ICELAND: An Introduction

Overview 

General introduction 

Iceland is a parliamentary republic and a member of several international organisations. Iceland is a part of the EU’s internal market through the agreement on the European Economic Area. As such, the country incorporates directives and regulations concerning the ‘four freedoms’ of the EU into its national legislation.

In the World Bank Group’s report “Doing Business 2018”, Iceland is ranked number 23 in ease of doing business, out of 190 economies.

The economic climate 

The economic climate of Iceland is generally in good order, as the foundations of the economy are strong. Iceland benefits from its rich natural resources, low unemployment, trade surplus, modern infrastructure and good educational system.

The Icelandic economy suffered severe shocks in the aftermath of the collapse of the country’s three largest banks in 2008. That resulted in, inter alia, the country’s GDP falling considerably, inflation peaking and companies being delisted from the stock exchange operated by NASDAQ OMX Iceland. Iceland has, however, experienced a robust economic recovery since then and the general view of analysts is that the Icelandic economy is stabilising.

The growth of GDP in 2016 was 7.4.%. GDP growth for the year 2017 is forecast at 4.9%, and 3.1% in 2018. The unemployment rate in Iceland for the year 2016 was 3%.

Iceland has historically been reliant on fisheries and fish processing and in more recent years on its renewable energy resources powering heavy industries. Iceland’s largest manufacturing industry by far is energy-intensive industry, mainly the aluminium industry, which has increased considerably over the past decade. Tourism has now firmly established itself as a pillar of economic growth and Iceland once again saw a record number of tourists in 2017 with approximately 24.2% increase from the previous year. There are also opportunities in the field of technology, notably data services, and global companies have taken an interest in Iceland’s relatively low electricity prices and renewable energy.

In recent years there has been an increase in listings on the NASDAQ OMX Iceland. There was, however, only one new listing on the market in 2017 when Klappir, which develops, sells and implements software solutions in the environmental field, was listed on NASDAQ First North Iceland. The reason for the low number of listings on the market can largely be attributed to the collapse of the government in September.

The legal market 

Iceland has a well-developed and transparent legal system based on civil law tradition. The country has a relatively stable legal market, dominated by domestic firms varying in size and expertise. Securities transactions, corporate work and M&A activity has gradually been picking up after a few years of less activity in that field.

Going forward 

Among the main macroeconomic challenges that Iceland now faces are the indebtedness of the state and issues related to the volatile domestic currency. While progress has been made towards fiscal balance every year since 2009, the Icelandic state remains heavily indebted and will be so for the foreseeable future.

A major step towards fiscal responsibility was taken in December of 2015. A new Act on public finances was passed which introduces an obligation to the government to produce a five-year plan which may not run a deficit. The annual budget must never run over 2.5% deficit and must be within the confines of the five-year plan. The five-year plan now includes a decrease of indebtedness from 28% of annual GDP in 2018 down to 21% by 2022.

Since the Icelandic banking system collapsed in the autumn of 2008, foreign exchange transactions were subject to capital controls in some form. The purpose of the capital controls was to temporarily restrict or prohibit certain types of cross-border capital movements, or related foreign exchange transactions that may potentially cause serious and substantial monetary and exchange rate instability in Iceland.

The capital controls were not intended to last indefinitely. In June 2015, the Icelandic government introduced a plan on the lifting of capital controls. The first steps towards lifting the controls were taken in late 2015. In October 2016, further steps were taken when the withdrawing, transferring or investing of up to ISK100,000,000 in foreign currency were allowed without restrictions. Furthermore, restrictions of outbound direct investment in non-Icelandic businesses and real estate were removed for the most part.

With Rules on Foreign Exchange no. 200/2017, which took effect in March 2017, most restrictions on foreign exchange transactions and cross-border movement of domestic and foreign currency were lifted. From that time, businesses and households have in general been unaffected by the restrictions. The requirement that foreign currency be repatriated was lifted as well. The rules also provided for authorisation of foreign investment by pension funds, funds for collective investments and other investors in excess of the maximum amount stated in the Foreign Exchange Act, which until then had been subject to explicit exemptions by the Central Bank. However, the status of ISK-denominated assets subject to special restrictions according to Act no. 37/2016 remains unchanged.

Even though most restrictions were lifted, some are still in place with the aim of reducing the likelihood of carry trade regarding investments in connection with new inflows of foreign currency. These restrictions concern derivatives trading for purposes other than hedging, foreign exchange transactions carried out between residents and non-residents without the intermediation of a financial undertaking, and in certain instances, foreign-denominated lending by residents to non-residents.

In general, the Icelandic market is open for investors and unrestricted; however, some limitations apply to specific sectors according to the Act on Investment by Non-residents in Iceland no. 34/1991, namely fishing, primary fish processing, energy production and aviation.

Iceland has systematically made its business environment increasingly attractive for investment and location. The macroeconomic situation is improving and financial concerns are easing. Iceland continues to benefit from a number of clear competitive strengths in moving towards a more sustainable economic situation.