Moody’s Investors Service (MIS) has today upgraded Iceland’s government and issuer ratings to A3 from Baa2. The rating outlook is stable. This rating action concludes the review for upgrade that commenced on June 10, 2016.
The two-notch upgrade of Iceland’s government rating reflects the speed and extent of the country’s recent progress in recovering from its 2008 banking crisis. Sustained growth and fiscal restraint allowed a very sizeable reduction in government debt over the past year, which Moody’s expects to continue and to be sustained with the deployment of the proceeds of the failed banks’ estates over the coming years. Cautious but steady progress in addressing the problems in the banking sector and in relaxing capital controls has considerably reduced the risks to economic and financial stability from the final stages of capital account liberalization.
The stable outlook speaks to the balance of risks that Moody’s foresees for the rating over the next two years. It balances the positive impact of moderate but sustained growth and continued fiscal consolidation against, for example, the residual risks from capital account liberalization, the potential economic and financial pressures associated with substantial capital inflows and tight labor markets, and finally the evolving political dynamics.