Iceland given stable outlook by S&P

Standard & Poor’s (S&P) has revised its outlook for Iceland to stable in light of the nation’s growth prospects and improved economic fundamentals.

The country, which received emergency funding and support from the International Monetary Fund (IMF) and some European neighbours in 2008, was previously given a negative outlook by the ratings agency.

Explaining the stable outlook, S&P predicts that Iceland’s GDP will rise during 2011, following the contraction of more than 10% that the country suffered between 2009 and 2010. The agency also says that planned energy investment projects and their related exports will add to growth in the years ahead.

In addition, Iceland’s government is tipped to achieve a primary surplus by the end of the year, leading the net general government debt burden to trend downwards from 2012 onwards.

S&P also affirmed the country’s long-term sovereign credit ratings at BBB, which is one notch above junk status.

“The ratings on Iceland are constrained by high external and public-sector debt  that we believe could become heavier still, if not for capital controls limiting residents’ ability to invest overseas and non-residents’ ability to exchange krona holdings for foreign currencies,” the agency says.

“The ratings are supported by what we view as Iceland’s relatively prosperous and flexible economy, and its institutional capacity to address its financial sector problems and build an environment more conducive to sustainable economic growth.”

Iceland’s credit rating could be lifted if the country is able to attract more foreign investment to bolster growth and reduce its susceptibility to external vulnerabilities. However, a downgrade may take place if its government debt rises due to extra support to the financial sector, “substantial” currency depreciation or political tensions.

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