The Icelandic Economyºtgáfa/kynningar/the_icelandic_economy_2016_presentation.pdf · 2000 2002...

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


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


AcknowledgementsThe following member companies supported the publication of this report


Current State

Recent

Developments

Future

Prospects


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


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


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)


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


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)


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


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


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


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


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%


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


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


Current State

Recent

Developments

Future

Prospects


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


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


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%


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


Figure 2.5


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


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


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


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


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%


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)


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


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


Figure 2.13

Data stored in Iceland

Increased sales due to green energy

Lower electricity prices

Cooler climate

Data stored in Europe


Favourable climate in addition to affordable energy makes Iceland an attractive location for data centersPotential increase in profitability by storing data in Iceland (illustrative)


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


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)


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)


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)


Current State

Recent

Developments

Future

Prospects


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%


-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


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


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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