Market analysts Moody’s view Iceland’s economy positively, but still have their misgivings.
In a statement from the company, “Iceland’s creditworthiness supported by improving economy and public finances, but capital account liberalisation risks remain”, they opened by noting the positive aspects of Iceland’s recovery:
The post-crisis recovery is under way and Iceland’s short-term growth outlook is relatively favourable, although growth has moderated in the last year. Over the medium term, Iceland’s growth prospects depend crucially on the outlook for investment, which is in turn largely dependent on the speed with which the extensive capital controls are removed.
Moody’s assesses Iceland’s institutional strength as high, given the significant progress that the authorities have made in bringing the economy, the financial system and the public finances back onto a sustainable path. The government has implemented important changes to its institutions and to the banking sector’s regulatory framework so as to avoid another crisis.
Moody’s is not without their reservations, however:
A material reduction in the debt burden in the coming years will depend on the ability of government to further strengthen the country’s fiscal position and run consistent and substantial primary surpluses. In addition, the government’s contingent liabilities are very large and mainly arise from its guarantee for Housing Financing Fund liabilities.
Susceptibility to event risk is assessed as moderate, mainly reflecting the risks emanating from the process of capital control liberalisation. As the size of potential capital outflows is substantial, the risk of too rapid a loosening in capital controls remains the key event risk for Iceland in Moody’s view.
Most interestingly, Moody’s contends that they believe “the banking system should be able to withstand the relaxation of capital controls”. Relaxing capital controls was one of the Independence Party’s major campaign promises.
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