Iceland – Economic Outlook - Government
Transcript of Iceland – Economic Outlook - Government
Successful Bond Issuance Eurobond issuance in the amount of 750 million with 0% coupon
Maturity in April 2028 – fits well into maturity profile of outstanding debt
Bonds were issued at a yield of 0,117% - 48 bps over Midswaps
Terms improved by 12 bps from the initial price guidance in book building process
Well received by investors with demand totaling 3.5 bn. EUR – more than 4x issued amount
The buyer group included over 150 investors mainly from Northern-Europe
Investor group: banks, insurance companies and other institutional investors
Joint lead managers were Citibank, Barclays, and Deutsche Bank
COVID-19: Successful health responseAs of January, Iceland has the lowest number of new COVID-19 cases per capita in Europe. Testing, contact tracing and quarantines have been pivotal.
Source: Macrobond.
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New COVID-19 cases now among the lowest in OECDNew diagnosed COVID-19 cases per 100,000 population, 14 day cumulative
OECD interquartile range Iceland OECD median
More targeted approach has benefitsRestrictions on activity have been less severe than in most developed economies. Unlike many peers, lockdowns have not been necessary.
Source: Macrobond.
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Stringency of containment effort relatively low in international comparisonOxford University Government Response Stringency Index (0-100)
OECD interquartile range Iceland OECD median
Iceland entered the downturn from a favorable starting positionIceland’s track record of high and sustainable growth, underpinned by a strong resource base, sound policies, favorable demographics and strong human capital, is a cause for optimism.
Germany
France
Italy
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DenmarkSweden
Iceland
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Iceland had experienced strong growth in recent years in comparison with peersGDP, 2010 = 100
Forecast
Source: Statistics Iceland (2010-2019 historical figures for Iceland), IMF WEO October 2020 (2020-2021 forecasts, 2010-2019 historical figures for other countries).
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Foreign exchange reserves are at a comfortable 30% of GDPCentral bank FX reserves, bn. USD
Very strong external position provides policy buffers
Source: Macrobond, Central Bank of Iceland. NIIP excludes depositary institutions in winding-up proceedings.
FX sales in recent months only a
fraction of reserves
-250%
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-50%
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Large current account surplus has contributed to significant strengthening of NIIPNet international investment position, % of GDP
2020Q3:33% of GDP
Strong bank capital and liquidity buffersCapital adequacy ratios of systematically important banks well above requirements and the banks have ample liquidity to support the economy.
Source: Central Bank of Iceland. In right figure, 2020 value is Q3.
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22%25%
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Arion Bank hf. Íslandsbanki hf. Landsbankinn hf.
All largest banks comfortably above capital requirementsD-SIB capital requirements and CARs, 2020Q2
Pillar I Pillar II
Capital buffers Management buffers
CAR
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Bank capital adequacy ratios high in European comparisonAverage tier 1 capital ratios
Icelandic SIBs Large banks, Nordics
Large banks, Europe
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Domestic consumption of Icelanders has been strongDomestic payment card turnover, real growthy-o-y, 14 day average
Private consumption has reboundedDomestic spending grew once pandemic subsided. Economic policy response and reorientation of spending from tourism abroad to domestic goods and services also help.
Source: Eurostat, Central Bank of Iceland, Ministry of Finance and Economic Affairs.
Thanks to containment of pandemic, consumption recovery has persisted into the new year
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Private consumption has been stronger than in peersY-o-y change in quarterly private consumption
2020Q2 2020Q3 Iceland, 2020Q3
Firm recovery expected to begin this yearStrong GDP growth this year expected by IMF (4.1%), Central Bank of Iceland (2.3%) and Statistics Iceland (3.9%), supported by strong fiscal and monetary policy response.
Source: Statistics Iceland actuals and October 2020 forecast.
4,5% 3,9%1,9%
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Statistics Iceland forecast, OctoberContributions to GDP growth
Private consumption Public consumptionCapital formation ExportsImports GDP
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2019 GDP level expected to be surpassed in 2023Bn. ISK, 2020 prices
Actuals Forecast
Unemployment has risen as expectedSigns that tide in labor market is shifting, with unemployment rising less in December than anticipated and more companies now intending to hire than lay off staff.
Source: Directorate of Labour, Central Bank of Iceland.
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Rise in unemployment is tapering off
of which related to partial employment schemeUnemployment
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More companies now intend to hire than lay off staff% of firms intending to increase staff minus % of firms intending to decrease staff, next 6 months
September 2020 December 2020
Inflation and unemployment expected to decline in 2021
Source for left figure: Statistics Iceland actuals (2000-2020), Statistics Iceland October forecast (2021-2022).Source for right figure: Statistics Iceland actuals (2019), Statistics Iceland October forecast (2020-2023).
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Inflation expected to be much lower than in previous downturns and to rapidly approach target this year
Inflation target (2.5%)
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6,8%6,2%
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Unemployment expected to start to decline this year
Bridge the gap for businesses
Protect vulnerable households
Facilitate a strong rebound
11. Closure subsidies12. Support loans13. Netting of income tax
14. Mental health, remote medicine15. Protection of vulnerable groups16. Special subsidies
17. Boosting innovation18. Summer measures for students19. Effective job-seeking20. Domestic value creation
Phase I (March) Phase II (April)
1. Part-time employment2. Bridge loans to companies3. Deferral of tax payments
4. Wages during quarantine5. Supplemental child benefit6. Private pension withdrawals
7. Subsidy for tourism operators8. VAT refund in construction9. Facilitation of imports10. Investment initiative
21. Income loss grant
22. Extension of Income-relatedunemployment benefits
23. Tax incentive for business investment24. Resilience grant
Phase III (November)
Measures were swiftly introduced to mitigate the economic effects of the crisis
Initiatives in tourism• Marketing campaign abroad once situation
normalizes will highlight Iceland’s strengths as a tourist destination.
Large increase in investment• A government investment boost of 4% of
2020 GDP over the years 2020-2025.
• Emphasis on labor-intensive projects which support long-run productivity.
• Business investment also supported through tax measures.
Boosting innovation• Additional contribution to companies
investing in growth.
• Expediated reimbursements for R&D investments
• In total, a 65% increase in contributions to innovation between 2019 and 2021.
A clear focus on the longer run
Support to R&D has been doubled
Source: Ministry of Finance and Economic Affairs.
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Clear focus on innovation with significant strengthening of government supportMillion ISK, 2021 prices
Tax deduction for R&D EU support for education, research and technical development
Icelandic Research Fund Technology Development Fund
Kría, the Icelandic Venture Initiative Tax support for filmmaking
Other
1% of GDPin 2021