Robust CA surplus and strong IIP in 2018

Iceland’s current account surplus amounted to nearly 3% of GDP last year. While this is the smallest surplus since 2012, it is nevertheless strong in historical context. Furthermore, 2018 was the sixth year in a row to see a sizeable surplus on the current account. Iceland’s external assets net of external liabilities totalled nearly 10% of GDP at the end of the year, and as before, the economy stands on firm ground in international context in this respect.

According to recently published figures from the Central Bank (CBI), the current account surplus measured nearly ISK 300m in Q4/2018.  It had already been established that the goods account showed a deficit of ISK 37bn for the quarter and the services account a surplus of ISK 33.4bn.  The new information, though, was that primary income generated a surplus of ISK 10bn, while secondary income generated a deficit of just over ISK 6bn. This outcome was more favourable than we had expected for the balance on income, and it appears to stem largely from a recorded loss on inward foreign direct investment.

A sea change in the CA balance

The CA surplus for 2018 as a whole totalled ISK 81bn, or 2.9% of GDP. The surplus for 2017 was ISK 95bn, and for the four years prior it averaged ISK 142bn. The shrinking surplus between years is due to a dwindling services account surplus, which measured ISK 246bn in 2018, down from ISK 271bn in 2017. Offsetting this, the goods account deficit narrowed by ISK 5bn, and the surplus on primary income increased by ISK 8bn between years. 

Although the CA surplus contracted year-on-year, this outcome is somewhat more favourable than we had expected (we had projected a surplus of ISK 70-75bn). It is also quite favourable in historical context, as Iceland has rarely sustained a CA surplus so late in the business cycle, and with a real exchange rate as high as it was, on average, last year. During the period from 1970-2010, the current account was in surplus only six times, and in those instances the surplus was much smaller than the average for the last six years. This represents a fundamental improvement for external trade, with the emergence of tourism as the mainstay of export revenues and the improvement in Iceland’s external position.

IIP still strong

The CBI also published figures on Iceland’s international investment position (IIP) at the end of 2018. The net position was positive by ISK 276bn, or 9.9% of GDP, at the year-end. Although this is somewhat weaker than the IIP at the end of Q2/2018 (12.6% of GDP), it is the second-best outcome in Iceland’s economic history, which until this decade has generally been characterised by external liabilities well in excess of external assets. The deterioration of the external position in Q4/2018 was due in very large part to a 13% decline in foreign securities prices during the period, as the majority of pension funds’ foreign assets are in mutual funds and equities. There is comfort to be had, however, as the slide in securities prices has largely reversed in 2019 to date, making it quite likely that the IIP will improve markedly once again.

Surplus and improving external position in the cards for this year

The outlook is for 2019 to be the seventh consecutive year to see a sizeable CA surplus. In our macroeconomic forecast, published in January, we projected a surplus of 2.8% of GDP this year. Since then, the outlook for the tourism and fishing industries has clouded over, but it is possible that import growth will turnout weaker than we projected in January. As before, we expect a surplus for the remainder of the decade, which should then translate to an even greater improvement in the IIP.