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Iceland in Europe

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Iceland Overview

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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 2017”, Iceland is ranked number 20 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 2015 was 4.2%. GDP growth for the year 2016 is forecast at 4.8%, and 4.4% in 2017. The unemployment rate in Iceland for the year 2015 was 4%.

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 the energy-intensive industry, mainly the aluminium industry, which has increased considerably over the past decade. Tourism has now firmly established itself as a pillar for economic growth and Iceland once again saw a record number of tourists in 2016 with approximately 40% 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. In 2016, there were two new listings of Icelandic companies. Skeljungur, an Icelandic oil company operating in Iceland and the Faroe Islands, and on NASDAQ True North the company Iceland Seafood International hf., a worldwide sales, production and marketing group for a variety of frozen, fresh, salted and dried seafood.

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 2017 down to 21% by 2021.

Since the Icelandic banking system collapsed in the autumn of 2008, foreign exchange transactions have been subject to capital controls in some form. The purpose of the capital controls is 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.

In principle, most cross-border movements of capital are restricted unless they are made for the purposes of purchasing goods or services. This is the most significant exception from the capital controls. Furthermore, new domestic investment will be unrestricted. The new investment registration represents a statutory exemption under which foreign and domestic investors may import foreign capital to Iceland and invest it domestically, subject to certain conditions, without being restricted to exit with the investment and, if applicable, gains by the capital controls.

The capital controls are 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 and the amount is up for review and possible increase at the middle of 2017. Furthermore, restrictions of outbound direct investment in non-Icelandic businesses and real estate were removed for the most part. Icelandic authorities have announced that more significant steps are planned in the complete lifting of the controls in coming years.

Even though the Icelandic market is in general open for investors and the economy’s foundations are strong, there are big tasks ahead. Thus, the main challenges are to re-establish free flow of capital to and from Iceland and reducing public debt.