LONDON, February 07 (Fitch) Fitch Ratings has affirmed Iceland's
foreign and local currency Issuer Default Ratings (IDR) at 'BBB'
respectively, with Stable Outlooks. The issue ratings on
unsecured foreign and local currency bonds have also been
affirmed at 'BBB' and
'BBB+', respectively. The Country Ceiling has been affirmed at
'BBB' and the
Short-term foreign currency IDR at 'F3'.
KEY RATING DRIVERS
Iceland's ratings are supported by its high level of income per
indicators of governance and human development similar to the
In Fitch's view, the Icelandic government's plan to finance the
announced household debt relief programme through budget
adjustments rather than
increased borrowing is consistent with the authorities'
commitment to fiscal
consolidation. The debt relief programme envisages a write-down
inflation-linked mortgages, through direct relief from the
government and tax
incentives to use private pension savings to pay down the debt.
The authorities' commitment to fiscal consolidation is also
underlined by the
introduction of a proposed organic budget law, which should
improve the fiscal
At the same time, public finances remain a credit weakness.
Fitch estimates that
general government gross debt in 2013 was just over 96% of GDP,
more than double
the 'BBB' median of 40%. At the same time, Iceland has had a
primary surplus for
the past two years, and Fitch expects that primary surpluses
over the next two
years will push the debt to GDP ratio down to 87.6% by 2015.
that the overall government deficit was 2.8% in 2013, and
forecasts an overall
budget balance by 2015.
A substantial proportion of direct debt relief is financed by
extending the bank
tax to the estates of the failed banks. This may dent investor
Iceland, making it more challenging to unwind capital controls.
Economic growth picked up in 3Q13 on an annual basis, from 3.8%
to 4.9%. This
was driven by both domestic demand and net exports. Fitch
estimates that real
GDP growth in 2013 was 2.1%, and expects that GDP growth will
edge up further
and average 2.6% over the next two years.
The country's external finances are a credit weakness, despite a
improvement in the current account over the first nine months of
legacy of the financial crisis in 2008/2009 and the winding up
the old banks, while unresolved, exacerbate the country's
Fitch estimates that in 2013 Iceland's net external debt was
almost five times
the size of the economy; in comparison, Ireland and Spain were
between 80% and
85%, and the 'BBB' median is just 7.7%. The external liabilities
concentrated in the private sector - foreign reserve exchanges
are large in
comparison with public sector foreign repayment obligations.
Fitch expects that
the current account deficit will average 1.5% of GDP over the
next two years.
The presence of capital controls implies that a substantial
non-resident claims (estimated to be around ISK327bn (EUR2bn,
around 18% of
GDP)) are currently 'locked in' krona assets.
The authorities are not committed to a precise date for the
removal of capital
controls, and appear committed to avoiding a disorderly
Fitch expects this factor will continue to weigh on Iceland's
economic and financial stability at least until 2015, as well as
on the credit
The Outlook is Stable. Consequently, Fitch's sensitivity
analysis does not
currently anticipate developments with a high likelihood of
leading to a rating
change. However, future developments that could, individually or
result in a positive rating action include:
-Enduring monetary and exchange rate stability in the context of
-Continued steady falls in external and public debt ratios.
-Greater clarity about the evolution of the process for lifting
controls. The completion of this process will probably depend to
some degree on
the winding up of the estates of the old banks.
The main factors that could lead, individually or collectively,
to a negative
rating action are:
-A substantially weaker than expected economic performance,
resulting in trend
growth over the projection horizon falling substantially below
assumptions, which would in turn weaken public debt dynamics.
-A weakening commitment to fiscal consolidation.
-A large crystallisation of contingent liabilities from the
especially the Housing Finance Fund (HFF), above the amounts
already assumed in
Fitch's debt sensitivity analysis. State guarantees are
ISK1,275bn (around 73% of GDP) at end-November 2013. The HFF
accounts for about
three-quarters of these guarantees.
The ratings and Outlooks are sensitive to a number of
Fitch assumes that capital controls will ultimately be unwound
in an orderly
manner, beyond the end of the forecast horizon in 2015.
Fitch assumes that the household debt relief plan will be fully
financed by the
announced budget adjustments, implying that revenue-raising
measures will not be
subject to successful judicial challenges.Country CeilingsAdditional Disclosure
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