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The Icelandic Economy
Current State, Recent Developments and Future Outlook
Iceland Chamber of Commerce
Iceland Chamber of Commerce | 1
Key Facts
The official language is Icelandic
The currency is the Icelandic Króna (ISK)
The total land area is 100,000 km2
The population is 330,000
The capital is Reykjavik
The main religion is Lutheran
Did you know?
� The number of tourists visiting Iceland in 2015 is expected to be quadruple the country‘s population
� Iceland‘s parliament, Alþingi, was established in 930 AD, making it the world‘s oldest extant parliamentary institution in the world
� Iceland is one of the least densely populated countries in the world, with only 3.2 inhabitants per km2
� Vigdís Finnbogadóttir, the 4th president of Iceland, was the first democratically elected female head of state
Iceland Chamber of Commerce | 2
Foreword
In 2008 the Icelandic economy underwent dramatic changes concomitant to the collapse of its financial sector. At the same time, foreign parties interested in Iceland experienced difficulties accessing in English a holistic overview of events and the status of the economy following the crisis.
To remedy this, in October 2008 the Iceland Chamber of Commerce (ICoC) published the first edition of this report. Our aim is to provide an objective overview of the current economic, business and political landscape in Iceland, recent events and developments, and future economic prospects.
Since its first publication, the report has been regularly revised and updated. Considerable changes have been made to the current edition, with more focus on the current economic landscape, on-going challenges and future prospects, with less focus on past events.
This report is divided into three sections. The first section is primarily a fact-based overview of Iceland’s current economic landscape. The second section is a more descriptive review of recent developments. Lastly, the third section portrays potential future scenarios and longer term growth prospects.
More detailed information on the financial crisis and its immediate consequences can be found in earlier editions. The current and previous editions of this report, in addition to a presentation based on its contents, can be accessed on the ICoC’s webpage.
It is our hope that the report will be useful to those looking to gain an insight into the functioning of the Icelandic economy and an overview of its current state of affairs.
Frosti ÓlafssonManaging Director,Iceland Chamber of Commerce
Iceland Chamber of Commerce | 3
AcknowledgementsThe following member companies supported the publication of this report
Iceland Chamber of Commerce | 4
Current State
Recent
Developments
Future
Prospects
Iceland Chamber of Commerce | 5
30
20
10
40
2015 ranking1980 ranking
Source: IMF World Economic Outlook; Iceland Chamber of Commerce analysis
Figure 1.1
Iceland has a high standard of living and has largely recovered from the recessionCountry rankings, GDP per capita (PPP adjusted)
United Arab EmiratesQatarSaudi ArabiaKuwaitLibyaBahrainSwitzerlandLuxembourgNorwayUnited StatesCanadaNetherlandsDenmarkGermanyAustriaBelgiumFranceICELANDItalySwedenAustraliaFinlandThe BahamasGreeceGabonSingaporeNew ZealandUnited KingdomJapanOmanSpainVenezuelaTrinidad and TobagoPuerto RicoIrelandIsraelHong Kong SARHungaryArgentinaCyprus
QatarLuxembourgMacao SARSingaporeBrunei DarussalamKuwaitNorwayUnited Arab EmiratesSan MarinoSwitzerlandHong Kong SARUnited StatesIrelandSaudi ArabiaBahrainNetherlandsSwedenAustraliaAustriaGermanyTaiwan Province of ChinaICELANDDenmarkCanadaOmanBelgiumFranceUnited KingdomFinlandJapanPuerto RicoKoreaNew ZealandMaltaItalySpainIsraelCyprusTrinidad and TobagoEquatorial Guinea
1980 1985 1990 1995 2000 2005 2010 2015
1
Iceland Chamber of Commerce | 6
1
1451
207
14029
61
50
24
129
18816
17820
18919
23
2
2
12
180
142
167
14113
14
16713
199
162
Global Competitiveness Index (WEF)
Globalization (KOF)
Global Innovation Index (INSEAD)
Economic freedom (HF)
Corruption (Transparendcy Int.)
