After several boom years, the Icelandic economy was on the defence in 2019. But it can be said to have won a defensive victory, as it now appears, contrary to most forecasts, that GDP growth was positive for the year. In addition, inflation remained low, and the króna was stable. Clearly, the economy is more resilient than many had feared. This is due not least to overall success in corporate operations and fiscal policy, buttressed by stable household balance sheets.
The Icelandic economy shows its resilience
More investment needed to drive GDP
Iceland is home to a host of opportunities for the future, and we can be proud of the value creation that has taken place here in the energy, tourism, fishing, and innovation sectors. But we need to do more. Weaker economic growth and a cloudy global outlook make it even more important that we maintain a thriving and diverse economy fuelled by innovation and Icelandic brainpower. In order for this to happen, we must ensure that sufficient capital is available for profitable investments.
In recent years, the pension funds have been virtually the only investors in the domestic market. The White Paper on a Future Vision for the Financial System points out the necessity of bringing more players to the table in order to boost the effectiveness of our financial market. The White Paper advances a number of intriguing proposals on how to do this, including expanding individuals’ freedom to invest their supplemental pension savings, as is done widely in other countries. It is important that the authorities and the business community follow up on the proposals in the White Paper in order to strengthen the Icelandic financial market.
Investment is also needed to ensure further development of our social infrastructure. In particular, we need to meet the needs of the vast influx of tourists who visit the country. Although Iceland’s fiscal position is sound, the Government should not stand alone in financing the many infrastructure projects that need to be undertaken. Chief among these are repairs to our road system and airports, and ensuring that everyone in Iceland has ready and reliable access to electrical power, even in the face of catastrophic weather like that in late 2019. In this vein, it would be interesting to explore further opportunities for public-private partnerships, as we did for the construction and operation of the Hvalfjarðargöng tunnel. Such partnerships have been
Reconstruction of the banking system
In the decade since I took over as Chairman of the Board at Íslandsbanki, Iceland’s financial system has undergone radical change. First of all, the system is much smaller than it was before the financial crisis, as nearly all of Iceland’s commercial banking operations focus on the domestic market. All of the risk within the banks is much better managed than before, and the cooperation between the Financial Supervisory Authority and the Central Bank has been very fruitful. This cooperation has strengthened Íslandsbanki’s risk framework and shored up its defences against money laundering, for instance. In addition, the Bank has made major investments in modern digital technology over this period. These investments have led to increased automation and simpler processes, thereby helping to improve operations and enhance security.
On the other hand, the competitive environment has changed dramatically with the arrival of fintech companies and other market participants. It is vital that the banks respond swiftly to these changed external conditions so as not to end up at the bottom of the heap competitively. And we must not forget that one of the foundations of successful operations is ensuring that customers and the general public have faith and confidence in the Bank. Indeed, fostering such confidence has been one of our primary objectives in recent years.
Regulatory environment and taxation
In a welcome move in 2019, Parliament approved a gradual reduction of the bank tax to 0.145% over a period of several years. But this is nowhere near enough: even with the reduction, taxes on Icelandic banks remain about five times higher than those in neighbouring countries — as opposed to seven times higher before the tax cut was approved. The aforementioned White Paper also notes that proposed statutory amendments and the establishment of a special resolution fund provide an opportunity for the authorities to conduct a comprehensive review of the special taxes and public levies in the financial market. It is important to look to the future and emphasise fair and appropriate taxation designed to build up funds so as to strengthen the foundations of the financial system and cushion against future shocks — through channels such as the deposit insurance fund and the resolution fund. It would be ill-advised to increase the already high levies on the Icelandic banks, which also have considerably higher capital requirements than their foreign peers. All of this inevitably affects the banks’ competitive position and profits. Furthermore, it severely curtails lending growth, undercutting the Central Bank’s efforts to stimulate the economy. These factors could also have a detrimental impact on efforts to sell Íslandsbanki. Discussions on starting the sale process have been underway in the past year. This is a welcome development, and such a sale would be extremely advantageous to Icelanders. Among other possibilities, it could enable the Government to embark on further infrastructure development or pay down Treasury debt.
Increased sustainability is an investment
At the end of 2019, the Board of Íslandsbanki approved a new sustainability strategy for the Bank. It was an important step forwards. The strategy emphasises integrating the Bank’s commitment to sustainability into its operations and overall strategy, alongside its profit objectives and other financial targets. The sustainability strategy has been introduced in response to stakeholders’ demands for action in the areas of sustainability and corporate social responsibility, and is consistent with the Government’s ownership policy. With this step, the Bank intends to be a leader in the field of sustainable development and a force for good in the community.
To this end, the Bank intends to initiate broad collaboration on responsible governance practices that both contribute to sustainable development in the Icelandic economy and support the Government’s Climate Action Plan, while also supporting the UN Global Goals.
In spite of economic challenges and increased competition, Íslandsbanki can be optimistic about its future. I am certain that the Bank’s strong executive leadership and highly competent staff will protect its interests in the years to come, and I am equally certain that the Bank will benefit from its investments in new technology, responsible strategies, and outstanding service to customers.