Fluctuations in inward foreign investment
The Financial Stability report also contains a summary of registered new investment through January 2023. According to that summary, net new investment totalled ISK 81bn in 2022, including ISK 25bn for investment in listed equities and Treasury bonds. On the other hand, it points out an inconsistency with data from Nasdaq, which indicate that inflows for portfolio investment were roughly ISK 16bn more than is captured by the data on registered new investment. In addition to this, two foreign acquisitions of Icelandic companies make their mark on the numbers. As can be seen in the chart above, inflows for new investment declined sharply in the final months of 2022 and January 2023 as compared with last autumn. However, March should weigh more heavily in these figures than, say, January, as the final phase of Iceland’s promotion to secondary emerging market classification by index provider FTSE Russell took place during the month.
The current account deficit: is the worst behind us?
In addition to the above, flows due to cross-border goods and services trade are naturally an important factor in FX market developments at any given time. On that score, matters have somewhat improved after last autumn’s spate of outflows, as we have discussed recently. In 2023 to date, the goods account deficit has averaged around ISK 20bn per month, as compared with nearly ISK 34bn per month in H2/2022.
Furthermore, the winter tourist season should bolster the sector somewhat. Nearly 260,000 tourists visited Iceland in January and February combined, or around 90% of the total from the same period in 2019. Our rough estimates of combined goods and services trade year-to-date suggest that January was broadly in balance, while February showed a deficit of ISK 10-12bn. The services account fluctuates widely between seasons, and we think it probable that it will show a surplus well in excess of the goods account deficit once the peak tourist season arrives this summer.
Position-taking with the ISK has increased again
Developments in the commercial banks’ forward FX position give quite an accurate view of current market expectations about near-term exchange rate movements. Last year, the forward FX position ballooned in H1, as “customers hedged against the appreciation of the króna or took positions with it”, to borrow the wording from Financial Stability (p. 10). Those positions turned around as the year progressed, however, shrinking by nearly ISK 50bn from end-August through end-November.