Gender equality (WEF)
Global Peace Index
Democracy Index (The Economist)
Environmental Performance Index (YALE)
Prosperity Index (Legatum)
Media Freedom (Freedom House)
Human Development (UN)
Doing Business (WB)
Property Rights Index (IPRI)
Competitiveness (IMD)
Competitiveness rankings (Iceland‘s latest rank and total number of countries in index)
Source: Respective websites
# of countries rankedIceland’s ranking
Iceland ranks highly in numerous competitive indicesFigure 1.2
Iceland Chamber of Commerce | 7
Figure 1.3
Sources: Statistics Iceland; Central Bank of Iceland (Monetary Bulletin 2016/2); Iceland Chamber of Commerce
2012 2015 20182003
3.0
6.0
1.5
9.5
-4.7
1.22.0
4.2 4.4
2.0
-3.6
8.2
2.7
0.5
3.84.7
4.04.54.0
2006 20092000
ProjectedActual
The economy shrank following the crisis in 2008 but is now experiencing growth and a positive future outlookReal GDP growth per capita (percent)
Iceland Chamber of Commerce | 8
Figure 1.4
Source: OECD Statistics; Iceland Chamber of Commerce analysis
Iceland OECD total growth
2.1
4.0
Euro area1
1.61.8
Other Nordics
Iceland’s growth rate in 2015 was especially strong in global comparisonGDP growth in 2015 (percent)
1 The OECD time series used had 15 euro area countries: Austria, Belgium, Estonia, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, Netherlands, Portugal, Slovak Republic, Slovenia and Spain
Iceland Chamber of Commerce | 9
Figure 1.5
Source: The Directorate of Labour
0
1
2
3
4
5
6
7
8
9
5.8
2.93.4
8.0
200920032000 2006 20152012
1.3 1.3
Unemployment has decreased after a sharp rise in 2009 and is approaching structural unemployment levelsUnemployment rate, yearly average (percent)
Iceland Chamber of Commerce | 10
Figure 1.6
Source: Central Bank of Iceland (Monetary Bulletin 2016/2)
0
50
100
150
200
250
300
350
400
177
357
20062003 2004 2007 20082005
199
2013 20142009 2011 2012 20152010
Private debt has gradually declined, especially corporate debt, and is now at pre-crisis levelsCorporate and household debt (percent of GDP)
Corporate debt Household debt
Iceland Chamber of Commerce | 11
Figure 1.7
Sources: Central Bank of Iceland
Public debt more than tripled following the financial crisis in 2008, but has gradually declined in recent years
1 Central Bank of Iceland’s prediction
General government debt (percent of GDP)
Gross debtNet debtPrediction1
69
95
27
46
0
10
20
30
40
50
60
70
80
90
100
201820092000 20062003 2012 2015
Iceland Chamber of Commerce | 12
Central Bank’s inflation targetInflation
Figure 1.8
Source: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce analysis
20042000 2016
5%
2006
0
20%
201220102002
10%
15%
2008 2014
18.6
1.6
Inflation rose following a devaluation of the krona but is now within the Central Bank’s target rangeAnnual inflation rate (percent)
2.5 ± 1.5
Iceland Chamber of Commerce | 13
Figure 1.9
Source: Central Bank of Iceland
20082002 201220042000 2016201420102006
200
160
240
140
0
120
180
100
220
+106%
The Icelandic krona devaluated dramatically during the financial crisis but has been strengthening recentlyExchange rate index (ERI). A higher index value indicates a weaker Icelandic krona
Iceland Chamber of Commerce | 14
Figure 1.10
Sources: Central Bank of Iceland; Iceland Chamber of Commerce analysis
The devaluation of the krona converted a persistent current account deficit into a surplusCurrent account balance1 (percent of GDP)
1 Underlying current account, excludes the effects of the failed banks’ estates
-25
-20
-15
-10
-5
0
5
10
2012 20182003 20152000 20092006
Average post crisis
Average 2000-2008
Central Bank forecast
Current Account Balance
+5.2%
-10.9%
Iceland Chamber of Commerce | 15
Figure 1.11
Burdening foreign obligations following the crisis have been dramatically reduced and are at a historical low
Source: Central Bank of Iceland
Iceland‘s net international investment position (percent of GDP)
-6
-73
-131
-82
-62
-49
0
20
40
60
80
100
120
140
2015201020001995 2005
Iceland Chamber of Commerce | 16
Figure 1.12
Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce analysis
Iceland has historically been dependent on fishing but three other export foundations have since emergedIceland‘s exports1, index (1995 = 100), inflation adjusted
0
50
100
150
200
250
300
2010
32%
22%
2005 2015
23%
23%
20001995
Aluminium and silicon
Fisheries
Tourism
International Sector
