Iceland is one of the few countries located in Europe that is not part of the European Union. Moreover, Iceland it has its own central bank and currency, the Icelandic Króna. This uniqueness brings Iceland the advantages and disadvantages of having its own monetary policy. For example, while the country is capable of devaluing the Icelandic currency to gain competitivity, the foreign exchange market in Iceland is of the most volatile in Europe. This creates opportunities for investors and arbitrageurs who can profit from these characteristics, specially by taking loans or betting against the local currency (ISK). Swapp Agency will be able to guide you throughout the process.
Small Market, Big opportunities
Given that the market is relatively small, the macro trends and swings strongly affect the value of the Icelandic Króna. Since the beginning of the year 2020, money in Iceland has suffered a depreciation of 12%. As the flow of USD and EUR depend mostly on tourism, the effect of the pandemic has been devastating for the value of the local currency. The central bank of Iceland has decided not to sustain the value of the Króna selling dollars, it has doubled down and lowered interest rates. Countries are incentivizing internal tourism more than anything and international flights and ferries expect a long-term shrinkage of their market, affecting long term inflows of USD and EUR to Iceland.
Opportunities have appeared. While you can take a cheap loan in ISK (lower rates), it is possible that the future value of the loan will be lower in hard-currency terms (USD or EUR) as the Króna loses its value. This means that you can invest in Króna by betting against it. (technically it would not be investing IN Króna per se). Currently, the CBI rate stands at 0.75% while the inflation rate is more or less 3%, this is a negative real interest rate. In addition, signs like PPP exchange rate shows that the ISK is significantly overvalued: the price of a Coffee is 3-5 USD, a pint of Beer 7 USD.
For example, current commercial loans have an annual fixed cost of approximately 4.5%. You can take a loan in ISK and use it to acquire USD or EUR expecting a depreciation in the next 2-3 years. In the meantime, you can use the money to gain interest in USD or EUR.
The graph shows a continuous deficit in the current account. A problem that, given the pandemic, should be partially reversed as USD / EUR are much less available due to lower tourism. The exchange rate is the way in which these relations come to equilibrium. Hence, more devaluation is expected.
Get in touch with Icelandic professionals
To have an extensive economic and currency relating consultation, contact Swapp Agency. We are a leading group of experts in diverse fields. Our professional team will be happy to assist you throughout the process of investing in Iceland. Whether it is personnel, the acquisition of goods & services or finance, we are prepared to solve all your inquiries.