The abrupt decline of WOW Air has made its mark on external trade in 2019 to date. The surplus on combined goods and services trade was handsome in Q1 despite a year-on-year decline in tourist arrivals, owing to an increase in average spending per tourist, revenues from aircraft sales, and reduced aircraft leasing costs. The outlook for 2019 is for a slight current account surplus, albeit smaller than last year’s, as dwindling tourism-generated revenues will erode the current account balance.
WOW Air’s woes weaken the Q1 current account balance
The abrupt decline of WOW Air has made its mark on external trade in 2019 to date. The surplus on combined goods and services trade was handsome in Q1 despite a year-on-year decline in tourist arrivals, owing to an increase in average spending per tourist, revenues from aircraft sales, and reduced aircraft leasing costs.
Sizeable services trade surplus in Q1
According to newly published figures from Statistics Iceland (SI), the surplus on services trade measured nearly ISK 30bn in Q1/2019, some ISK 7bn less than in the same quarter of 2018. The difference is due to several factors: the surplus on international transport, which contracted by ISK 8bn YoY; export revenues from financial services, which were down nearly ISK 3bn; and expenditures relating to imported computer and telecom services, which rose by ISK 3bn between years. Pulling in the opposite direction were net revenues from tourism, which increased by ISK 2bn, and net expenditures relating to “other business services”, which declined by almost ISK 7bn. The latter item includes leasing of aircraft and other transport vehicles. WOW Air downsized its fleet of aircraft substantially at the turn of the year, which presumably plays a major role in the improvement in this item year-to-date.
Even though Q1/2019 saw a nearly 5% YoY decline in tourist arrivals, tourists’ spending increased by nearly ISK 5bn between years, to over ISK 66bn. Offsetting this in part was an increase of ISK 3bn in Icelandic travellers’ spending abroad, to a total of more than ISK 41bn. In sum, the services account balance in connection with passenger transport by air and tourists’ spending at their destination was positive by ISK 49bn in Q1/2019, down from ISK 53bn in the same quarter of 2018. In our opinion, this reflects the depreciation of the ISK in H2/2018, as the relative weakness of the currency has caused a marked increase in the ISK value of tourist spending.
Aircraft sales pretty up the goods account
SI’s measurements of two key current account components for Q1/2019 are now available. As is stated above, the services account was in surplus by nearly ISK 30bn during the period. But in a new twist, the goods account showed a surplus over the same period — for the first time in four years. The surplus on goods trade measured ISK 3.5bn, thanks for the most part to ISK 19bn in export revenues from the sale of WOW Air’s fleet at the turn of the year. Excluding transactions with ships and aircraft, the balance on goods was negative by nearly ISK 22bn in Q1/2019.
The Central Bank (CBI) will publish figures on Iceland’s Q1/2019 balance of payments and external position a week from now. In view of the figures above, we think it probable that those figures will show a relatively large surplus on the current account. In Q1/2018, the surplus measured ISK 6bn, but a quick perusal suggests that this year’s Q1 surplus could range anywhere from ISK 20bn to ISK 30bn. But it is virtually a given that the party will be over once Q2 current account figures come in and the full impact of WOW Air’s implosion comes to the fore.
On the whole, we think 2019 will show a slight current account surplus, but a much smaller one than the ISK 81bn we saw in 2018. The main underlying factor, of course, is the YoY plunge in tourism revenues, although the failure of this year’s capelin catch plays a role as well. On the other hand, tourism-related expenditures will fall markedly between years, and exports of groundfish and aluminium will probably generate more revenue in ISK terms than they did in 2018.