A valuable lesson for trying times
So what does all of this mean for the near future?
First of all, the Government has significant scope for countercyclical action in the form of increased public investment, reductions in public levies, and other measures — thanks to the prudence the authorities have shown in recent years. To put this into context, it is worth mentioning last week’s announcement concerning possible measures, in which the authorities stated that relative to previous estimates, Government investment would be increased by a third over the next three years. At first perusal, it seems to us that this could amount to some ISK 75-80bn. If it is credit-financed in full, it will push Treasury debt upwards by just under 3% of GDP, to roughly the level seen at the end of 2018. Of course, other factors will play into this as well — reduced tax revenues and increased benefit payments come to mind — but the central point is that the Treasury has considerable latitude, and Government-guaranteed financing can be obtained at more favourable terms than ever before.
In the corporate sector, moderate debt means vastly reduced risk that difficulties in the sectors initially affected by the COVID-19 pandemic will trigger a general rise in arrears and corporate insolvencies. It also means that the authorities and the financial system will be better able to channel policy measures and assistance to those who need it most.
And last, but certainly not least, most households have considerable scope to absorb temporary losses of jobs and income. In addition to this, the risk that their housing equity will evaporate is far less than it was a decade ago. For one thing, the share of indexed debt has fallen, and for another, we think there are limits to how low the ISK will fall in the coming weeks and months, given Iceland’s strong IIP and the CBI’s deep pockets. Any inflation spike caused by exchange rate pass-through will most likely be much milder and do much less damage to households’ equity and purchasing power than it did a decade ago.
It is abundantly clear that the Icelandic economy is facing exceptional challenges and that many will suffer severe shocks in the quarters to come. The lessons learned from the cataclysmic events of 2008 and beyond, and the prudence shown by private and public sector alike, have proven invaluable as the country faces the difficulties ahead. Furthermore, in our opinion, they will provide a major boost when the time comes to re-boot the economy after the crisis has passed.