Autumn surge in dollar-denominated deposits

FX deposits denominated in US dollars have grown rapidly since mid-year, most likely in connection with the sale of biotech firm Kerecis, which was settled in late August. The rise and subsequent acquisition of Kerecis is a sign of how positive an impact the development of knowledge-based exports can have on Iceland’s current account balance.

Non-residents held FX deposits with Icelandic deposit institutions in an amount equivalent to ISK 358bn at the end of September. The balance declined by ISK 52bn between August and September despite a more than 2% depreciation of the króna during the month of September. A new record was set at the end of August, however, when the total amount of non-residents’ foreign-denominated deposits in Icelandic banks grew by ISK 96bn during the month, to the equivalent of ISK 409bn.

Movements of this magnitude are unusual for the Icelandic financial system, but as the chart indicates, foreign-owned FX deposits have been growing slowly and steadily from mid-2021 through mid-2023. The chart also shows clearly that the lion’s share of the August increase – and the contraction in September – was in US dollars.

This shift becomes even clearer if the deposits are examined in their original currencies. In US dollars, these deposits were relatively stable at USD 800m-1.0bn until the end of last winter. At that point they started to grow somewhat, rising to nearly USD 1.3bn by the end of July. A month later they had grown to nearly USD 1.9bn, whereupon they slid to slightly less than ISK 1.6bn by end-September. Euro-denominated deposits changed less dramatically over this period. These two currencies are the backbone of foreign-owned FX deposits, accounting for a combined 90% of the entire stock of such deposits at the end of September.

In this context, it is appropriate to take into account the foreign acquisition, for USD 1.3bn, of Icelandic growth company Kerecis, which was announced in mid-summer and settled at the end of August. The acquisition price is the equivalent of ISK 180bn, and the company was largely owned by Icelandic residents before the transaction. For comparison, aggregate FX purchases by Iceland’s pension funds came to ISK 68bn over the first eight months of 2023, according to the Central Bank’s (CBI) Financial Stability report. Therefore, in the Kerecis transaction alone, FX inflows to Icelandic residents may well end up exceeding the pension funds’ total foreign investments for 2023, assuming that the pension funds maintain the same pace over the final third of the year.

In an interview with the business website Innherji, the Governor of the Central Bank was reluctant to exclude the possibility that the CBI might need to intervene in the foreign exchange market because of the Kerecis settlement, in order to mitigate the impact of the sale on the ISK exchange rate. That said, the Kerecis settlement had little impact on the FX market in late August and early September.

The CBI’s report points out in this context that the Kerecis trade could support the ISK in the coming term. Based on CBI data, it is likely that a sizeable share of the proceeds from the sale are still held in Icelandic FX accounts. It should come clear over time whether a portion of these hefty USD deposits are converted to ISK, or whether they are used for investment in other foreign assets.

In any event, the Kerecis trade shows clearly how positive the development of knowledge-based companies is for Iceland’s external position. It is also worth noting that in the Federation of Icelandic Industries’ recent analysis, export revenues from intellectual property will total an estimated ISK 280bn in 2023, an increase of 17% year-on-year. Icelanders’ net external assets totalled ISK 1,158bn at mid-year 2023. If we can manage to maintain a reasonable balance on external trade, including continued growth in knowledge-based exports, this important foundation for the ISK exchange rate will probably remain strong.


Jón Bjarki Bentsson

Chief economist