Iceland

Politics:

• Analysis

  Iceland politics: Quick View - Support for government rises to highest leve

  Event

  On November 5th, an opinion poll revealed the highest support for the government as well as for the largest coalition party, the centre-left Social Democratic Alliance (SDA), since the beginning of the year. The largest of the new parties, the left-leaning Bright Future (BF), would gain considerable parliamentary representation in next year's election based on current levels of support.

  Analysis

  A poll by Capacent Iceland shows that the opposition centre-right Independence Party (IP) remains the country's largest political force but its rating falls marginally, to 36.2% from 37.1% last month. The second-largest opposition party, the centrist Progressive Party (PP), takes a hit, going from 14.2% to 12.1%. Internal rivalry over primaries for the upcoming general election (to be held in April 2013) has been evident; in recent times, the PP has been the only one of the established parties to go through extensive restructuring, including four different chairpersons since 2006.

  Support for the government now stands at 35% (this is a separate question in the poll, independent of support levels for individual parties), its highest level this year. In terms of support for the two coalition parties individually, the SDA goes up to 22.1%, compared with 19.4% in October; the party appears not to have been affected by the recent defection of one of its members of parliament (MPs) to BF. The second coalition party, the Left-Green Movement (LGM), is down to 11.7% from 12.4%.

  The only new party to reach the 5% needed for parliamentary representation is BF, which sees its support rise from 4.9% to 6.9%. As its candidate list has not yet been finalised, the party will continue to serve as a refuge for MPs concerned about their re-election chances with their current parties. The threat of further defections to the BF is most prominent for the ideologically most similar SDA.

  If the latest support levels are translated into seats in parliament, the SDA-LGM coalition would still fall significantly, to just 24 in the 63-seat parliament, down from 34 after the 2009 election and 31 in the current parliament (the government has lost its parliamentary majority in recent years). A potential IP-PP coalition would get a comfortable five-seat majority.

  Parliamentary standing and opinion polls
  	2009 election		September 2012 poll	October 2012 poll	November 2012 poll
  	% of vote	seats	% of vote	% of vote	% of vote	seats
  Social Democratic Alliance (SDA)	29.8	20	20.7	19.4	22.1	16
  Independence Party (IP)	23.7	16	36.0	37.1	36.2	26
  Left-Green Movement (LGM)	21.7	14	13.3	12.4	11.7	8
  Progressive Party (PP)	14.8	9	13.8	14.2	12.1	8
  Bright Future (BF)	-	-	4.5	4.9	6.9	5
  Dawninga	-	-	3.7	3.6	3.8	-
  Right Green	-	-	3.0	4.4	3.8	-
  Solidarity	-	-	3.0	2.4	1.9	-
  Other	10.0	4	2.0	1.7	1.7	-
  Total	100.0	63	100.0	100.0	100.0	63
  Memorandum items
  Support for government coalitionb			34	32	35
  Combined support SDA-LGM	51.5	34c	34.0	31.8	33.8	24
  Combined support IP-PP	38.5	25	49.8	51.3	48.3	34
  a Dawning is the new incarnation of the Citizens' Movement, which gained four MPs in the 2009 election but is no longer represented in parliament as a separate group. b The question about the support for the government coalition is a separate question that does not necessarily have to be the same value as the combined support for the SDA and the LGM. No decimal points are recorded for this question. c The government's majority has since 2009 turned into a small minority. After several defections, the current combined seat tally is 31.
  Sources: Economist Intelligence Unit; Capacent Iceland, www.capacent.is; Icelandic Financial News, www.vb.is.

  November 12, 2012

• Background

  Iceland: Key figures

  Geir Haarde

  Leader of the Independence Party (IP) since October 2005, Mr Haarde became Iceland's new prime minister in June 2006 following the resignation of the Progressive Party (PP) leader, Halldor Asgrimsson. Mr Haarde served as minister of finance between 1998 and 2005. Mr Haarde has a business-like and understated manner, and has repeatedly been rated as the most trusted politician in Iceland. He is well respected within the business community and has rather close ties with parliamentarians from other parties. Mr Haarde lacks some of the charisma of his predecessor, David Oddson, and has been criticised for avoiding difficult political decisions, particularly in relation to divisions between IP Rejkjavik city councillors, but he remains the country's dominant political figure.

