Sigrún Davíðsdóttir's Icelog

Iceland is doing pretty well, thank you – except in FDI

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Iceland is not only on track but is actually ahead in paying off its loans to the IMF, as this press release today indicates:

“Iceland announced today that it repaid, ahead of schedule, obligations to the IMF amounting to some SDR 288.8 million (US$ 443.4 million). The payment was made on March 12.

The early repayment is about one fifth of the SDR 1.4 billion (US$2.15 billion) that Iceland borrowed from the IMF under its Stand-By Arrangement (SBA) (see Press Release 08/296). The amounts repaid early are the obligations falling due in 2013 under the original repayment schedule.

Together with a scheduled payment made in February 2012, this early repayment will reduce Iceland’s outstanding obligation to the IMF to SDR 1.041 billion (about US$1.60 billion). This outstanding balance is projected to be repaid during 2012-16.

After this early repayment, and taking into account a similar early repayment of Iceland’s Nordic loans, reserve adequacy—as measured by the ratio of reserves-to-short term debt—will remain above the standard benchmark of 100 percent.

The recovery in Iceland has, in many ways been remarkably good and quick, considering the sharp fall, following the collapse of its three main banks in October 2008.

Richard Barley, WJS, recently compared the Icelandic and the Irish crisis – who had a better crisis? There are striking similarities:

The costs of dealing with banking failure have been similar. Bank recapitalization cost about 45% of GDP in Iceland and 40% in Ireland. Both saw deep economic declines of 12%-13% of GDP. And both ended up with budget deficits in the double digits, as a percentage of annual GDP, which have required stiff fiscal tightening. Government debt is lower in Iceland, but not by much, reaching 100% of GDP in 2011. The difference is that Iceland grew 3% in 2011, Fitch estimates, versus 1% for Ireland.

The growth in Iceland is promising but Barley points out that Ireland is doing strikingly better in one aspect:

Longer-term, euro membership should help Ireland lure investment and boost exports: Even in 2011, there was a 30% increase in companies investing in Ireland for the first time. Over time, that may prove the deciding factor.

Barley singles out the deterring effect of the currency controls to Iceland – it’s difficult to lure foreign investors over the sky-high barriers of the currency controls. Unfortunately, the problem of luring foreign investors is both deeper, longer-running and more severe than just the currency controls, in place since post-collapse 2008.

Historically seen, it’s always been difficult to attract foreign investors to Iceland. In this respect, Italy and Iceland are similar. Foreigners often sense in Iceland that things are done in some specific Icelandic ways that foreigners find hard to understand and penetrate. Personal relationships matter everywhere but in Iceland it’s very difficult to get anywhere at all without the right Icelandic personal relationships. Ad hoc decisions and opacity cloud the island.

Who are investing in Iceland? David Rowland has invested in a small bank, MP Bank. Rowland bought the Kaupthing Luxembourg operation in the summer of 2009. He was chosen to be treasurer for the British Conservative Party but after the Daily Mail published a series of rather unflattering articles on him Rowland realised he didn’t have the time to dedicate himself to the unpaid honorary but extremely influential job. Mike Ashley, owner of Newcastle United football club, is another investor in MP Bank. He was a client of Kaupthing and an intimate friend of Kaupthing Singer & Friedlander’s CEO Armann Thorvaldsson, according to Thorvaldson’s book, Frozen Assets.

Iceland and Ireland are small countries and there is quite a bit of cronyism in both countries. In Ireland, the cronyism is heavily connected to the building sector, which collapsed spectacularly in 2008 and brought down the three main banks. Other sectors, like high-tech and bio-tech, seem to be outside the cronyism sphere and are healthily attracting foreign investors. For some reason, Iceland is struggling in this respect. The feeling is that it’s not just because of the currency controls and not being members of the eurozone.

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Written by Sigrún Davídsdóttir

March 16th, 2012 at 3:13 am

Posted in Iceland

5 Responses to 'Iceland is doing pretty well, thank you – except in FDI'

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  1. The question of currency control is indeed crucial.
    People are arguing that lifting it will increase investments and reduce unemployment.
    Keeping a tight control on the amount of money exchanged prevent speculation, widely fluctuating interest rates, limit tax evasion and increase stability conducive to local investment and job growth.
    The question is who wants and argues today for complete freedom of capital market movement?

    In fine
    We’ve got to keep 7 billion people happy without destroying our planet. It’s the biggest challenge we’ve ever faced.

    goupil

    16 Mar 12 at 10:50 am

  2. Forgot to say that foreign exchange currency trading is said to be 5 trillion dollars a day.
    Think of it like a liquid in the hull of a ship.
    Sloshing around without bulkhead. Titanic, Concordia ?

    goupil

    16 Mar 12 at 2:57 pm

  3. […] foreign creditors shoulder the losses and is now enjoying an enviable growth rate of 2-3% of GDP. (Here is an earlier Icelog, comparing Ireland and […]

  4. […] is a recent Icelog from March on Ireland and […]

  5. I have before me the UNCTAD statistics on inward FDI stock. It shows that inward FDI stock in Iceland in 1993 was $116m whereas in 2011 it was $48,752m, which is not as high as Ireland, which is $243,483 but Iceland’s stock has been growing recently at far far higher rate than Ireland’s, and indeed every other developed country in the world.
    Yet you write as if nothing much has changed since he 1990s. I do not understand, and would like to do so. has UNCTAD got wrong figures? Am I reading them incorrectly? is this inward flow purely financial and therefore invisible to an Icelander in their daily life? Any assistance in helping me understand what is going on would be much appreciated. Thanks, Michael

    Michael

    6 Nov 12 at 1:25 pm

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