Meginmál

Moody's affirms Iceland's rating of Aaa

NOTE: This article is from 19. July 2005 and is therefore more than 5 years old.

Moody’s Investors Service has affirmed Iceland’s credit rating of Aaa, in the following press announcement released on July 19, 2005.

No. 20/2005

July 19, 2005

MOODY’S REPORTS: ICELAND’S LOW GOVERNMENT DEBT AND FLEXIBILITY SUPPORT Aaa RATING           

In its annual report on Iceland, Moody’s Investors Service cites the government’s low debt and the economy’s unusual flexibility among the reasons for the country’s Aaa rating. Iceland is nevertheless challenged by a propensity for volatile macroeconomic performance and its sizeable net external indebtedness.

“In the past, the dominance of fisheries was the principal cause of economic volatility,” observed Moody’s analyst Joan Feldbaum-Vidra, author of the report. “However, during the last decade such fluctuations have been sparked by foreign investment cycles in power-intensive industries, exploiting the country’s abundant low-cost and environmentally-friendly hydro- and geothermal energy.”

According to the rating agency, the country’s largest-ever foreign investment cycle in the aluminum industry and structural changes in the financial markets have led to a rapid expansion of credit, a huge buildup in foreign debt, and outsized trade and current account deficits

“The current account deficit is expected to exceed 12% of GDP in 2005 because of project-related imports, the real appreciation of the currency, which is causing imports to swell and some exports to lose their competitiveness, and a credit-driven consumer spending boom,” said Ms. Feldbaum-Vidra. She emphasized that Iceland’s “external indebtedness is itself an important ingredient in the current account deficit, with net factor payments amounting to 2.5% of GDP.”

The key immediate challenge, said the analyst, is the careful coordination of monetary, fiscal and income policies to contain the financial risks posed by the credit boom. Given the scale of the investment cycle, public finances arguably need to be tightened to alleviate some of the pressure being exerted on monetary policy.

In spite of these challenges, she stated that Iceland’s Aaa rating is secure in view of the government’s modest direct debt, high labor force participation rates, low unemployment, young population, and well-funded pension system. General government debt of just 36% of GDP at the end of 2004 compares well to an average of 57% for other Aaa-rated advanced industrial countries.

“While a soft landing may not be achieved at the end of this cyclical upturn, government finances are strong enough to overcome any of the consequences,” said Ms. Feldbaum-Vidra. “Moreover, the proven flexibility of the economy, in particular the labor market, to rebound from adverse circumstances reduces the likelihood of a long, painful adjustment.”

“Icelanders’ common perspective on economic and social policy has provided the basis for the country's remarkable success so far in achieving sustainable economic development,” said the analyst.

The rating agency’s report, “Iceland: 2005 Credit Analysis,” is a yearly update to the markets and is not a rating action.