  Ingibjorg Solrun Gisladottir

  Leader of the Social Democratic Alliance (SDA) and minister for foreign affairs, Ms Gisladottir came to prominence as a popular and respected mayor of Reykjavik from 1994 to 2002. She was the SDA's prime ministerial candidate in the 2003 general election, before being elected party leader in May 2005, after winning twice as many votes from members as Ossur Skarphedinsson (the current minister for industry), who had led the party since 2000. Despite her previous popularity as mayor, the party initially lost electoral support under her leadership and she has attracted criticism for her somewhat abrasive manner and lack of control of elements of her party that remain loyal to Mr Skarphedinsson. That said, the SDA's inclusion in the coalition has helped to silence some of the internal criticism of Ms Gisladottir.

  Steingrimur Sigfusson

  Leader and founder of the Left-Green Movement (LGM), Mr Sigfusson has long enjoyed wide popularity and respect, even outside the ranks of the far left. He consistently receives high ratings for honesty and trustworthiness among the electorate. Mr Sigfusson's position has nevertheless been weakened slightly for having missed the opportunity of taking the party into government and he has suggested that he might decide to leave politics before the next election.

  Gudni Agustsson

  Gudni Agustsson was elected chairman of the Progressive Party (PP)—its third leader in less than two years—following the PP's poor performance in the 2007 general election. Mr Agustsson was a popular minister for agriculture from 1999 to May 2007. He is faced with the difficult task of rebuilding a party that lost almost one-half of its seats in parliament at the election and is unsure of its role in the current political landscape. Mr Agustsson is expected to move the party away from its relatively pro-market policies of the past 12 years, emphasising instead the PP's rural roots.

  Gudjon A Kristjansson

  The Liberal Party (LP) leader is a former IP member of parliament and fishing captain from the West Fjords. He is immensely popular in his home region among fishermen who are unhappy with the current fishing quota system (the overhaul of which forms the basis of the LP's political platform).

  The legislature

  The Republic of Iceland is a parliamentary democracy based on the constitution of 1944, which has been amended seven times, most recently in 1999. Proposals for further revisions are currently being drafted by a special commission, with the president's role in approving legislation being one of the issues under review. Legislative power is vested in a unicameral parliament (Althing), which is elected for a four-year term. The 63 members of parliament are elected from six constituencies on the basis of a system of proportional representation. Each constituency elects eight to ten parliamentary seats. The remaining nine seats are distributed to constituencies and allocated to political parties so that their parliamentary representation reflects as closely as possible the number of votes each party received. A party must have won at least 5% of the national vote in order to be eligible for these proportionally distributed seats.

  The cabinet

  Executive power is vested in the cabinet, headed by the prime minister, which is responsible to the Althing. The cabinet is officially appointed by the president after a general election, although this process is usually conducted by leaders of the political parties, who decide among themselves which parties can form the cabinet and how its seats in the cabinet are distributed (under the condition that it has majority support in parliament). The prime minister is usually appointed from the largest coalition partner. The current cabinet consists of six ministers from the IP and six from the SDA. A reshuffle can be expected in 2009 as a member of the SDA is to become president of the parliament.

  The president

  The president is the head of state and is elected for a four-year term by a direct vote of the electorate. Parliamentary bills currently require the president's signature to be enacted, but this is under debate. Olafur Ragnar Grimsson became the fifth president in 1996 and was re-elected in 2000, 2004 and 2008.

  Local government

  There are currently 79 municipalities. Over the past decade governments have pursued an active decentralisation programme, transferring more competencies to the local level. The municipalities are responsible for pre-school education, waste management, social services, public housing and public transport. Municipal elections are held every four years, most recently in May 2006.

