Moody’s Ratings upgrades Iceland’s ratings to A1, changes outlook to stable
20 September 2024 - 10:15PM
UK Regulatory
Moody’s Ratings upgrades Iceland’s ratings to A1, changes outlook
to stable
Moody’s Ratings (Moody's) has upgraded the local
and foreign-currency long-term issuer ratings of the Government of
Iceland to A1 from A2 and changed the outlook to stable from
positive.
The key driver for the upgrade is the
government’s improving fiscal metrics, which Moody´s expects to
continue, with a sizeable reduction in the budget deficit and a
clearly established downward trend in the government debt ratio
since a recent peak in 2020. Moody’s expects the budget deficit to
decline broadly in line with the government’s medium-term plans,
which the rating agency considers credible.
A consensual settlement of the HF Fund’s (A2
positive) liabilities, which are included in government debt, and
renewed sales of government held bank shares will likely result in
additional one-off reductions in the debt ratio, in addition
to an underlying declining trend. Secondly, tight monetary and
fiscal policy has started to moderate elevated inflation, which
supports Moody´s assessment of Iceland’s strong institutions and
pro-active and well-coordinated policy stance.
Iceland's medium-term fiscal policy framework
has been a credit strength, ensuring fiscal sustainability and the
creation of fiscal space over time since its introduction in 2015.
The fact that the authorities are now considering to replace the
current balanced budget rule with an expenditure rule is credit
positive, as such a change would strengthen the framework further
by contributing more strongly to macroeconomic stability.
The stable outlook reflects balanced risks at
the A1 rating level. Moody´s expects fiscal consolidation to
continue over the coming years broadly as planned in the
medium-term fiscal plan. The economy is expected to return to
robust growth next year, after a temporary slowdown this year as
the tight monetary and fiscal policy cool the previously overheated
economy. The sovereign’s economic and fiscal metrics may improve
faster than Moody´s currently expects. At the same time, Iceland
remains a small and comparatively undiversified economy, sensitive
to sector-specific shocks. Also, its debt ratio and debt
affordability metrics remain weaker than close peers at the same
rating level, making fiscal strength relatively sensitive to
shocks.
The rating could be upgraded further if the
government debt ratio continued to decline much faster than under
Moody´s baseline assumptions and debt affordability metrics aligned
with higher-rated peers. The rating could also be upgraded if the
ongoing economic diversification efforts yielded stronger results
in terms of reducing volatility of economic growth.
Conversely, the rating would come under downward
pressure if the government deviated significantly from its
medium-term fiscal plans, resulting in a material increase in the
public debt ratio with no indication of a timely correction.
Further information on www.government.is