Icelandic Financial Market Digest 05. mars

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Current account surplus shrinks in 2017, but external position improves

Last year’s current account surplus was less than half that in 2016. The year-on-year contraction was due mainly to a surge in the goods account deficit, relatively modest growth in the surplus on services trade, and a much less favourable contribution from primary and secondary income. Even so, Iceland’s international investment position (IIP) continued to improve in 2017 and was positive by 7.5% of GDP at the year-end, the most favourable IIP in the country’s modern economic history. 

According to recently published figures from the Central Bank (CBI), the current account surplus measured ISK 2.8bn in Q4/2017, the smallest surplus since Q1/2014. In comparison, the Q4/2016 surplus exceeded ISK 43bn. It had already been established that the balance on goods was negative by just over ISK 40bn and the balance on services positive by just over ISK 53bn during the quarter. The primary and secondary income balances were each negative by slightly more than ISK 5bn during the period. The deficit on secondary income was consistent with previous quarters, but the negative primary income balance was due in large part to relatively high financial expense in connection with inward foreign direct investment. 

The current account for 2017 as a whole was just over ISK 93bn, down from nearly ISK 189bn in 2016, a contraction of roughly half between years. The 2017 surplus is the smallest since 2012, excluding the effects of the old banks on calculated factor income in 2008-2015. 

As we discussed in Iceland Market Daily last Friday, this is due largely to a sizeable YoY increase in the goods account deficit, which grew from just under ISK 102bn in 2016 to ISK 167bn last year, mainly because of a surge in goods imports. The balance on services was positive by ISK 272bn last year, up from ISK 257bn in 2016, with the increase due mostly to growth in tourism. And finally, net factor income went from a surplus of more than ISK 33bn in 2016 to a deficit of nearly ISK 12bn in 2017, primarily due to reduced financial income on outward foreign direct investment. 

Although the current account surplus shrank significantly last year, it remained robust in historical terms, given Iceland's propensity to run a current account deficit until the present decade. The combined CA surplus in the past five years totals ISK 664bn, or 26% of estimated year-2017 GDP.

External position still improving

A handsome CA surplus has played a leading role in the vast improvement in Iceland’s IIP. According to CBI figures, the net external position was positive by ISK 190bn, or 7.5% of GDP, at the end of 2017, the best IIP in Iceland’s modern economic history. Iceland's total foreign assets amounted to ISK 3,092bn, and foreign liabilities were ISK 2,902bn. The IIP improved by ISK 63bn in Q4, due both to net financing activities and to positive exchange rate and price changes. The latter of these stems mainly from a more than 5% rise in foreign securities market values. 
In our recent macroeconomic forecast, we project that the current account balance will remain positive through the end of the decade, although the surplus will narrow somewhat from year to year. If this forecast materialises, Iceland’s IIP will improve still further in the years to come, all else being equal. This is both welcome news and an important improvement from recent decades, when a persistent CA deficit led to a negative IIP, which in turn caused net foreign financial expense to erode the CA balance. If developments are in line with the current outlook, net financial income will support the CA balance to an increasing degree over time.


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