  The judiciary

  The judicial system is composed of ordinary courts, special courts and the Supreme Court in Reykjavik. There are nine justices on the Supreme Court, all appointed for life by the president on the binding recommendation of the minister of justice. They are dismissible only by the court. The Supreme Court reviews all judicial applicants. The minister has in recent years recommended people that have not been favoured by an advisory committee. This has led to charges of political nepotism and calls for changes to the appointment process.

  Media services

  Iceland has a free press. The main daily newspapers are Morgunbladid, Frettabladid, 24 stundir and DV. Frettabladid and Morgunbladid are published daily; DV and 24 stundir are published five times a week. Morgunbladid relies mainly on subscriptions. Frettabladid, its main competitor, has eclipsed the venerable Morgunbladid in readership. It is distributed free of charge to households in the capital area, as well as in most other major population centres. 24 stundir, owned by Morgunbladid, is also distributed free of charge.

  The Icelandic National Broadcasting Service (RUV) is an independent public-service broadcaster, operating one television channel and two radio stations. Iceland's largest private-sector media corporation, 365 (formerly Nordurljos), was de-listed from the stockmarket in 2008. The company is split into a newspaper arm (Frettabladid and DV) and a broadcasting arm. Seven radio channels are broadcast across Iceland in addition to a number that are only heard in Reykjavik or other regions. Seven TV channels are broadcast in Icelandic, with a large number of foreign channels available via satellite and cable.

  Democracy index (for methodology, see Appendix)

  The Economist Intelligence Unit's 2006 Democracy index places Iceland in the top group of full democracies alongside other Nordic countries. It scores high in terms of electoral process, political culture, civil liberties and government functioning but, although voter turnout is relatively high, it does not show as strongly as some other countries in levels of political participation. There is also only moderate confidence in political parties and this may even have weakened recently.

  Democracy index
  	Overall score	Overall rank	Electoral process	Government functioning	Political participation	Political culture	Civil liberties	Regime type
  Iceland	9.65	3	10.00	9.64	8.89	10.00	9.71	Full democracy
  Overall and component scores are on a scale of 0 to 10; overall rank is out of 167 countries.

  Download text file (csv format)

  August 05, 2008

• Structure

  Iceland: Political structure

  Official name

  Republic of Iceland

  Form of state

  Parliamentary republic

  Legal system

  Based on the constitution of 1944

  National legislature

  Althingi (parliament) of 63 members elected for a four-year term

  Electoral system

  Universal direct suffrage over the age of 18; proportional representation

  National elections

  Most recent legislative election held on April 25th 2009. Next election due by April 2013

  Head of state

  President, directly elected for a four-year term; Olafur Ragnar Grimsson (an independent, but previously part of the left wing of politics) was elected for a fifth successive four-year term in June 2012. The next presidential election is due in June 2016

  National government

  Responsible to the Althingi. A coalition of the Social Democratic Alliance and the Left-Green Movement was formed on May 10th 2009. Some ministerial changes were announced on January 1st 2012

  Main political parties

  Social Democratic Alliance (SDA; 20 seats); Independence Party (IP; 16 seats); Left-Green Movement (LGM; 12 seats); Progressive Party (PP; nine seats); the Movement (three seats)

  Ministers

  Prime minister: Johanna Sigurdardottir (SDA)

  Economy, agriculture & fisheries: Steingrimur Sigfusson (LGM)

  Education, science & culture: Katrin Jakobsdottir (LGM)

  Environment: Svandis Svavarsdottir (LGM)

  Finance: Oddny Hardardottir (SDA)

  Foreign affairs: Ossur Skarphedinsson (SDA)

  Industry, energy & tourism: Katrin Juliusdottir (SDA)

  Interior: Ogmundur Jonasson (LGM)

  Welfare: Gudbjartur Hannesson (SDA)

