THE ICELANDIC ECONOMY AN IMPRESSIVE RECOVERY BUT WHAT CHALLENGES LIE AHEAD?

Transcription

1 THE ICELANDIC ECONOMY AN IMPRESSIVE RECOVERY BUT WHAT CHALLENGES LIE AHEAD?

2 FROM BUST TO BOOM.

3 AN EPIC BUST After 16 years of growth with a short pause for breath in 2002, the Icelandic economy entered one of it s worst recessions in Icelandic banks and other domestic companies had enjoyed access to what seemed to be unlimited foreign borrowing. High domestic interest rates attracted inflow of foreign capital that resulted in overvalued Icelandic krona (ISK) and double digit current account deficit. Following the global liquidity crisis, there was a sudden stop in the economy. Foreign borrowing dried up and inflow of capital reversed to outflow. Nearly all the Icelandic banks collapsed and with them a significant portion of the corporate sector. The government imposed capital controls to stop the outflow of capital. The ISK lost 50% of its value and inflation went up to 19%. Private debt shot up to 420% of GDP in Government debt went up by 50% of GDP. Hopefully there will be scope to pay down debt in the coming years.

4 THE ECONOMY HAS RECOVERED Recovery time frame: The economy back to prev. GDP level in 6 years 1983: 2 years 1967: 4 years 1991: 4 years 2008: 6 years Post-crisis development in GDP - Index = 100 in t t+1 t+2 t+3 t+4 t+5 t Iceland Euro area US UK Source: IMF, Statistic Iceland

5 TOURISM DRIVING THE ECONOMIC RECOVERY Drivers of economic growth - vísitala = 100 árið % 4% Current account balance - As % of GDP [VALUE] % 0% -2% -1% % -3% -3% 80-6% % -10% Domestic consumption Export of services Export of goods GDP -12% -11% Sources: Central Bank of Iceland, Statistics Iceland

6 INLFATION HAS COME DOWN AND SO HAS UNEMPLOYMENT 20 Inflation -yoy since March % Unemployment 18 9% 16 8% 14 7% 12 6% 10 5% 8 4% 6 3% 4 2% 2 1% 0 0% Sources: Central Bank of Iceland, Statistics Iceland

7 PRIVATE SECTOR DELEVERAGING 160 Household debt - as % of GDP 350 Corporate debt - as % of GDP Denmark Ireland Greece Spain Denmark Ireland Greece Spain Sweden UK Norway Iceland Sweden UK Norway Iceland sources: Macrobond

8 NET FOREIGN ASSETS ARE POSITIVE 20% Net foreign asset position - as % of GDP, after 2008 without DMBs 0% -20% -40% -60% -80% -100% -120% Sources: Central Bank of Iceland, Statistics Iceland

9 NET FX-RESERVES TURNING POSITIVE 300 Net FX reserves - in billion ISK Today sources: Central Bank of Iceland, Statistics Iceland

10 GOVERNMENT BUDGET - FROM BOTTOM TO THE TOP IN SEX YEARS Norway Hong Kong Switzerland Singapore Sweden New-Zealand Estonia Finland Denmark Germany Malta Canada Australia Italy Austria Slovenia Netherland Belgium Czech Republic Cyper OECD Taiwan Isreal France Latvia Slovakia Lithuania Iceland Portugal Japan UK Spain USA Ireland Greece 2009: Government balance -as % of GDP 2015: Government balance -as % of GDP Norway Hong Kong Singapore Germany Iceland New Zealand Switzerland Estonia Greece Cyper Sweden Latvia Lithuania Netherland Czech Republic OECD Canada Austria Malta Taivan Denmark Ireland Finland Slovakia Italy Belgium Portugal Australia Isreal France Slovenia USA Spáin UK Japan source: IMG

11 ALL BOXES TICKED FOR CAPITAL CONTROL EASING Economic stability restored. Inflation below target; fiscal budget balanced and current account surplus. Economic outlook positive. Strong GDP growth forecasted Sound financial system. Strong equity ratio, clean balance sheets and strong liquidity. Private sector recovering fast. Companies and households have reduced debt levels significantly. Similar to pre-boom levels of The budget has been balanced. Government debt will be reduced over the coming years. All IMF loans have been repaid ahead of schedule. Access to international credit markets restored. Improved credit rating and lower yields for both public and private debt. Foreign reserves are increasing fast. Net reserves at 180 billion ISK today. Up from net position of almost -300 billion ISK only 6 years ago. High interest differential to Europe and US. A further weakening of the exchange rate unlikely in relation to easing of capital controls.

12 THE PLAN TO LIFT CAPITAL CONTROLS Fallen Banks Domestic Investors Old Carry trade

13 BUT THE BANKS WERE NOT THE SOLE CAUSE OF THE RECESSION IN 2008

14 THE ICELANDIC WAY TO INCREASED PURCHASING POWER 7 6 The Nordic countries: Changes in wages, inflation and real purchasing power - average yoy from Nominal wages Inflation Purchasing power Iceland Denmark Finland Norway Sweden Source: Economic Division Business Iceland

15 BUT ALSO HIGHER INFLATION AND POLICY RATES The Nordic countries: Policy rate and inflation - average from Policy rate Inflation 0 Iceland Denmark Finland Norway Sweden Source: Economic Division Business Iceland

16 AND AN UNSUSTAINABLE REAL EXCHANGE RATE 140 Real exchange rate - Index 2000 = % Current account balance - as % of GDP, after 2008 without DMBs 130 5% Average % -5% -10% Average Equilibrium real exchange rate -15% -20% 50-25% % Real exchange rate that supports a current account balance Sources: Economic Division of Business Iceland, Central Bank of Iceland

