Fitch Ratings on Dec. 8 upgraded Iceland's long-term foreign- and local-currency issuer default ratings to A from A- with a stable outlook.
The rating agency cited continued economic growth without excessive macroeconomic imbalances, a continued decline in the public debt ratio coupled with prudent fiscal policy, and the economy's resilience to repayment of external liabilities and lifting of capital controls as reasons for the positive ratings action.
The krona appreciated by 8.1% year over year in November, while foreign exchange reserves remain strong at 7.3 months of external payments, despite falling from 9.3 months at the end of 2016. Moreover, Iceland boasts strong current account surpluses with a five-year average of 5.4%, buoyed by strong growth in tourism activity and favorable terms of trade.
Fitch expects the current account surplus to fall to 2.1% of GDP by 2019 as the import bill increases due to investment growth and private consumption while growth in tourism moderates. The rating agency forecasts GDP growth to fall to 3.3% in 2018 and 2.9% in 2019 from its revised estimate of 4.0% for 2017.
Fitch noted that the government debt-to-GDP ratio continues to drop and is expected to reach 45% of GDP by the end of 2017, down from its 2011 peak of 94.7%. Moreover, Fitch forecasts HICP inflation to increase to 1.0% in 2018 and 2.0% in 2019 due to a decline in imported inflation and higher nominal wages expected from 2018 wage talks.
Debt reduction in the organic budget law has led to sustainability in government debt, and the sale of some government stakes may lead to further improvement in this area.
The rating agency also upgraded Iceland's short-term foreign-currency issuer default ratings to F1 from F2 and affirmed its local-currency issuer default ratings at F1.