  Central Bank governor

  Mar Gudmundsson

  October 01, 2012

• Outlook

  Iceland: Key developments

  OVERVIEW

  Despite some likely tensions between the two coalition parties, the Independence Party (IP) and the Social Democratic Alliance (SDA), the coalition is expected to hold together. A sharp economic slowdown is likely to result in a government budget surplus of 5.2% of GDP in 2007 moving into deficit by 2009. In an attempt to fight rising inflation exacerbated by a depreciating currency, the Central Bank of Iceland will keep interest rates at their present level of 15.5% for the rest of 2008 and may even move them higher. Inflation is forecast to begin to slow at the end of 2008 and fall to an average of 10% in 2009. With wages eroded by high inflation, private consumption is likely to fall in both 2008 and 2009. Investment fell sharply in 2007 and is likely to fall further in 2008 and 2009. The Economist Intelligence Unit expects overall GDP to grow by 2% in 2008 and to be flat in 2009.

  Key changes from last month

  Political outlook

  As a result of high inflation the popularity of the larger governing party, the IP, and of the prime minister, Geir Haarde, have continued to decline. That of the other governing party, the SDA, is less affected by economic conditions.

  Economic policy outlook

  Despite inflation rising from 13.6% in July to 14.5% in August, the highest figure in the OECD, the Central Bank has kept its intervention rate at 15.5%. Inflation should begin to ease in the coming months, but if it does not do so then the Central Bank may raise its rate further.

  Economic forecast

  Although revised figures show year on year GDP growth in the second quarter of 2008 at 4.4%, we still expect the economy to come to a halt in the second half of 2008 and in 2009 as a result of falling private consumption and investment.

  September 17, 2008

Economy:

• Background

  Iceland: Economic background

  Gross domestic product by sector
  (% of total)
  	2003	2004	2005	2006	2007
  Agriculture, hunting & forestry	1.5	1.4	1.3	1.1	1.4
  Fishing & fish processing	6.0	5.0	4.6	4.5	4.4
  Manufacturing	13.2	12.8	10.2	11.0	10.9
  Electricity, gas & water supply	3.6	3.7	4.0	4.0	4.3
  Construction	7.6	8.5	9.5	10.4	11.0
  Services	68.1	68.6	70.4	69.0	68.0
  Source: Statistics Iceland.

  Download text file (csv format)

  As in other developed economies, services form the bulk of economic activity, accounting for 68% of GDP in 2007. The marine sector was the most important source of export revenue until 2007, but recent heavy investment in aluminium production and lower fishing quotas made industrial products the most important export sector in the first half of 2008. Fisheries contributed 4.4% of GDP in 2007, down from about 17% in 1980. This contrasts sharply with the pace of development in power-intensive industry (particularly in the aluminium sector) in recent years, utilising Iceland's vast hydroelectric and geothermal resources. The largely unspoiled natural environment has also spurred the development of a rapidly expanding tourist industry, now a major source of foreign revenue. At the same time, human capital-intensive industries such as financial services, information technology (IT) and biotechnology have grown in size and importance over the past decade. Many of the growth leaders in Iceland are specialised small or medium-sized enterprises with expertise in research and development (R&D).

  August 05, 2008

• Structure

  Iceland: Economic structure

  Economic structure: Annual indicators

  	2008a	2009a	2010a	2011a	2012b
  GDP at market prices (Ikr bn)	1,480.3	1,497.6	1,536.5	1,626.3	1,800.3
  GDP (US$ bn)	16.8	12.1	12.6	14.0	14.2
  Real GDP growth (%)	1.2	-6.6	-4.0	2.6	2.6
  Consumer price inflation (av; %)	12.7	12.0	5.4	4.0	5.3
  Population (m)	0.32	0.32	0.32	0.32	0.32
  Exports of goods fob (US$ m)	5,399	4,050	4,603	5,344	5,148
  Imports of goods fob (US$ m)	-5,699	-3,318	-3,621	-4,506	-4,699
  Current-account balance (US$ m)	-4,471	-1,433	-1,024	-953	-701
  Foreign-exchange reserves excl gold (US$ m)	3,515	3,813	5,699	8,450	9,000
  Exchange rate (av) Ikr:US$	87.95	123.64	122.24	115.95	127.22
  a Actual. b Economist Intelligence Unit estimates.

