Fitch Ratings has upgraded Iceland's
Long-term foreign currency Issuer Default Rating (IDR) to 'BBB-' from
'BB+' and affirmed its Long-term local currency IDR at 'BBB+'.
Its Short-term foreign currency IDR has also
been upgraded to 'F3' from 'B' and its Country Ceiling to 'BBB-' from
The Outlooks on the Long-term ratings are
"The restoration of Iceland's Long-term
foreign currency rating to investment grade reflects the progress
that has been made in restoring macroeconomic stability, pushing
ahead with structural reform and rebuilding sovereign
creditworthiness since the 2008 banking and currency crisis," says
Paul Rawkins, Senior Director in Fitch's Sovereign Rating Group.
"Iceland has successfully exited its IMF program and gained renewed
access to international capital markets. A promising economic
recovery is underway, financial sector restructuring is
well-advanced, while public debt/GDP appears to be close to peaking
on the back of a robust fiscal consolidation program," added
As the first country to suffer the full
force of the global financial crisis, Iceland successfully completed a
three-year IMF-supported rescue program in August 2011.
Despite some setbacks along the way, the
program laid the foundations for renewed access to international capital
markets in mid-2011 and an encouraging rebound in economic growth to 3%
for 2011 as a whole.
Flexible labour and product markets and a
floating exchange rate have facilitated the correction of external
imbalances and contained the rise in unemployment, while the financial
system has shrunk to one fifth of its former size.
Iceland has been among the front runners on fiscal consolidation in
advanced economies: the primary deficit has contracted from 6.5% of GDP
in 2009 to 0.5% in 2011 and Iceland appears to be on track to attain
primary fiscal surpluses from 2012 and headline surpluses from 2014.
Fitch believes that gross general government debt may have peaked at
around 100% of GDP in 2011 (excluding potential Icesave liabilities);
net debt is significantly lower at around 65% of GDP, reflecting
appreciable deposits at the Central Bank (CBI).
Barring further shocks, Iceland should see a
sustained reduction in its public debt/GDP ratio from 2012, assuming
economic recovery continues and the government adheres to its medium
term fiscal targets. Ample general government deposits at the CBI and
record foreign exchange reserves ameliorate near-term fiscal financing
However, the risk of additional contingent
liabilities migrating to the sovereign's balance sheet remains high.
Iceland's unorthodox crisis policy response has succeeded in preserving
sovereign creditworthiness in the face of unprecedented financial sector
distress. However, legacy issues remain, notably the
protracted dispute over Icesave, an
offshore branch of the failed
Landsbanki that accepted foreign
exchange deposits in the UK and the Netherlands, and the slow unwinding
of capital controls imposed in 2008.
The impact of Icesave on Iceland's sovereign creditworthiness has
diminished over time and Landsbanki has begun to remunerate deposit
Nonetheless, Fitch considers that Icesave
still has the capacity to raise public debt by 6%-13% of GDP, should an
EFTA Court ruling go against Iceland. Resolution of Icesave will be
important for restoring normal relations with external creditors and
removing this uncertainty for public finances.
Capital controls continue to block repatriation of USD3bn-USD4bn of
non-resident investment in ISK-denominated public debt and deposit
instruments. Fitch acknowledges that Iceland's exit from capital
controls promises to be lengthy, given the underlying risks to
macroeconomic stability, fiscal financing and the newly restructured
commercial banks' deposit base.
So far, Iceland has been relatively unaffected by the Eurozone
sovereign debt crisis and, although growth is expected to slow to
2%-2.5% in 2012-13, Fitch does not expect Iceland to slip back into
However, the private sector remains heavily
indebted - household debt exceeds 200% of disposable income and
corporate debt 210% of GDP - highlighting the need for further domestic
debt restructuring, while the key export sector has been held back by
capacity constraints and a lack of investment exacerbated in part by the
slow unwinding of capital controls.
Fitch says that future sovereign rating actions will take a broad range
of factors into account including continued economic recovery and fiscal
consolidation and progress towards public and external debt reduction.
Iceland is still a relatively high income
country with standards of governance, human development and ease of
doing business more akin to a high grade sovereign than low investment
Accelerated private sector domestic debt
restructuring, a progressive unwinding of capital controls,
normalization of relations with external creditors and enduring monetary
and exchange rate stability would help to further advance Iceland's
investment grade status.