New opportunities for international investors and industrial players in Iceland

October 18, 2017

New opportunities for international investors and industrial players in Iceland

The Icelandic economy is booming. Capital controls were lifted in March this year and the real economy grew by over seven per cent last year, fuelled by a thriving tourism industry.
– Nine years after the devastating banking crash, the economy is now back as a credible part of investor’s international investment opportunity set, says Ulrik Årdal Zürcher, the author behind Beringer Finance’s report on the Icelandic economy and financial sector.

Nevertheless, Iceland’s historical challenge of low productivity (excl. the aquaculture and energy-intensive sectors) remain. As is to be expected, the capital control regime (2008-2017) has likely put further pressure on Iceland’s underlying international competitiveness.
– Without the capital controls, the Icelandic domestic sector will be exposed to a higher degree of foreign competition. This should force the domestic sector to become more efficient, with the alternative being that it will be outcompeted and lose market shares in its own market, says Ulrik Årdal Zürcher.

While Icelandic fisheries and aluminum production is considered internationally competitive, the country’s overall low level of productivity is a weakness when it comes to building other export sectors.
– The inefficiency of the Icelandic domestic sector is an opportunity for international investors and industrial players in the medium term, as they can disrupt the market since the islander Vikings are not internationally competitive. However, if the country cannot invent new export sectors after adjusting to a new and higher production equilibrium the disruption proposition will be less attractive, as long-term real growth rates will be at risk, says Ulrik Årdal Zürcher.

The American membership-only warehouse club Costco opened a superstore in Iceland in May 2017 and gained 60-thousand paying members within its first month of operations (Costco’s biggest opening in a foreign market ever). Moreover, the Swedish clothing retailer H&M plans to open up stores in three different locations in Iceland over the next two years. These greenfield entries by internationally competitive companies will serve as a wake-up call to a relatively shielded Icelandic domestic sector.
– The system has undergone substantial deleveraging and restructuring since the economy was devastated by the financial crisis. The economy is entering what is probably the late expansion stage of a business cycle boom from a position of considerable strength, says Ulrik Årdal Zürcher.

The whole report can be found here