  Download the numbers in Excel

  Origins of gross domestic product 2011	% of total	Components of gross domestic product 2011	% of total
  Public administration	20.3	Private consumption	51.9
  Manufacturing	19.7	Government consumption	25.3
  Financial services & real estate	17.1	Fixed investment	14.0
  Wholesale & retail trade	16.2	Stockbuilding	0.3
  Agriculture, forestry & fishing	8.5	Exports of goods & services	59.3
  Professional, scientific & technical services	6.9	Imports of goods & services	50.8
  Principal exports fob 2011	Ikr bn	Principal imports cif 2011	Ikr bn
  Marine products	252	Industrial supplies	165
  Aluminium	245	Capital goods (excl transport)	114
  Other manufacturing products	90	Consumer goods	69
  Agricultural products	9	Transport equipment	44
  Main destinations of exports 2011	% of total	Main origins of imports 2011	% of total
  Netherlands	33.3	Norway	16.0
  Germany	14.8	US	10.8
  UK	8.9	Germany	7.9
  Norway	4.4	Netherlands	7.4

  Download the numbers in Excel

  Download text file (csv format)

  October 01, 2012

• Outlook

  Iceland: Country outlook

  Iceland: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: The coalition of the Social Democratic Alliance (SDA) and the Left-Green Movement (LGM), in power since May 2009, suffers from internal divisions and faces strong opposition from the Independence Party (IP) and the Progressive Party (PP). The coalition has only a one-seat majority, with 32 of the 63 seats in the Althingi (parliament). Since the election, three LGM members of parliament, unhappy at the government's austerity programme, have quit the party to become independent; any further defections could force an early election. The government has a full and difficult agenda in the run-up to the next election, which is scheduled for April 2013. This includes passage of the 2013 budget, institutional reforms, new rules for fishing quotas and ongoing EU accession negotiations. The last issue is particularly difficult for the coalition, as the LGM strongly opposes EU membership and is under pressure to reverse the sharp slide in its opinion poll ratings since the 2009 election. Given a lack of public support for EU membership, some members of the SDA (which is the only party to back accession) will also urge the government to shelve the issue.

  ELECTION WATCH: In the presidential election on June 30th 2012, the 69-year-old incumbent, Olafur Ragnar Grimsson, who has been in office for 16 years, was re-elected with 52.8% of the vote for a fifth consecutive four-year term. He is expected to continue his assertive style of presidency. The next general election is due in April 2013. Opinion polls suggest that the IP will emerge as the largest party; the next government is likely to be a coalition between it and the smaller PP.

  INTERNATIONAL RELATIONS: The collapse of the currency and the banking system in late 2008 led to a temporary shift in favour of EU membership, which Iceland applied for in 2010. However, public opinion has subsequently swung against membership. EU accession is not expected, either because a new IP-led government would oppose it or because it would be defeated in a referendum (which is currently unlikely to be held).

  POLICY TRENDS: Policy should continue to be driven by the need to stabilise the economy, rebuild the banking system after the collapse of the three main commercial banks and the currency in late 2008, and narrow the government deficit. An IMF programme providing for fiscal and banking reform, and currency stabilisation, was put in place in November 2008. The Fund completed its final review in August 2011, leading to the last disbursement of the Ikr200bn (US$1.6bn) loan. Although co-operation with the IMF will continue, it will no longer be a significant policy anchor. Despite recent repayments ahead of schedule of some loans received from the IMF and Nordic countries, Iceland still holds foreign-exchange reserves equivalent to the IMF's benchmark of more than 100% of its short-term external debt (133.8% at end-2011).

