Icelandic Financial Market Digest 04. desember

Publisher: Íslandsbanki Research • Resp.Editor: Ingólfur Bender

Sizeable current account surplus and improving net IIP in 2018

The current account surplus for the first nine months of 2018 was only slightly smaller than in the same period of 2017, thanks to a hefty surplus in Q3. The outlook is for a healthy CA surplus both in 2018 as a whole and in 2019. Iceland’s external position improved markedly in Q3, and external assets net of liabilities have never been larger.

 The current account balance was positive by ISK 76.5bn in Q3, according to figures just released by the Central Bank (CBI), the largest CA surplus in a single quarter in the past two years, and the second-largest ever recorded. The CA balance is subject to wide seasonal fluctuations, as a large share of tourism revenues fall in the third quarter of each year. 

It had already been established that the goods account showed a deficit of ISK 43.7bn for the quarter and the services account a surplus of ISK 123.7bn.  There was also a 2.4 surplus on primary income and a 6.0 deficit on secondary income.  Primary income derives largely from financial income and expense to and from Iceland. In recent quarters, income and expense on Iceland’s assets and liabilities have been relatively well balanced. In previous years, however, when external liabilities far exceeded external assets, this component was a considerable drag on the CA surplus and therefore a source of foreign currency outflows.

The CA surplus for the first nine months of 2018 totalled ISK 76.7bn, as opposed to ISK 83.4bn for the same period in 2017. The services account surplus narrowed by ISK 10bn between periods, but the goods account deficit narrowed as well, by ISK 7bn. The balance on primary and secondary income was poorer by about ISK 3bn this year than during the same period in 2017.

Outlook for continuing surplus

The outlook for 2018 as a whole is for a CA surplus about the same size as last year’s, which was ISK 87bn. We expect a small surplus in Q4, given that terms of trade have been improving with falling oil prices, and growth in both private consumption and business investment has eased. This is a larger surplus than we projected in our macroeconomic forecast this past September. The difference is due to weaker growth in goods imports and somewhat stronger growth in tourism than we had projected for the final months of the year. For 2019 as well, the outlook is for a continued CA surplus. The depreciation of the ISK will tend to shift domestic demand back into Iceland and facilitate a continued surplus on services trade.

Strongest external position in modern history

Iceland’s net IIP was positive by ISK 368bn, or 13.3% of GDP, at the end of September. Foreign assets totalled ISK 3,380bn and foreign liabilities ISK 3,012bn,  giving the most favourable external position Iceland has ever had by this metric. A strong external position is exceedingly important for Iceland’s growth potential and living standards further ahead, as it enables the economy to withstand a higher real exchange rate, all else being equal, than it could otherwise, without giving rise to a trade deficit.
The IIP improved by nearly 6% of GDP between quarters. Net financial transactions improved it by ISK 86bn, and price and exchange rate movements improved it by ISK 79bn, owing to a 4% depreciation of the ISK and a 4% price increase in foreign markets. The outlook is for a further improvement in the IIP in the near term, owing to the prospect of a continued CA surplus in the quarters to come.


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