S&P Global Ratings has affirmed 'A+/A-1' long- and short-term foreign and local currency sovereign credit ratings on Iceland. The outlooks on the long-term ratings are stable.

The stable outlook reflects the view that Iceland's economy will continue to expand over the next two years, while recording only modest fiscal and external deficits. It also reflects S&P ́s assumption that volcanic activity will remain contained and not have a significant adverse effect on the country's economic, fiscal, and balance-of-payments performance.

The rating reflects Iceland's more robust GDP growth than in most other sovereigns that S&P rates in Western Europe. The key tourism sector, which represents about 30% of exports, has been performing well and most indicators, including arrivals, have surpassed pre-pandemic levels. Alongside tourism, the rating agency expect domestic demand to drive growth from 2024 onward, supported by Iceland's strong population growth rate and the continued expansion of new economic sectors. These include biotechnology, onshore and offshore fish farming, IT, and business services, as well as traditional sectors such as marine products and aluminum smelting. S&P also note that Iceland remains largely self-sufficient in meeting its domestic energy needs, mainly through local hydropower and geothermal sources.

The government continues to make progress on its fiscal consolidation plans, which should also support monetary policy in efforts to bring down inflation. Iceland's low net external leverage and relatively strong central bank international reserves relative to the size of the economy provide further economic buffers. Iceland's stable institutional framework and effective policymaking also support the ratings. Nevertheless, the ratings remain constrained by the volatile nature of Iceland's small, open economy, which is vulnerable to natural events, including volcanic activity, as well as limitations to monetary policy effectiveness due to external influences on domestic inflation trends

According to S&P, the credit ratings could be raised if Iceland's public finances strengthened significantly more than the rating agency currently anticipate, either from narrower deficits and lower net public debt, or a decrease in the government's contingent liabilities. The ratings could also be raised if economic diversification increases and makes the economy more resilient to external shocks.

S&P could lower the ratings if Iceland's fiscal or balance-of-payments performance worsened significantly compared to forecasts. This could happen, for example, if persistently disruptive volcanic activity hampered the country's tourism sector, with repercussions affecting growth and fiscal prospects.

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