdom and the United States. Many Icelanders have prospered under this credit and economic boom propelling Iceland to the worldís seventh highest standard of living. Iceland is now home to the few powerful noveau riche. Iceland according to Forbes now has the worldís number 488 billionaire on the planet. With a heated economy, inflationary pressures have accelerated. Are interest rates going to rise to spoil the party?
Icelandís economy is however swamped in high business & household debt levels. Inflation is currently running higher than the Central Bankís target (March 2005 at 4 percent) as demand for housing has increased, the public sector is sending signals for wage increases. A crash is unlikely but a correction is the more likely scenario. With a small economy, the Central Bank has room to cut interest rates if required while at the same time the kroner has room to depreciate in relation to the USD and EUR to help stimulate the economy.
CURRENCY: ISO Symbol ĎISK, Icelandic krona. At the time of review on July 4, 2005, the Icelandic krona had an exchange valuation of 65.7 ISK to the US-dollar (USD) and/or 78.186 ISK to the Euroland euro (EUR). The krona follows that of a floating exchange rate regime based on inflation target as set out by the Bank of Iceland. In relation to the USD, the krona is significantly overvalued as measured by purchasing power parity.
CURRENCY HISTORY: currency crisis dates were November 1984, May 1988 and June 1993. Historical exchange valuations include: January 2005 at 62.59 ISK to the USD, January 2004 at 69.43, January 2003 at 79.49, November 2001 at 107.39, January 2001 at 85.166, year 2000 at 78.61, August 12, 1999 at 73.32, January 1998 at 72.7, year 1997 at 70, 1996 at 66.50, 1995 at 64.69, 1994 at 69.94, and 1993 at 67.7. During the 1990ís, the managed exchange band was slowly widened to set the stage for the current float. On March 27, 2001, the Icelandic government announced that the krona will float rather than its previous policy of being pegged to a basket of currencies including the euro. The central bankís goal will be to target the inflation rate as an anchor for monetary policy. Accordingly, significant currency depreciation took place after the announcement. Before the float, the krona was trading at 85.87 to the USD on March 1, 2001. In late spring on June 2001, the exchange was at 103.96 ISK to the USD.
CURRENCY FORECAST: modest depreciation, the prospects are for a sound currency as the economy is successfully awakening from its long global isolation. There are several positive developments taking place for Iceland including its integration into the global economy and its access to international capital markets to finance future economic growth. However, Iceland is a small economy. The krona is more vulnerable to macro-economic changes plus the Bank of Iceland will find inflation targeting more challenging for a small GDP economy. Inflationary pressures are prevalent with CPI approaching 4 percent outside of the CBI target range, the Bank of Iceland maybe forced to modestly increase interest rates to curtail inflation, higher rates may slow the economy and deflate the credit boom.. BankINTRO.comís best guess is that the kroner will decline modestly to the USD and the EUR over the next year as the kroner remains tremendously overvalued when analyzing purchasing power parity. Overall, Icelandís economy is moving in a positive direction with diversification within the private sector coupled with sound public finances provides for a relatively good currency ranking for the Icelandic kroner over the medium term.
UPDATED: July 4, 2005