Icelandic Financial Market Digest 05. desemberPublisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender
Current account surplus narrows ; IIP improves
Iceland’s current account surplus has shrunk markedly year-to-date, owing mainly to broadly unchanged net revenues from international travel concurrent with a ballooning goods account deficit caused by strong import growth and a marginal contraction in exports. Even so, Iceland’s international investment position (IIP) continues to improve and is now at its most favourable in at least half a century.
The current account balance was positive by just over ISK 68 bn in Q3/2017, according to figures just released by the Central Bank (CBI), yet even though this is a handsome surplus, it is down by about a third year-on-year in ISK terms. The CA surplus itself is due primarily to strong revenues from tourism, which have delivered sizeable services account surpluses in recent years. It had already been reported that services trade generated a surplus of nearly ISK 118 bn during the quarter, while goods trade generated a deficit of ISK 47 bn. Other subcomponents did little to change the overall situation. Primary income net of primary expenditure – mainly a reflection of financial income and expense – totalled ISK 1.6 bn, whereas secondary income was negative by ISK 3.5 bn.
Current account surplus down by a third
The CA surplus for the first nine months of the year totalled ISK 91 bn, as opposed to ISK 147 bn over the same period in 2016. As in Q3, this development reflects negligible changes in the surplus on services trade and a much larger deficit on goods trade. The services account surplus for the three-quarter period was ISK 220 bn, an increase of ISK 4 bn YoY, whereas the goods account deficit for the same period totalled ISK 128 bn, an increase of ISK 40 bn YoY.
In our macroeconomic forecast, published this past September, we assumed that this year’s CA surplus would be just under 5% of GDP (the equivalent of about ISK 120-130 bn). The newly published figures suggest that our forecast was reasonably accurate, although the CA surplus could turn out slightly smaller than we projected.
External assets ISK 108 bn in excess of external liabilities
The CBI has also published figures on Iceland’s external assets and liabilities. Foreign assets net of foreign liabilities totalled ISK 108 bn, or 4.4% of estimated GDP, at the end of September. The net international investment position (NIIP) improved by ISK 125 bn in Q3, whereas the CBI’s last numbers had indicated a slightly negative NIIP at mid-year. Foreign assets totalled ISK 3,307 bn and foreign liabilities ISK 3,198 bn as of end-September. It hardly need be emphasised how positive it is that Iceland’s external assets should exceed its foreign liabilities, as the opposite has been true in recent decades.
Other things being equal, a positive NIIP should mean that financial income from abroad will exceed financial expense, as has been the case in the past few quarters. In that case, the balance on income will make a positive contribution to the CA balance, whereas until very recently it was usually a drag on the current account. In other words, the improved external position means that, on average, the real exchange rate can be higher than before without eroding the current account balance.
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