Iceland still lacking date for abolition of capital controls, says Nordea Markets

Jonathan Boyd

Iceland’s recovery from its financial crisis continues, but there is still no firm date for the abolition of capital controls, which are stopping deeper and broader recovery, says Nordea Markets in an update.

A weaker ISK against key trading currencies has helped the economy since it collapsed in 2008. However, there is still a drag in improvements when it comes to consumption. Many households are struggling with mortgage debt.

“The Icelandic government has presented a two tier mortgage debt relief programme to reduce households’ huge mortgage debt,” the bank notes.

“First, some of the inflation related increase in principal amounts from December 2007 to August 2010 will be removed. Specifically, any writeup caused by inflation beyond the average level during the years 2001-07 (4.8%) will be reversed. According to estimates, this corresponds to a principal reduction of 13% over four years.

“Second, the new programme will make it possible to use pension savings to pay down mortgage loans In addition, mortgage holders will be given tax breaks for paying down their mortgage debt. People who do not own their homes will be able to save money on a special mortgage savings account and in the process get tax breaks.”

Overall, the measures should result in greater private consumption in coming years. This is important because historically it has accounted for 50%-60% of GDP.

Real wages are estimated to grow by about 3%-4% in real terms annually in coming years, which should act to underpin consumption growth – after wages were savaged by the crisis. However, the lessons learned during the crisis mean that households are unlikely to start increasing their leverage even as net wealth grows – Icelanders have become more cautious, Nordea notes: “we see no signs of loan financed growth.”

More broadly, the economy is still suffering low levels of investment. This could be pushed higher as the mortgage debt relief programme comes into force, stimulating demand for housing. Residential unit prices have risen in the capital in particular since 2010, with tight housing supply encouraging rising rents.

The stock market lost 95% of its value in the wake of the financial crisis, but has continued to recover.





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