Moody’s upgrades Iceland’s credit rating amid improving fiscal conditions

Moody’s has upgraded Iceland’s credit rating after a reduction in the budget deficit and debt levels. The rating agency improved the government’s credit score from A1 to A2, indicating that the country is assessed as very capable of meeting its financial commitments, although there are four ratings higher than A1.

The primary reasons for the upgrade include a decreasing debt-to-GDP ratio and an improved fiscal stance due to a smaller budget deficit. Moody’s considers the government’s expectations that the economy will continue to strengthen, with ongoing fiscal discipline and a decrease in operational deficits, as credible.

The country’s debt ratio is expected to continue declining, particularly as the government continues the sale of its shares in Íslandsbanki and manages liabilities of the IL fund. Furthermore, strong economic growth is anticipated for the next year.

Government plans to establish a stability rule that sets limits on expenditure growth are viewed positively. However, Moody’s points out that the debt levels and fiscal burdens are weaker compared to other nations with similar ratings. The agency still considers Iceland’s finances relatively vulnerable to external shocks due to the small and homogeneous nature of its economy, making it susceptible to fluctuations within specific sectors.

If the reductions in the debt-to-GDP ratio persist at a rate faster than Moody’s forecasts, the credit rating may be upgraded further. Conversely, if the government deviates significantly from its mid-term fiscal plans, leading to an increase in the debt ratio, the rating could be downgraded.