Although the NIIP is very solid in historical and international context, it deteriorated between years, falling from 48.7% of GDP at the beginning of 2025. Even so, it is not very long ago that Iceland’s external liabilities exceeded its external assets. Only 7-8 years have passed since the NIIP first turned materially positive. Until then, Iceland had for decades been a perennial debtor in the community of nations, dependent on the tender mercies of foreign creditors as regards its resilience against balance of payments shocks and currency collapse.

The NIIP is affected by not only by external trade but also by factors such as the ISK exchange rate and price movements in domestic and foreign asset markets. For example, developments in foreign equity markets have a strong impact on Iceland’s foreign asset stock, as a large share of the country’s external assets are invested by the pension funds in foreign shares and mutual funds. We reviewed the past year’s developments in the pension funds’ performance in a recent article, which specified that the funds’ foreign assets appreciated by ISK 325bn in 2025, to a total of ISK 3,681bn at the year-end. A goodly portion of those assets take the form of equity market-linked mutual funds or shares in individual companies.

The domestically financed portion of the CBI’s international reserves are also an important part of the NIIP. At the end of 2025, the CBI’s net short-term FX position was positive by ISK 601bn and had grown by ISK 53bn during the year. The reserves totalled ISK 958bn, or just over 19% of year-2025 GDP. The CBI therefore has considerable muscle that it can use to mitigate abrupt short-term exchange rate movements not caused by underlying changes in the external balance of the economy.

Perhaps most important on the liabilities side of the NIIP are interest-bearing debt and net inward foreign direct investment (FDI). It should be noted that interest-bearing debt owed to foreign creditors is largely in foreign currencies, and the interest burden is therefore considerably lighter than it would be for ISK-denominated debt. Inward FDI is due mainly to manufacturing companies, particularly in the metals sector.

A strong NIIP is important

In our report yesterday on Iceland’s current account balance in 2025, we pointed out that although there was a sizeable CA deficit last year, closer scrutiny revealed a less worrisome situation than might be expected. Enormous investment in the data centre sector strongly affected last year’s figures but had little impact on the FX market.

The outlook is for a far more modest CA deficit in 2026 than in the two years beforehand, and it is not too much of a stretch to say that external trade looks set to be in balance. Thus the CA deficit will probably not have a material negative impact on the NIIP in the near future. Provided that developments in foreign market prices do not prove significantly unfavourable and no unforeseen shocks upend Iceland’s external balance, it looks as though the NIIP will remain strong. This is vital for our very small open economy: a solid NIIP bolsters foreign entities’ confidence in Iceland, lowers risk premia on borrowings, and enhances the likelihood of a fairly stable exchange rate in the years ahead.