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Iceland Country Risk Report Q1 2016

Iceland Country Risk Report Q1 2016

Core Views

We expect divisions in Icelandic politics to become more stark asthe schisms exposed by the country's response to the migrant crisisand Paris terror attacks comes to the fore. An initially welcomingstance has moderated following the Paris attacks, and we expectto see rhetoric from the pro-immigration Pirate Party and the morereticent Progressive Party wing of the coalition government escalatefurther.

Strong high-frequency economic indicators have prompted us torevise up our forecasts for Iceland's real GDP growth for 2016 and2017. The economy remains on a solid footing, driven by a sustainedrebound in domestic demand, with private consumption being themain driver of growth in the coming quarters.

Inflationary pressure will build in 2016 from rising wages and foreignexchange pass through. This will necessitate continued tightening bythe Central Bank of Iceland, underpinning our forecast for the mainmonetary policy rate to rise to 7.00% by end-2016, from 5.75% atend-2015.

Major Forecast Changes

Whereas previously we expected real GDP growth of 3.5% for 2015and 3.1% for 2016, we now estimate 4.1% growth in 2015 and 3.8%in 2016 on account of stronger high-frequency indicator readings inH215.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Political Divisions To Widen Over Migrant Crisis
We expect divisions in Icelandic politics to become increasingly stark as the schisms exposed by the country's response to the migrant
crisis and Paris terror attacks come to the fore. An initially welcoming stance has moderated following the Paris attacks, and we expect
to see rhetoric from the pro-immigration Pirate Party and the more reticent Progressive Party wing of the coalition government escalate
further.
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 very 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 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Rebound On A Solid Footing
Strong high-frequency economic indicators have prompted us to revise up our forecasts for Iceland's real GDP growth for 2016 and
2017. The economy remains on a solid footing, driven by sustained rebound in domestic demand, with private consumption being the
main driver of growth in the coming quarters.
Monetary Policy
Rising Inflation In 2016 Necessitating Hawkishness
Inflationary pressure will build in 2016 due to rising wages and foreign exchange pass through from króna weakness. This will
necessitate continued tightening by the Central Bank of Iceland, underpinning our forecast for its main monetary policy rate to rise to
7.00% by end-2016, from 5.75% at end-2015.
Chapter 3: 10-Year Forecast
The Icelandic Economy To 2024
Settling Into More Moderate Long-Term Growth Trend
Iceland's Real GDP growth over our the 10 years to 2024 is forecast to average 2.2%. This is lower than the 4.7% in the decade to
2007, but higher than our 2015-2024 eurozone average forecast of 1.4%. However, population growth rather than productivity gains will
be the major driver of economic expansion.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: BMI Global Macro Outlook
Global Outlook
Emerging Markets Bending, Not Breaking
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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