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Current account flipped to a surplus in Q2

A current account surplus in Q2 offset most of the deficit from Q1, bringing the current account into equilibrium for the first half of the year. A buoyant spring tourist season and a surplus on primary income were the main drivers of the shift, counterbalancing the sizeable deficit on goods trade. The net international investment position (NIIP) has improved significantly year-to-date, and the outlook for the external balance of the economy is positive.

The current account surplus totalled ISK 7.5bn in Q2, according to newly published figures from the Central Bank (CBI). After deficits in the previous two quarters, this is a positive turnaround, with thanks due mainly to the strong rebound in tourism. The surplus on services trade, driven largely by tourism, totalled nearly ISK 88bn during the quarter, slightly overtaking the goods account deficit of ISK 84bn. The primary income balance showed a surplus of ISK 17bn, while there was a deficit on secondary income in the amount of ISK 13bn.

It makes a big difference in the current account balance when the tourism industry gets into its stride, as it has been since spring 2022. The sector generated a total of ISK 160bn in export revenues in Q2 and ISK 256bn in H1. Tourism revenues peak in Q3, so a hefty surplus on services trade can be expected this quarter.

Primary income balance still in surplus

The balance on primary income has shown a surplus for three quarters running, after deficits during the quarters beforehand. Primary income is defined as cross-border income and expenses due to wage payments and returns on financial assets.

As the chart shows, net financial income due to foreign direct investment (FDI) has been the main determinant of the overall balance on primary income in recent years. In H1/2023, it came to a net total of nearly ISK 23bn. These figures are affected by rising global interest rates, as the CBI’s international reserves have begun to generate fairly considerable interest income – nearly ISK 11bn in H1. In addition, net income from portfolio investment totalled ISK 14bn, and flows due to wage payments were positive by just over ISK 2bn. All of this was offset by outflows of nearly ISK 10bn due to investments other than those listed above.

As we have discussed previously, fluctuations in net financial income from FDI stem largely from the operating performance of Iceland’s three aluminium smelters, which are wholly owned by foreign entities. The deterioration in their performance due to falling aluminium prices shows as an improvement in this part of the financial income balance. But that does not tell the whole story, of course, because this same deterioration in performance results in a decline in revenues from aluminium exports. The overall impact of aluminium price volatility on the current account balance has subsided in recent years, however, as the energy purchase agreements with the smelters depend to a diminishing degree on developments in the price of aluminium.

Current account virtually balanced in H1

Iceland’s current account showed a deficit of right around ISK 4bn in H1/2023. This is a vast improvement relative to the same period in the years beforehand, which saw deficits of nearly ISK 74bn (H1/2022) and ISK 63bn (H1/2021). A sizeable current account surplus is likely in Q3, if the statistics showing a booming peak tourist season are any indication.

In our macroeconomic forecast from late May, we projected a small current account deficit for 2023 as a whole, followed by modest surpluses in 2024 and 2025. But based on the figures released to date, the forecast for 2023 could well prove to have been a bit too pessimistic, and this year could end with a balanced current account or a marginal surplus.

Net external assets on the increase

The CBI has also published data on Iceland’s international investment position as of end-June. Net external assets totalled ISK 1,158bn, or just under 29% of GDP for the four quarters ending in mid-2023. The NIIP improved by ISK 217bn during the first half of the year, owing both to increased external assets and reduced external liabilities.

Developments in global stock markets strongly affect the NIIP at any given time, as Icelanders’ shareholdings abroad net of non-residents’ shareholdings in domestic companies provide the backbone of Iceland’s net external asset position. Foreign markets have been enjoying tailwinds in 2023 to date, and the value of foreign shareholdings (consisting mainly of Icelandic pension funds’ holdings of foreign equities and related funds) rose by ISK 237bn in H1.

Net external holdings in equities and unit shares totalled ISK 2,420bn at the end of June, and the item labelled “other” – which is mainly the CBI’s net international reserves – came to another ISK 609bn. Non-residents’ direct investment in Iceland exceeded Icelanders’ outward investment by ISK 583bn, however, and Iceland’s net liabilities due to loans and bonds amounted to ISK 1,288bn.

Favourable prospects for Iceland’s external balance

The outlook for Iceland’s external balance is quite favourable at present. The current account is likely to be in balance or generate a modest surplus in coming quarters, as export revenues are on the rise, particularly on the services side, and consumption- and investment-related import growth will probably lose steam.

Because of this, together with the composition of Iceland’s external assets and liabilities, the outlook is tilted towards an improvement in the external position of the economy. A robust external balance is an extremely important sign of strength for a small open economy with a tiny floating currency, and we therefore view the latest figures from the CBI as very good news indeed.


Jón Bjarki Bentsson

Chief economist