This morning, the Central Bank of Iceland (CBI) published preliminary balance of payments (BoP) figures for Q1 2019, as well as the external position of the economy at the end of the quarter. Usually, the current account balance receives more attention than other variables. However, this time around, the external position of the economy emerged as the showstopper, as it was positive by no less than 21% of GDP!
The current account surplus in Q1 measured 35.1 bn. ISK, which is both a considerably larger surplus compared to the same time last year and the strongest Q1 since the CBI began publishing quarterly figures (1995). The figures far exceeded our expectations, as our forecast amounted to 2.6 bn. ISK current account deficit. As we mentioned in our discussion on the BoT figures last week, the difference lies in goods exports. The reason is exports of aircrafts, as the sale of four WOW air carriers to Air Canada was not recorded in Statistics Iceland’s export figures until after our forecast was published. Net secondary income was slightly more negative than we expected while net primary income was more positive than we anticipated.
Sources: CBI, Arion Research
The current account surplus in Q1 2018 measured 6.7 bn. ISK, compared to 35.1 bn. ISK this year. That is a whopping 424% increase between years. The graph below illustrates the difference between years. Starting with the negative changes, net secondary income was more negative than a year ago. Increase in cross-border money transfers mainly explains this difference, as total personal transfers to foreign individuals amounted to a record breaking 7.4 bn. ISK in Q1. Personal transfers have increased steadily in recent years as the number of foreign labor continues to climb. On April 1 the number of foreign residents had increased to 45,518, despite the slowing economy. The larger negative change is the smaller services surplus than before, mainly due to reduced activity in the tourism industry. It should be noted that the figures describe the Icelandic economy when two domestic airlines were still operating. As WOW air collapsed at the end of the quarter, we expect softer BoP figures in the quarters to come.
The most noteworthy change between years is the reversal of trade deficit to trade surplus. This change is not permanent in our opinion as the WOW aircrafts affect the Q1 numbers, skewing them upwards. We expect trade deficit to return as soon as Q2 and remain throughout the years, despite falling imports. Finally, the primary income surplus increased YoY, for the third quarter in a row. The increased surplus is however a double edged sword, as the reason for the increase is not necessarily positive. The change is not due to stronger returns on foreign assets or higher wage payments from foreign parties, but falling expenditures, which can be traced to operating performance of domestic companies. In other words, domestic companies are returning lower profits, even losses, to their foreign owners.
Sources: CBI, Arion Research
The financial account was positive by 98 bn. ISK in Q1. Foreign assets increased by 59 bn. ISK while liabilities decreased by 39 bn. ISK, a trend that has continued for three consecutive quarters. The increase in foreign assets is largely due to an increase in securities investment, both stocks and bonds. Other investment increased as well, mainly due to currency and deposits. Conversely, the CBI’s reserves decreased over the quarter as the CBI intervened seven times in the FX market to buy ISK.
When it comes to liabilities, both direct investment and other investment decreased. These changes are to a large extent attributable to debt repayments. Foreign parties however increased their portfolio investment by 24 bn. ISK, over the quarter, with the lion’s share of the inflow being invested in Marel shares. What’s noticeable however is the increased inflow into debt instruments. Undoubtedly the lowering of the reserve requirement to 0% plays a large part in this development.
Sources: CBI, Arion Research
On March 6 the special reserve requirement was lowered from 20% to 0% in one go. The impact is particularly evident when looking at the CBI’s monthly figures on securities investment.
Sources: CBI, Arion Research
The positive financial account improved the international investment position (IIP) by 98 bn. ISK over the quarter. A 4.5% depreciation of the ISK also improved the IIP but the most important factor is a nearly 12% rise in foreign securities prices during the quarter. Overall, exchange rate movements and price changes had a positive impact on the external position in the amount of 182 bn. ISK. The net external position improved by 270 bn. ISK during the quarter, which equals 9.5% of GDP, ending the quarter on a high note of total 597 bn. ISK, or 21% of GDP!
The opposite was true in the years leading up to the financial crisis, when Icelanders were net borrowers. A strong external position is a sign of strength, and indicates, among other things, that the economy is well prepared to tackle the economic downturn most expect this year.
Sources: CBI, Statice, Arion Research