  ECONOMIC GROWTH: The Economist Intelligence Unit forecasts economic growth of 2.6% in 2012 (similar to 2011) and annual expansion of around this level in 2013-14. In the first quarter of 2012 real GDP expanded by a robust 4.2% year on year (non-seasonally adjusted) and 0.3% quarter on quarter (seasonally adjusted), driven largely by strong domestic demand. However, real GDP contracted by 6.5% in the second quarter, dragged down by lower investment, bringing annual growth to 0.5% Domestic demand is still recovering from the collapse in 2008-10: total domestic demand expanded by 4.3% in 2011 after falls of 3% in 2010, 19.7% in 2009 and 8.5% in 2008. Economic activity in the second half of 2012 should be supported by solid private consumption (partly owing to lower inflation), and so domestic demand growth is forecast to accelerate to 5.1% in 2012 as a whole, before decelerating to 2.2% in 2013 as the recovery in private consumption, investment and stockbuilding eases. External demand is likely to weaken in the second half of 2012, amid a slowdown in euro area export markets, but the external sector should become more supportive of economic activity later in the forecast period, given an expected mild recovery in the euro area.

  INFLATION: We expect inflation to average 5.3% in 2012, before moderating to 3.5% in 2013, given weaker domestic demand, base effects and higher interest rates. Inflation jumped from 5.3% in December 2011 to 6.5% in January 2012, but subsequently moderated, to 4.1% by August 2012, following a slight appreciation of the krona and a tighter monetary policy. However, inflation is still above the 2011 average (4%). We expect price pressures to continue to ease in 2012. However, continuing high oil prices and strong wage growth should keep inflation well above the Central Bank of Iceland's target of 2.5% throughout the forecast period.

  EXCHANGE RATES: The krona depreciated sharply against the euro and the US dollar in 2008 and the first half of 2009, but has since recovered some ground as a result of strict capital controls. During 2012 the krona has been fairly volatile, strengthening against the euro between March and July, as the euro zone crisis intensified, but depreciating during August-September, as investor confidence improved. In September 2012 the krona was around 5% cheaper against the US dollar than a year earlier, but around 3% stronger against the euro. In mid-September it traded at Ikr158:EUR1 and Ikr122.3:US$1, largely unchanged since the beginning of 2012 against both currencies. We expect the krona to remain fairly stable on average during the forecast period, given that capital controls are likely to remain in place until well after the 2013 election.

  EXTERNAL SECTOR: Merchandise and services trade moved from a deficit in 2008 to a surplus in 2009-11 because of lower imports and moderately higher export earnings. The current account was kept substantially in deficit by a large negative income balance, boosted by bank restructuring. With import growth slightly outpacing export growth in 2012, the trade and services balances should narrow. However, the income deficit should narrow even more, given the waning effect of bank restructuring, leading to a smaller current-account deficit in 2012 (an expected 5% of GDP, compared with 6.8% in 2011). In 2013, with moderating import growth, the trade and services surpluses should expand slightly as the income deficit narrows further, resulting in a further improvement in the current-account deficit, to 3.6% of GDP.

  October 01, 2012

Country Briefing

Total land area

Iceland's total surface area is 103,000 sq km, but only 21,000 sq km can be used for agriculture. Glaciers, lava fields and lakes comprise 26% of the total area, 54% is barren land and most of the remaining 20% is used for grazing.

Population

319,575 (January 1st 2012)

Main towns

(January 1st 2012):

Reykjavik (capital): 118,814

Kopavogur: 31,205

Hafnarfjordur: 26,486

Akureyri: 17,875

Reykjanesbaer: 14,137

Climate

Cool temperate oceanic; highly changeable, influenced by the warm Gulf Stream and Arctic currents

Weather in Reykjavik (altitude 18 metres)

Hottest month, July, 10.6°C; coldest month, January, -0.5°C; driest month, May, 44 mm (average monthly rainfall); wettest month, October, 86 mm

Language

Icelandic, belongs to the Nordic group of Germanic languages, descended from Old Norse

Weights and measures

Metric system

Currency

1 Krona (Ikr) = 100 aurar

Fiscal year

Calendar year

Time

GMT, all year

Public holidays

January 1st; April 5th, 6th, 8th and 9th; May 1st, 17th, 27th and 28th; June 17th; August 6th; December 25th.

July 24, 2012