1 As agriculture is heavily subsidised and only a small fraction of total exports, it is not included in this analysis
Iceland Chamber of Commerce | 17
Current State
Recent
Developments
Future
Prospects
Iceland Chamber of Commerce | 18
Figure 2.1
Source: Prime Minister’s Office
A new centre-right wing government was formed in May 2013, replacing a centre-left wing government
Iceland Chamber of Commerce | 19
Figure 2.2
Source: Iceland Chamber of Commerce
Iceland’s application to the EU was halted in 2013 and since 2015 Iceland is no longer a candidate countryIceland‘s negotiations with the European Union
Feb. 22nd 2014
New govt. proposes to withdraw the application
Negotiations in
pogress – 27 out of 33 chapters opened
July 27th 2010
Admission process commences
July 16th 2009
Applicationsubmission
Sept. 13th 2013
Accession teamdissolved andapplication halted
June 27th 2011
The screening process ends and formal negotiations begin
Q2Q4Q4Q4Q4Q4 Q3Q3Q3Q3Q3 Q2Q2Q2Q2Q2Q2 Q1Q1Q1Q1Q1Q1
2009 2011 2012 2013 20142010
Q4Q3 Q1
2015
March. 12th 2015
Govt. no longer considers Iceland a candidate country
Iceland Chamber of Commerce | 20
Figure 2.3
1 Consumption taxes in are divided between two brackets, the lower being 11% which includes and the higher 24% which is the general rate; some service is exempt from consumption taxes, such as health service, public transport and schools2 Income taxes are divided between three brackets, the lowest being 37.13% for the first ~336 thousand ISK of an individual‘s monthly income, the middle bracket being 38.35% for the next ~501 thousand ISK and the highest being 46.25% for income above ~837 thousand ISK
The Icelandic tax system relies heavily on consumption and labor income
Sources: PwC; Directorate of Internal Revenue; Iceland Chamber of Commerce
Key taxes in Iceland
� Lowered from 25.5% / lower bracket raised from 7% to 11%
� Middle bracket to be removed in 2017
� Unchanged since 2011 when it was increased from 18% to 20%
� Unchanged since 2011 when it was increased from 18% to 20%
Dividends / Capital gains
Tax Tax rate Recent changes
VAT1
Labor income2
Corporate profits
24%
46%
20%
20%
Iceland Chamber of Commerce | 21
Figure 2.4
Sources: Gallup; Datamarket; Iceland Chamber of Commerce
Support for the government declined in its first year and has remained lowGovernment approval rating (percent)
35%
20
30
40
50
July '13 July '14 Jan '16Jan '14 July '15Jan '15 July '16
Iceland Chamber of Commerce | 22
Figure 2.5
Source: Iceland Chamber of Commerce
Pension FundsIndividuals
Icelandic Companies
Foreign Investors
Failed Banks’ Estates
Foreign Investors
Capital Controls
The capital controls were imposed to prevent an outflow of capital that could destabilise the economyKey parties inside and outside of the capital controls
Iceland Chamber of Commerce | 23
Figure 2.6
Sources: Central Bank of Iceland; Iceland Chamber of Commerce analysis
1.4
Canadian Dollar
1.4
0.91.1
Swedish Krona
0.9
Norwegian Krona
1.1
British Pound
1.21.2
US DollarJapanese Yen
1.41.5
0.8
1.8
Icelandic Krona
2.5
1.7
Capital controls (10-’16)1Free-floating (03-’09)
The Icelandic krona was one of the most volatile currencies in the developed world before the controlsExchange rate fluctuations against the Euro (standard deviation of weekly changes)
1 From 1st of January 2010 till 12th of July 2016
Iceland Chamber of Commerce | 24
Free flow of capital
250
150
50
300
100
200
02005
243230
1990 1995 2000
89
+7%
2010 2015
+1%
87
+1%
Figure 2.7
Sources: Central Bank of Iceland; Statistics Iceland; Iceland Chamber of Commerce analysis
The adverse effects of the capital controls are most visible in the international sector; such exports have grown faster when flow of capital is freeIceland‘s exports originating from the international sector, bn. ISK (inflation adjusted)
1 For the years 1990-94, the international sector is inflated as agriculture, silicon and ships and planes are included
Iceland Chamber of Commerce | 25
Figure 2.8
Sources: Iceland Chamber of Commerce
Most of the major steps needed to lift the capital controls on domestic parties have been takenTimeline for lifting capital controls
Financial stability Refinancing Failed banksOffshore currency
Domestic
parties
� Capital controlsand restructuring of private debt
� Government, banks and state-ownedcompaniesrefinanced debt
