Danske Bank on Iceland: be positive
This morning, Danske Bank’s chief economist Lars Christensen introduced the bank’s latest report on Iceland, Iceland: Recovery in Uncertain Times. The key points are:
* The Icelandic economy is now recovering after the collapse of the Icelandic banking sector in October 2008. We believe that the recovery could prove sustainable, as macroeconomic imbalances have been reduced significantly.
*We expect Icelandic GDP growth of around 3-4% y/y in the coming two to three years, but growth could surprise on the upside if certainty about the Icelandic funding situation increases.
*While the recent “no” vote in the second Icesave referendum adds to the uncertainty surrounding the Icelandic recovery, we think it is unlikely to derail the recovery. *Inflation is likely to continue to ease and should stay below the Icelandic central bank’s inflation target of 2.5% through 2011-13.
*PPP estimates indicate the ISK is around 25% undervalued versus the euro on an onshore basis. The offshore ISK rate is much more undervalued.
In his address this morning, Christensen made fun of president Olafur Ragnar Grimsson who has been on a roll on Bloomberg e.a., berating the rating agencies. It doesn’t improve the situation to scold the rating agencies and say to foreign investors that they aren’t needed. Christensen said it was important for Icelandic officials to step forward and say they will respect the ruling of the EFTA Court.
Christensen became infamous in Iceland when Danske Bank published its report on Iceland where many of the shortcomings in the economy were underlined. That analysis turned out to be all too true. Now his message was: “Spring is in the air. Be positive.”
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