13 January 2017

S&P raises Iceland‘s long-term ratings to A- on stronger external position

Central Bank of Iceland

The rating agency S&P Global Ratings raised its long-term foreign and local currency sovereign credit ratings on Iceland to A- from BBB+. At the same time, the A-2 short-term ratings were confirmed. The outlook is stable.

This upgrade stems from Iceland‘s stronger-than-anticipated external performance characterized by a sizeable current account surplus and material growth in the CBI‘s foreign exchange reserves throughout 2016 as well as the Icelandic economy‘s robust growth dynamics and S&P‘s expectation of a continued reduction in the general government debt level as a percentage of GDP.

The stable outlook primarily balances the potential for improvement in Iceland‘s external and monetary profiles, as capital controls are fully lifted, against the risk of the domestic economy overheating over the next two years. S&P could raise the ratings if capital controls are fully lifted without putting the balance of payments or financial stability at risk. S&P could also raise the ratings if the ratio of net general government debt to GDP declines materially faster than they presently anticipate. S&P could lower the ratings if they perceived that recent sizable wage hikes led to a significant overheating of the domestic economy, with heightened risks for the country's monetary, fiscal, or external stability. This could also be the case if further liberalization of capital controls proceeded in a disorderly fashion, placing renewed pressure on the Icelandic krona exchange rate and the financial system.

S&P press release can be found here.