� Voluntarycompositionagreement withestates of all failed banks
� FX auction and ringfencing of all ofshore ISK
� Governmentplans to liftcontrols onothers in theautumn
Iceland Chamber of Commerce | 26
1 The new measurement’s scope is new inflow of foreign currency that’s in particular intended for new investment in electronically registered bonds and bills, and deposits, as well as new inflow related to loans taken for investment in such instruments2 The current reserve ratio and period is 40% of the invested amount (29% of the total) and 1 year but the Central Bank can raise the ratio to up to 75% and the period up to 5 years; the capital is held on a capital flow account with the Central Bank of Iceland with the Icelandic króna as the settlement currency
Figure 2.9
A new measurement has been introduced to reduce volatile capital inflowsIceland’s new capital flow instrument, illustration
Sources: Central bank of Iceland; Alþingi; Iceland Chamber of Commerce
71%
71m is free to invest as intended
29m is held for 1 year at 0% interest2
Foreign investor
100m in foreign currency intended for investment in Icelandic securities1
29%
Iceland Chamber of Commerce | 27
Figure 2.10
1 The figure for 2016 is an estimate by Íslandsbanki2 Yearly average
24
18
30
0
12
200
1,000
800
6
600
400
1,200
0
1,400
1,600
1,800
20112003 20152013200920072005
Hotel rooms2 (left axis)
Tourists1 (right axis)
The supply of hotel rooms has not kept up with tourism demand, but new infrastructure is under construction
Sources: Statistics Iceland; Icelandic Tourist Board; Íslandsbanki; Iceland Chamber of Commerce
Number of tourists and hotel rooms (thousands)
Iceland Chamber of Commerce | 28
50
200
100
150
0Mar Sep DecJan NovAprFeb May OktJul AugJun
0%
20%
40%
60%
80%
100%
120%
140%
160%
Figure 2.11
Sources: Iceland Tourist Board; Iceland Chamber of Commerce analysis
3 year % change (right axis)
# of visitors in 2015 (left axis)
The Icelandic tourism industry has suffered from high seasonality, but recently the it has been reducedNumber of foreign visitors, thousands
Iceland Chamber of Commerce | 29
Figure 2.12
1 United Silicon, PCC and Thorsil have signed both investment agreements with the government and power purchase agreements with Landsvirkjun. Silicor Materials and Thorsil have not made their final investment decision yet.
Four silicon plant construction project agreements have been signed, resulting in significant new investments
Sources: Statistics Iceland; News reports; Iceland Chamber of Commerce estimates
Signed silicon plant investment projects (percent of GDP1)
9.4
1.6
0.5
PCC Thorsil
1.8
Silicor MaterialsUnited Silicon
5.4
Total business investment in
2015
12.1
Total planned investments in silicon plants
Iceland Chamber of Commerce | 30
Figure 2.13
Data stored in Iceland
Increased sales due to green energy
Lower electricity prices
Cooler climate
Data stored in Europe
Source: Iceland Chamber of Commerce
Favourable climate in addition to affordable energy makes Iceland an attractive location for data centersPotential increase in profitability by storing data in Iceland (illustrative)
Iceland Chamber of Commerce | 31
Fenno-Skan
200 km800 MW
Konti-Skan 1&2
149 km550 MW
BritNed
260km1,000 MW
NorNed
580km700 MW
Baltic cable
262 km600 MW
SwePol
245km600 MW
Sources: GAM Management; Iceland Chamber of Commerce
Figure 2.14
England-France
70km2,000 MW
Iceland-UK
~1,000 km700-1,000 MW
A proposed interconnector from Iceland to the UK wouldbe one of the longest in Europe, if constructedInterconnectors in northern Europe, length and capacity
Iceland Chamber of Commerce | 32
Figure 2.15
Source: Annual reports
100%
Landsbankinn
100%
Arion bank
2%
98%
100%
Íslandsbanki
13%
87%
Government
Active investors
Failed banks‘ estates
Iceland‘s “Big Three“ banks are all in inactive ownership, either through the government or estatesOwnership of the three largest domestic banks (percent, EOY 2015)
Iceland Chamber of Commerce | 33
Speculative grade
Figure 2.16
Source: Central bank of Iceland
Aaa/AAA
Aa1/AA+
Aa2/AA
Aa3/AA-
A2/A
…
Baa1/BBB+
Baa3/BBB-
A1/A+
Baa2/BBB
A3/A-
201520132009 2012
Ba1/BB+
2011 201620102008 2014
Investmentgrade
Moody’s Standard & Poor’s
Iceland‘s credit rating has recovered recently and the outlook is stableIceland‘s credit ratings (sovereign debt)
Iceland Chamber of Commerce | 34
