Business Monitor International

Iceland Country Risk Report

Published 16 December 2014 | Quarterly

  • 23 pages
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  • Includes 3 free updated quarterly reports
Iceland Country Risk Report

Core Views

  • Recent policy decisions by the current government are jeopardising the sustainability of Iceland's economic recovery.

  • The debt relief plan, passed through parliament in late May 2014, will provide a short-term boost to consumption, at the expense of deteriorating external surpluses and reduced ability to meet external debt obligations.

  • Despite the government set to announce its plan for removing capital controls by end-2014, we expect the process to be drawn out over several years, which will continue to hamper foreign investment into Iceland, capping long-term growth potential.

  • Iceland will remain one of the most politically stable countries globally, even in the face of significant external account uncertainty.

Major Forecast Changes

  • We have revised our inflation and interest rate projections for 2014 and 2015, following the surprise rate cut by the Central Bank of Iceland in November 2014. We are now forecasting the policy rate to drop another 25 basis points in 2015, to 6.50%, although inflation will pick up slightly to average 3.2%, from 2.3% in 2014, driven by a one-off increase in the VAT rate.

Key Risks To Outlook

  • The biggest risk to our forecast is policy trajectory, particularly in terms of how the current government chooses to remove distortive capital controls. Any abrupt lowering of the controls would almost certainly lead to a rapid outflow of capital from the country, triggering a sell-off in the krona and a potential balance of payments crisis. We do not believe that this will happen over the next two years or so, but the potential fall-out is so large that the risk must be acknowledged.

Macroeconomic Forecasts (Iceland 2012-2015)
Indicator 2012 2013 2014f 2015f
Real GDP growth, % y-o-y 1.5 3.3 3.3 3.0
Nominal GDP, USDbn 13.6 14.6 16.3 16.2
Consumer price inflation, % y-o-y, eop 4.2 3.7 2.2 3.0
Exchange rate ISK/USD, eop 128.02 115.18

Table of Contents

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Scandals, Protests Endanger Reform Efforts
Iceland's governing coalition faces increasing pressure as scandals, protests and in-fighting undermine political progress at a crucial
Iceland's governing coalition faces increasing pressure as scandals, protests and in-fighting undermine political progress at a crucial
time for the economy
The current climate generates concerns over whether the government will be able to manage a swift and orderly
withdrawal of capital controls, and this uncertainty remains a key risk to both political and economic stability
Table: Political Overview
Long-Term Political Outlook
Few Major Threats On the Horizon
Over our 10-year forecast period we see Iceland enjoying a high degree of political stability, given a very solid security environment,
Over our 10-year forecast period we see Iceland enjoying a high degree of political stability, given a very solid security environment,
few societal dividing lines and a high standard of living
Uncertainty over how and when the government will normalise the country's
economic situation weighs on political continuity, but Iceland will likely remain in the top 20 politically stable countries globally
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Risks Undermine Short-Term Growth Upswing
Iceland's economic growth is set to accelerate in the short-term, as the government's debt relief plan spurs domestic demand and
Iceland's economic growth is set to accelerate in the short-term, as the government's debt relief plan spurs domestic demand and
construction begins on new investment projects
However, the growth trajectory is undermined by economic imbalances caused
by capital controls, and uncertainty over how and when they will be removed remains the key drag on the country's medium-term
by capital controls, and uncertainty over how and when they will be removed remains the key drag on the country's medium-term
Table: GDP By Expenditure
Monetary Policy
Limited Scope For Further Easing
The Central Bank of Iceland (CBI) faces major challenges as it attempts to oversee monetary policy and maintain economic stability
The Central Bank of Iceland (CBI) faces major challenges as it attempts to oversee monetary policy and maintain economic stability
amid great uncertainty over the planned withdrawal of capital controls
After November's surprise rate cut, we believe there is limited
room for further monetary easing in the coming quarters as slack in the economy disappears
We expect the CBI will continue to
intervene heavily in the FX market to prevent short-term krona appreciation
Table: Monetary Policy
Chapter 3: 10-Year Forecast
The Icelandic Economy To 2023
Settling Into More Moderate Long-Term Growth Trend
Real GDP growth over our 10-year forecast period is forecast to average 2
7% in the decade to 2007, but
higher than our 2014-2023 eurozone average forecast of 1
However, population growth rather than productivity gains will be a
major driver of economic expansion
Table: Long-Term Macroeconomic Forecasts
Chapter 4: BMI Global Assumptions
Global Outlook
Warning Signs Growing
Table: Global Assumptions
Table: Developed States, Real GDP Growth, %
Table: Emerging Markets , Real GDP Growth , %

The Iceland Country Risk Report helps businesses with market assessment, strategic planning and decision making to promote growth and profitability in Iceland and is an essential tool for CEOs, Chairmen, Finance Directors/CFOs, Managing Directors, Marketing/Sales Directors with commercial interests in this emerging market.

An influential new analysis of Iceland's economic, political and financial prospects through end-2019, just published by award-winning forecasters, Business Monitor International (BMI).

Key Uses

  • Forecast the pace and stability of Iceland's economic and industry growth through end-2019.
  • Identify and evaluate adverse political and economic trends, to facilitate risk mitigation.
  • Assess the critical shortcomings of the business environment that pose hidden barriers and costs to corporate profitability.
  • Contextualise Iceland's country risks against regional peers using BMI's country comparative Risk Rankings system.
  • Evaluate external threats to doing business in Iceland, including currency volatility, the commodity price boom and protectionist policies.

The Iceland Country Risk Report by Business Monitor International (BMI) includes four major sections: Economic Outlook, Political Outlook, Business Environment and Key Sector Outlook.

