Iceland Economic Outlook

Transcription

1 Iceland Economic Outlook Fridrik M. Baldursson IACC Conference New York, April

2 What happened in Iceland? Banking sector grew to 10 x GDP in 2008 GDP on order of 10 bn Banks were allowed to collapse in first week of October 2008 Emergency legislation passed right before the first bank collapsed Domestic part ring-fenced in new banks Assets and liabilities (deposits) transferred All deposits in Icelandic branches fully covered Assets in excess of liabilities shall be paid out to old banks Creditors (international and Icelandic) left with claims to international assets of old banks Recovery rate of creditors after deposits in two out of three banks (Kaupthing and Glitnir) on order of 30% Recovery rate of creditors in Landsbanki much lower, perhaps 10% or less because of higher share of deposits Overall recovery higher, perhaps about 60-65%

3 US cents / krona Banking crisis currency crisis US cents to 1 krona

4 Devaluation of krona CPI inflation

5 Domestic debt Private sector was highly indebted Precrisis levels: Corporate debt 300% of GDP (US 73%) Household debt 225% of disposable income (US 130%) Much foreign-currency denomiated debt 65% of bank lending to corporations 25% of bank lending to households Most longer-term krona debt is indexed to CPI E.g. all krona housing debt So with collapse of krona most debt shot up

6 % Sharp contraction, higher unemployment 10 Growth 8 Unemployment

7 Asset prices have fallen

8 Debt + Asset prices + Wages + Unemployment = Domestic debt crisis and social unrest pots and pans revolution

9 IMF Program As crisis struck negotiations began immediately with the IMF for two year Stand-By Arrangement Finalized in November 2008 Financing from IMF, Nordic countries, Poland = 5.1 bn USD Three key policy goals Stabilising exchange rate and bringing down inflation Fiscal sustainability Rebuilding the financial sector Quick and efficient workout of debt Recapitalisation of new banks So how are we doing?

10 Monetary and exchange rate policy Stabilising the exchange rate was tackled by Imposing capital controls Setting the policy interest rate at 18% Now: inflation at 2% and policy rate at 4.25% Capital controls still in place Risk of capital flight due to remnants of carry trade Money in search of high yield in But nothing stops Icelandic money from taking flight as well Current plans allow up to five years to lift controls Highly damaging in the longer run Can expect 2-3 years until possible to open

11 % of GDP Public debt (including pension liabilities) (est) Assets Debt Net debt

12 % of GDP Fiscal consolidation on target Overall balance Primary balance

13 Rebuilding the financial sector Important achievements New banks set up, recapitalised, and working Two out of three new banks majority owned by creditors of old banks But debt resolution has proceeded too slowly Important progress made this year Still, 40-50% of corporate loans are non-performing 5-8% of households have serious debt service problems And bank credit is flat Slow progress on financial resolution is one of the main impediments to growth

14 Lack of confidence

15 Iceland should be able to grow The resources are there... Human Natural Infrastructure (physical and social).. and they are underemployed Unemployment at 8-9% Output gap at -4% - overall capacity is underutilized by 4% Prices have never been as competitive and underlying external balance is much better than headline figures indicate Net external debt taking old banks into consideration is 38% of GDP Current account is +12% of GDP

16 Jan-02 May-02 Sep-02 Jan-03 May-03 Sep-03 Jan-04 May-04 Sep-04 Jan-05 May-05 Sep-05 Jan-06 May-06 Sep-06 Jan-07 May-07 Sep-07 Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 Real exchange rate is 25-30% under longterm average (excluding bubble years) Real exchange rate (CPI)

17 Right now we benefit from the commodity boom

18 Outlook Forecasts: 2-3% GDP growth in Driven by growth in Fixed investment (15-20%) Private consumption (2-3%) Exports (2-3%) Government expenditure will continue to contract Unemployment falls (slowly) Inflation 2-2.5% But so far there are only weak signs of renewed growth And lots of uncertainty

19 Risks to the outlook Further delays in repairing balance sheets Resolution process is expected to be over in 2012 Delays to investment projects Icesave issue remains with us after referendum last week and rating agencies are contemplating downgrades May cause difficulty in financing Private consumption Held up in 2010 due to asset effects - many cashed in their pensions Consumer confidence is still very low Global developments