Figure 2.17
Sources: GAM; Registers Iceland; Statistics Iceland; Iceland Chamber of Commerce
75
100
125
150
175
200
225
201620152010 2011 2012 2013 2014
+80%
+26%
+33%
Real estateEquity Bonds
Domestic assets have gained significant value in the last few yearsAsset value, inflation adjusted (BOY 2010 = 100)
Iceland Chamber of Commerce | 35
Current State
Recent
Developments
Future
Prospects
Iceland Chamber of Commerce | 36
GDP per capita,
PPP adjusted
USD thousands
52.6
48,2
+13%
Employment-
population
Percentage
0%
289
Ø 290
Capital intensity
USD thousandsper employee
Total factor
productivity
Level
1,864
+20%
1,559
Hours worked
per employee
Average hours
13,3
10
-28%-7%
44.3
48
= x xx
Figure 3.1
Source: Iceland Chamber of Commerce analysis
Iceland has a strong labour market compared to peers, but productivity level is lagging behindIceland‘s GDP composition (2014)
Iceland Chamber of Commerce | 37Sources: IMF; OECD; Iceland Chamber of Commerce
The Icelandic workforce‘s contribution compared to that of neighbour countries has increased even moreWork effort of Icelandic and neighbour countries‘ labour
Figure 3.2
40
42
44
46
48
50
52
54
56
1.400 1.450 1.500 1.550 1.600 1.650 1.700 1.750 1.800 1.850 1.900
Iceland
Denmark
Finland
United Kingdom
Sweden
Norway
Employed
Employed persons as a share of total population, percent
Annual working hours
Hours
2010
2014
Iceland Chamber of Commerce | 38Source: Statistics Iceland; Iceland Chamber of Commerce
Figure 3.3
Capital per employer has contracted in recent yearsCapital stock per employer, million ISK (inflation adjusted, 2015)
43,4
38,8
33,8
201520122009200620032000
-11%
Iceland Chamber of Commerce | 39
-44
-32-38
-23-18 -18
-26-25 -26-24
-5
41
6
-7
Sources: Respective countries‘ statistic bureaus; OECD; McKinsey & Company (2012); Iceland Chamber of Commerce
There is a big labour productivity gap between most Icelandic industries and the Scandinavian counterpartsRelative comparison of labour productivity in various industries (2014)1,2,3,4
1 Comparison of Gross Value Added (GVA) per employer in each industry, compared to Denmark, Norway and Sweden; GVA measures production value before indirect taxes and subsidies2 All industries are PPP adjusted except for export industries, as they are adjusted for USD exchange rate3 Data for Sweden for 2014 wasn‘t available so it is extrapolated assuming average growth of GVA and average industry share of total GVA from the years 2009-134 As was done in the McKinsey‘s report: „Charting a growth path for Iceland“, quarry, oil and real estate comparison was skipped, because of irregular comparison5 GVA of the public sector measures it‘s operating cost, not it‘s quality
Over +15% difference
Between -15% and +15%
Under -15%
Metal manufacturing
Fisheries
Food production
Tourism and Logistics
Financial services
Wholesale and Retail
Other Services
Electricity and Water
Public sector5Agriculture
Construction
Arts and Entertainment
Other manufacturing
Info and Communication
Icelandic industry share of GVA (%)
Figure 3.4
Iceland Chamber of Commerce | 40
Present FuturePast
390
540
2015
1,130
1995 2005
~ 870
~370
2025
~1,500
Fishing
2035
Tourism
New exports
Aluminium and silicon
~2,000
International sector
364
243
265
258
Source: Central Bank of Iceland; Statistics Iceland; McKinsey & Company; Iceland Chamber of Commerce
Figure 3.5
Exports need to increase by one trillion ISK in the next 20 years to support a GDP per capita growth of 2.6% p.a.Iceland‘s exports, ISK billions (2013 prices)1
Iceland Chamber of Commerce | 41Source: McKinsey & Company
Figure 3.6
McKinsey introduced a growth plan in their report about the Icelandic economy that outlined different priorities to each segment of the economy
Domestic service sector
„Fuel growth through efficiency gains that enable a
reallocation of labour”
Resource-based sector
„Focus on capturing and maximizing value from scarce
resources”
International sector
„Enable growth and renewal by creating a globally
competitive business environment”
Iceland‘s
Growth
Path
1
2
3
Iceland Chamber of Commerce | 42
Figure 3.7
Source: Iceland Growth Forum website
The Iceland Growth Forum presented approx. 40 reform proposals to support a sustainable growth trajectory
Iceland Chamber of Commerce
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