Economic Outlook:

How will the Iceland economic policy-making and performance impact on corporate profitability over 2015-2019?

BMI provides our fully independent 5-year forecasts for Iceland through end-2019 for more than 50 economic and key industry indicators. We evaluate growth, and also forecast the impact of economic management.

Economic Outlook Contents

The Iceland Country Risk Report features BMI's forecasts with supporting analysis for 2015 through to end-2019, set against government views and BMI's evaluation of global and regional prospects.

Key Areas Covered:


  • Full 10-year forecasts with data - for key macroeconomic variables including GDP (real growth and per capita), population, inflation, current account balance and the exchange rate.
  • BMI's comprehensive Risk Rankings system - rates each country worldwide for economic and political risk, and rates the business environment, within a global and regional context.

Written Analysis:

  • Economic Activity - real GDP growth, employment, inflation, consumption (retail sales and confidence).
  • Balance of Payments - trade and investment, current and capital account.
  • Monetary Policy - interest rate trends (bank lending and deposit rates) and inflation (producer price and consumer price).
  • Exchange Rate Policy - currency controls, foreign investment flows, exchange rates and foreign exchange reserves.
  • Fiscal Policy - macroeconomic strategy and policies, government finance and tax reforms.
  • Foreign Direct Investment - approvals, inflows and climate.
  • External Debt - debt profile (short and long-term plus public and private sector exposure).
  • Global Assumptions - forecasts for each year to end-2019 covering: major commodities, growth in key regions, inflation, and interest and exchange rates, in the United States, Japan, China and the eurozone.

Key Benefits

  • Rely upon BMI's 100% independent forecast scenarios for Iceland and underlying assumptions - we take no advertising and are privately-owned.
  • Exploit the benefits of BMI's comprehensive and reliable macroeconomic database on Iceland, sourced and fully maintained by BMI from an extensive network of private sector, government and multilateral contacts.
  • Gain key insights into the current and future direction of government economic policy, which could significantly affect your company's business prospects, from BMI's team of analysts and economists.

Political Outlook:

What are the political risks to doing business in Iceland over the next 5-years?

BMI's Iceland country Risk Rankings evaluate the short- and medium-term threats to political stability.

Political Outlook Contents

  • SWOT Analysis for the Iceland Market - Political Strengths, Weaknesses, Opportunities and Threats facing Iceland.
  • Political Stability and Risk Assessment - BMI's Risk Rankings assess explicit short- and long-term risks to political stability; latest ankings, rankings and trends for Iceland's risk are compared with regional and global averages.
  • Current Administration and Policy-making BMI assesses the threats to the continuity of economic policy, and likely changes to the business operating environment.

Key Benefits

  • Benchmark Iceland's risk profile against its neighbours, the global and regional average, allowing easy comparison of risks between key business markets.
  • Identify, evaluate and anticipate political and security risks to the business environment, and to your company's current operations and future plans.
  • Gain valuable insights into government and policy-making, through BMI's specialist team of analysts and economists, and their network of private and public sector sources.

Business Environment

Business Environment Risk Rankings with SWOT Analysis - Business Environment Risk Rankings for Iceland, benchmarked against rankings for regional neighbours.

Country Competitiveness - Competitiveness of Iceland's business operating environment in supporting corporate growth and profitability, compared with regional neighbours.

Business Environment Contents

  • Domestic Environment - Transparency, cronyism and corruption; labour market flexibility; corporate tax burden; interest rate levels; sophistication of banking sector and stock market; levels of business confidence; infrastructure and IT.
  • Foreign Direct Investment - Analysis of foreign investment regime; foreign ownership laws; attractiveness of business environment to foreign investors.
  • Foreign Trade - Analysis of trading environment, government trade policy, liberalisation measures, tariffs and membership of trade areas.

Key Benefits

  • Assess your company's evolving exposure to country specific operational and business risks, using BMI's in-depth analysis of the legal and regulatory business environment.
  • Understand your market's comparative strengths and weaknesses in the key areas of commercial infrastructure and business institutions, using BMI's proprietary global Business Environment Risk Rankings.

Key Sector Outlook

Which industry sectors in Iceland will grow fastest, and where are the major investment opportunities in the market?

BMI's identifies investment opportunities in Iceland's high growth industries including automotives, defence & security, food & drink, freight transport, infrastructure, oil & gas, pharmaceuticals & healthcare and telecommunications & IT.

Key Areas Covered:

  • Market Overview - Size and value of each industry with developments over 2010-2014, covering major industry key performance indicators (KPIs) that have impacted company performance.
  • 5-year Industry Forecasts - Forecasts for each year over 2015-2019, using BMI's proprietary industry modeling technique, which incorporates all key domestic and international indicators - including economic growth, interest rates, exchange rate outlook, commodity prices and demographic trends - to provide fully integrated forecasts across, and within, each industry.
  • Demand- and Supply-Side Data/Forecasts - BMI's industry data covers both the output of each industry and the domestic demand, offering clear analysis of anticipated import/export trends, as well as capacity growth within each industry.

Key Benefits

  • Target strategic opportunities in high growth industries, which are benefiting from global mega trends, and thus offer strong investment and growth opportunities.
  • Compare the growth path of different industries to identify which are best placed to benefit from domestic and international economic prospects, and which have historically suffered from volatile growth trends - a key indicator of future risks.

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The sections that I find most interesting and useful are the macroeconomic data and forecasts for the country, top export destinations and economic activity. The indicators/analysis of these areas helps us orient our thinking, our assumptions and, consequently, our decisions in the commercial area.

Country Manager, DHL Express