17 TO FUEL INSTABILITY FURTHER FISCAL POLICY HAS BEEN PROCYCLICAL MORE OFTEN THAN NOT Fiscal Stabilization Coefficients - The higher coefficient the more countercyclical Fiscal policy 2,0 1,8 1,6 1,4 1,2 1,0 0,8 0,6 0,4 0,2 0,0 If stabilization coefficient = 1; then when the output increases above potential by 1% of GDP then the government balance increases by 1% of GDP. source: IMF

18 THIS LEADS TO INSTABILITY IN PRICES 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 OECD: Price fluctuation (%) - Stdev CPI in Source: IMF

19 AND GROWTH 8 OECD: GDP fluctuation (%) - stdev GDP from Source: IMF

20 AND OF COURSE INTEREST RATES Iceland UK USA Nordic countries Euro area Standard deviation Nominal policy rate , % 0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,5 4,0 Nominal policy rate, % Iceland Nordic countries Euro area UK USA Source: IMF

21 NOT TO FORGET THE EXCHANGE RATE 140% ISK vs USD - Change in annual average 120% 100% % 60% % 20% 0% % sources: Statistics Iceland, Central bank of Iceland

22 PRODUCTIVITY IN ICLEAND IS LOW GDP per hour worked in OECD countries USA=100 source: OECD

23 AND PRODUCTIVITY GROWTH HAS SLOWED Changes in productivity of labor

24 EXPORT INDUSTRIES COULD DIVERSITY BE MORE? 350 Export products in Iceland - In ISK billion, fixed prices Export (%) - as % of total export Other export Export tied to natural resources Sjávarafurðir Afurðir orkufreks iðnaðar Ferðaþjónusta Sources: Statistics Iceland, Economic Division of Business Iceland

25 THE FOCUS SHOULD BE ON THE EXPORT INDUSTRY % The Nordic countries: Export on goods and services - As % of GDP 37% 36% 34% 34% 53% 6% 4% 2% 0% -2% -4% -6% -1% Iceland: Current account balance - as % of GDP -3% -3% [VALUE] 10-8% Iceland Denmark Norway Sweden Finland -10% -12% -11% source: Macrobond,

26 THE RECOVERY HAS BEEN IMPRESSIVE BUT STRUCTURAL REFORMS HAVE NOT BEEN ADDRESSED

27 WAGES ARE RISING AT UNSUSTAINABLE LEVELS 130 Public sector vs. private sector: Wages - index = 100 in December Total Public sector Private sector CB s estimation of what wages can increase without risking price stability Dec-13 Feb-14 Apr-14 Jun-14 Aug-14 Oct-14 Dec-14 Feb-15 Apr-15 Jun-15 Aug-15 Oct-15 Dec-15 Source: Business Iceland

28 OVERVALUED KRONA AGAIN NOT LONG UNTIL WE REACH THE 2007 LEVEL Real exchange rate 1 - Index = 100 in 2000, relative UCL Average from Equilibrium real exchange rate 2 Average from Estimate RER from based on contractual agreements and 5% appreciation of the nominal exchange rate. 2 Real exchange rate that coordinates with positive current account balance Sources: Central bank of Iceland, Economic Division Business Iceland

29 WAGE FUELLED INFLATION IN THE PIPELINE? Consumer price index from yoy changes 10% +15% 8% 6% 4% 2% 0% -2% -4% -6% -8% Jan-10 Jun-10 Nov-10 Apr-11 Sep-11 Feb-12 Jul-12 Dec-12 May-13 Oct-13 Mar-14 Aug-14 Jan-15 Jun-15 CPI Domestic goods Imported goods Sources: Statistics Iceland

30 FISCAL POLICY: GOVERNMENT EXPENDITURE ON THE RISE AGAIN Government expenditure per capita 1 - Index = 100 in 2003, real value of expenditure excl. unregular expenditure Government austerity Unregula expenditure: accrued state guarantees, lost claims, depreciation tax claims, donation to Housing Financing Fund anunemployment expenditure sources: Ministry of Finance

31 FISCAL POLICY: THE PROBLEM LIES ON THE EXPENDITURE SIDE Government expenditure:from the proposal to the final results - index=100 budget proposal 1 34% 32% Budget proposal Final result Government expenditure - as % of GDP % % % 98 24% 96 22% 94 Budget proposal Government budget supplementary budget Government Accounts 20% Average Average changes per year from , excl and 2009 sources: Government budget proposal every year, estimated by Economic Division Business Iceland

32 THE CENTRAL BANK RESPONDS IN A FAMILIAR MANNER Nominal policy rate (%) source: Central bank of Iceland

33 AND CARRY TRADE INVESTORS ARE BACK 12 Interest rates differential: 10Y gov.bonds Carry trade: Foreign owners of government bond - in billion ISK 10 Germany Spain Government published plan to lift the capital controls Jan-15 Mar-15 May-15 Jul-15 Sep-15 changes from prev. Month cumulatively from January 2015 source: Macrobond

34 MONEY SUPPLY GROWING AGAIN SO WILL THE CREDIT 80 Money suplly and domestic bank credit - 12M changes 60 M3 Credit in real terms Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Source: Central bank of Iceland

35 STRUCTURAL REFORMS REQUIRED Monetary Policy GOAL: The labor market supports the monetary policy by negotiating wages in line with productivity growth and inflation target. REALITY: Wage increases have on average been far higher than in neighboring countries, putting both inflation and exchange rate under pressure. GOAL: Fiscal policy must support the monetary policy in slowing down or inducing growth, depending on economic cycles. REALITY: Fiscal policy has been more prothan counter cyclical increasing the pressure on the monetary policy in times of economic growth. LABOR MARKET FISCAL POLICY GOAL: Balance between public and private sector in wage increases REALITY: No coordination between markets, no consensus on the leeway for wage increases and limited regard to economic impact of wage policy