S&P Global Ratings Revises Iceland‘s Outlook to Positive; Affirms at 'A/A-1'

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The Republic of Iceland – Government Debt Management
The Republic of Iceland – Government Debt Management

S&P Global Ratings has revised the rating outlook to for Iceland to positive from stable and affirmed Iceland‘s sovereign ratings at A/A-1.

According to S&P, strong ongoing economic recovery from pandemic fallout, alongside continued fiscal consolidation over the next few years, will improve Iceland's public finances beyond S&P‘s previous expectations. S&P expects high domestic demand and the ongoing recovery of tourism to result in real GDP growth of 3.3% this year and an average of 2.4% in 2024-2026. Iceland has effectively managed external pressures, and the country's extensive energy independence has shielded the country from the fallout of the Russia-Ukraine conflict according to the agency. S&P has therefore revised the outlook on Iceland to positive from stable.

The positive outlook reflects S&P‘s view that Iceland's fiscal outlook or its ability to withstand external shocks will continue to improve, potentially beyond S&P‘s expectations, over the next 24 months.

S&P could raise the ratings if Iceland's public finances improved more than anticipated, either via narrower deficits and lower net public debt, or a decrease in the government's contingent liabilities. The ratings could also be raised if S&P considered that the country's ability to withstand external shocks had improved. This could be a result of stronger export growth, with exports becoming more diversified, resulting in a reduction of net external debt, and potential volatility in Iceland's terms of trade.

The outlook could be revised to stable if fiscal or external performance worsened significantly below expectations. Such a scenario would likely coincide with lower-than-expected economic growth. This could stem from, for example, decelerated economic activity in Iceland's main trading partners in Europe or a shift in global travel preferences that hinders the ongoing recovery of the country's tourism sector.