The current account surplus totalled ISK 45.7bn in Q3/2024, according to newly published figures from the Central Bank (CBI), or nearly ISK 41bn less than in Q3/2023. The difference stems largely from a far weaker balance on primary income, plus a smaller surplus on goods trade. It had already been established that the goods account deficit for the period came to ISK 76bn, while the surplus on services trade totalled almost ISK 141bn. The other two main components of the balance on payments showed deficits during the quarter, however. The deficit on primary income was ISK 6.6bn and the deficit on secondary income ISK 12.2bn. The secondary income balance, which represents cross-border transfers, is always negative, as it includes Iceland’s contributions to development aid and international institutions, as well as monetary remittances such as those made between family members.
Current account surplus shrinks year-on-year in Q3, but the external position is sound
Iceland’s current account surplus was far smaller in Q3 than in the same quarter of 2023 and did not offset the deficit in H1, owing primarily to a smaller surplus on services trade and a reversal in the balance on primary income. On the other hand, Iceland’s net international investment position (NIIP) remains strong, with net external assets valued at more than 40% of GDP.
Primary income is an umbrella term for income deriving from labour and capital – in other words, cross-border wage payments, interest payments, and dividends from direct and indirect shareholdings. In the recent term, financial income and securities holdings have generated surpluses, and the CBI’s international reserves always generate some interest income, which has grown recently because of rising short-term interest rates abroad. Furthermore, the balance on other investments has been consistently in deficit in the recent past.
The balance on financial income from inward and outward foreign direct investment (FDI) has been more volatile, not least because of fluctuations in aluminium prices – and therefore, in the operating performance of Iceland’s three aluminium smelters, all of which are foreign-owned. Aluminium prices have been rising in recent quarters, as can be seen in the chart below. At the same time, the export value of aluminium has increased in ISK terms, and Iceland’s aluminium industry generated just over ISK 82bn in gross export revenues in Q3, as compared with ISK 74bn over the same period in 2023. On the other hand, the smelters’ profits increased, and their improved operating performance is doubtless the main reason for the year-on-year turnaround in reinvested earnings by foreign owners of Icelandic companies. In 2023, foreign-owned Icelandic companies generated an operating loss of just over ISK 15bn, but this year they recorded reinvested earnings in the amount of slightly more than ISK 9bn.
Current account deficit expected in 2024
The current account balance showed a deficit of slightly over ISK 26bn for the first three quarters of 2024 combined. This is a considerably poorer outcome than in the same period of 2023, when the current account was in surplus by more than ISK 63bn. The reasons for the reversal can be found in all key subcomponents of the current account, primarily the ISK 46bn narrowing of the services account surplus and the ISK 35bn narrowing of the surplus on primary income.
In our macroeconomic forecast, published in late September, we projected that the current account would show a deficit in 2024, for the second year in a row. At that time, we expected a full-year deficit of just over ISK 50bn, but the newly published figures suggest that the 2024 deficit will probably be larger than this, as we envision a sizeable current account deficit in Q4. Nevertheless, we still think prospects for the coming term have improved. It is quite likely that the current account will be broadly in balance in 2025 and 2026, buttressed by steady growth in exports and modest growth in imports. Relative changes in import and export prices could affect the situation, however, as could factors such as fish catches for individual species and the possibility of cutbacks in energy supply to the energy-intensive sector.
Improved international investment position
Included in this morning’s figures from the CBI is a summary of Iceland’s NIIP as of end-September. External assets totalled ISK 6,351bn at the end of the quarter, while external debt totalled ISK 4,558bn. This leaves a positive NIIP in the amount of ISK 1,793bn, or just over 40% of GDP. The NIIP improved by ISK 130bn in Q3, mainly because of positive price and exchange rate movements.
Iceland’s foreign assets and liabilities differ somewhat in composition. For instance, foreign assets comprise just under 40% of the pension funds’ asset portfolio, and the majority of those assets take the form of unit shares in foreign mutual funds. As we have discussed previously, foreign equity markets were buoyant in Q3 (see the blue columns in the chart below). On the other hand, inward FDI exceeds outward FDI, and resident entities’ interest-bearing foreign debt exceeds non-residents’ interest-bearing debt in Iceland.
Better to own abroad than owe abroad
On the whole, the figures above can be seen as relatively favourable, even though the current account balance has taken a turn for the worse. Iceland’s NIIP remains strong, and as is noted above, the outlook for the current account is positive. As a result, the outlook for a balanced economy remains quite good.
Until the end of the 2000s, a current account surplus was a rare occurrence for Iceland, and deficits were the rule and not the exception. The deficits were accompanied by debt accumulation that peaked in 2005-2007, during the run-up to the financial crisis. The turnaround since then provides an important foundation for economic stability, as it is vital for a small open economy with one of the world’s tiniest floating currencies to have a nest egg abroad rather than being dependent on foreign creditors.
