Equity securities and FX reserves weigh heavily in the external asset position
As the chart shows, Iceland’s foreign assets and foreign liabilities differ markedly in terms of composition. For example, net shareholdings totalled just over ISK 2,000bn at the end of September, reflecting not only the Icelandic pension funds’ substantial holdings in foreign shares and UCITS funds, but also the small share of Icelandic equities that are owned by foreign investors.
On the other hand, net external liabilities in the form of debt instruments and bank liabilities totalled just over ISK 1,400bn at the end of Q3. Fortunately, though, the bulk of these liabilities are denominated in foreign currencies and bear lower interest rates than ISK-denominated liabilities do. As interest rates rise abroad, however, the expense of bearing this debt is likely to increase markedly in the near future. Inward FDI exceeded outward FDI by ISK 552bn, mainly because of the aluminium smelters, as well as other foreign-owned manufacturing activities.
And last but not least, the CBI’s foreign exchange reserves show on the assets side of the bank’s NIIP accounts. The reserves came to ISK 886bn at the end of September, after holding largely stable over the quarter. In simplified terms, it can be said that Iceland’s balance sheet is broadly in balance, apart from the CBI, and that the FX reserves make the difference as regards net external assets. The CBI owes fairly substantial sums in foreign currencies, although for the most part, the reserves are financed domestically.