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Iceland Country Risk Report 2016

Iceland Country Risk Report 2016

Core Views Despite the rapid rise in popularity of Iceland’s anti-establishment Pirate Party, we remain sceptical it will win power in the April 2017 general elections. Instead, the Pirates’ popularity will prompt the ruling coalition to pursue a more expansionary fiscal policy in 2016, which will allow it to regain public support. Iceland’s economic rebound will slow modestly in 2016, due to weaker demand from the eurozone and rising uncertainty around the lifting of capital controls this year. The Icelandic krona will come under pressure with the start of capital account liberalisation in the next few months. Krona depreciation will add to rising wage-pull inflationary pressures in H116, warranting monetary tightening, which will stabilise the currency in H216.


Executive Summary
Core Views
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Rebound To Remain In Place, But To Slow Down
Iceland's economic rebound will slow modestly in 2016, due to stagnant external demand and rising uncertainty around the lifting of
capital controls this year.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
Monetary Policy
Gradual Lifting Of Capital Controls To Ensure Inflation And FX Stability
The Icelandic krona will come under pressure with the start of capital account liberalisation in the coming months. Krona depreciation
will add to rising wage-pull inflationary pressures in H116, warranting monetary tightening, which will stabilise the currency in H216.
TABLE: NET EXPORTS FORECASTS
Monetary Policy Framework
Chapter 2: 10-Year Forecast
The Icelandic Economy To 2025
Settling Into More Moderate Long-Term Growth Trend
Real GDP growth over our 10 year forecast period is forecast to average 2.2 . This is lower than the 4.7% in the decade to 2007, but
higher than our 2015-2025 eurozone average forecast of 1.4%. However, population growth rather than productivity gains will be a
major driver of economic expansion.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Pirate Party Popularity To Prompt Fiscal Expansion
Despite the rapid rise in popularity of Iceland's anti-establishment Pirate Party, we remain sceptical that it will win power in the April
2017 general elections. Instead, the Pirates' popularity will prompt the ruling coalition to pursue a more expansionary fiscal policy in
2016, which will allow it to regain public support.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Few Major Threats On the Horizon
Over our 10-year forecast period we see Iceland enjoying a high degree of political stability, given a solid security environment, few
societal dividing lines and a high standard of living. Uncertainty over how and when the government will normalise the country's
economic situation weighs on political continuity, but Iceland will likely remain in the top 20 politically stable countries globally.
Chapter 4:BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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