Reykjavík Grapevine - 07.12.2018, Blaðsíða 12

This year marked the tenth anniversary
of the country’s economic collapse,
bringing unprecedented attention to
Iceland. The tourist salvation is slowing
down and there is a fear among many
that this industry’s success will be as
fleeting as the banks’ brief boom. The
growth of visitors
has levelled off,
the Icelandic króna
(ISK) has lost value
and airlines are
losing money, with
one of them going
bankrupt.
B e f o r e t h e
b a n k i n g b o o m ,
Icelanders were
subject to dramatic
economic swings
stemming from the fishing market.
Fishing was the country’s only large
scale export for most of the 20th
century, and the largest industry until a
few years ago. Apprehension about the
economic outlook is understandable.
Small, trading states like Iceland are
vulnerable to shocks, and global reces-
sions are felt more deeply here.
The double-digit growth rates of the
past few years were unsustainable and
undesirable. The state and industry
have failed to build infrastructure and
regulate effectively. This has led to a
severe housing shortage, labour abuses
and environmental damage. Analyses
from the Central Bank, private banks
and international organizations all
predict a slower but still robust growth
rate. The same is true for most of the
world. However, there are risks and
dissenting voices. Currency fluctua-
tion, contract negotiations and the fate
of Icelandic airlines are the main issues
for Iceland next year.
We shall see if the island nation has
reached cruising altitude or will come
crashing down once again.
Currency Crash
Iceland is the smallest economy to
have its own floating currency. That
gives the country more flexibility but
comes at a great cost to most people.
The króna has a long history of insta-
bility, felt by residents who have to pay
much higher interests than in other
developed economies. Many loans are
indexed to inflation, meaning if infla-
tion is 5%, the principal loan increases
by 5% before interest is calculated. The
devaluation of the króna that happened
during the financial crisis made
Iceland a more affordable destina-
tion for tourists, which got the nation
out of recession much faster than
other economies. Southern Europe, by
comparison, did not have independ-
ent currencies to value and had to do
“internal devaluation,” meaning severe
austerity and wage cuts.
Over the last few months, the ISK
has lost value against major world
currencies. The troubled airline indus-
try is often blamed for the drop. It is
certainly a factor, but it is not the only
one. Pension funds and wealthy indi-
viduals have taken the opportunity to
move money overseas to stronger and
more stable currencies. They were not
able to invest abroad from 2008 to 2017
because of capital controls that were
put in place after the entire banking
sector collapsed in October 2008. That
capital was invested domestically, most
notably in real estate. Average deposi-
tors do not have the ability to shift
their money overseas and must endure
the costs. The Panama Papers showed
Iceland to be one of the most offshored
countries in the world, with the politi-
cal and economic elite often stashing
cash abroad.
Turbulent Industry
The airline market is in a period of
intense competition and consolidation.
Profitability is down and airlines are
going out of business. Icelandic airlines
had a difficult year in 2018. Primera Air
went bankrupt in October, WOW Air
has been near bankruptcy for much of
the year, and Icelandair has endured
large losses.
After years of astonishing growth
and profitability, WOW Air saw losses
and did not have enough money in
reserve to weather a competitive
airline market, slowing tourist growth,
and rising fuel costs. The company’s
attempted bond offering was a flop,
raising much less money than it had
hoped to. Icelandair announced it was
going to buy WOW after a weekend
of negotiations. However, Icelandair
pulled out of the deal on November
29th because requirements of the deal
could not be reached before sharehold-
ers voted on the buyout. At the time
of this writing, WOW Air announced
Wizz Air owners Indigo Partners were
going to buy a minority stake in the
company, but few details are known
about the deal. WOW carries more than
a third of travellers to Iceland. If it went
bankrupt, it would be a huge loss for
the whole economy. Thousands of jobs
would be lost and the wider tourist
industry would be devastated.
Iceland’s oldest carrier, Icelandair,
announced large losses and plans to
restructure next year. As a legacy
airline, it has huge capital reserves
and relationships with banks. If its
restructuring plans work as planned,
the company will weather the storm.
The airline plans to shift its business
model to that of WOW Air, focusing
on low-prices instead of all-inclusive
comfort. Oil prices and stiff competi-
tion will continue to be an issue in the
new year.
“Class War!”
One of the biggest domestic issues
coming next year are the looming
labour talks. Minimum wage in Iceland
is not set by law, but through collec-
tive bargaining. Efling and VR are
two of the largest unions in Iceland.
They represent many of Iceland’s low-
wage workers, and are united in their
demand for a significant minimum
wage increase to 425,000 ISK, which is
about a forty percent increase.
Business leaders claim that they
cannot afford such an increase and
some economists claim it will only
increase inflation. However, the labour
leaders point to the growing income
inequality in the country and the
increased cost of living to make their
case. Ragnar Þór Ingólfsson, leader of
VR, pointed out that an average two-
bedroom apartment costs more than
the post-tax minimum wage. Many
low-wage workers live in precarious
housing and homelessness is on the
rise, and some workers often live in
crowded and costly units without the
protections of a rental agreement. The
proposed large wage increase would
allow workers to live with dignity. The
unions are preparing for tough talks
in the new year. They have billions in
strike funds and can use their pension
funds as leverage. They have unabash-
edly spoken of “class war” in regards to
the fight ahead.
Global Downturn?
Mainstream economists see 2019 as
the start of a period of slower growth.
The Organization for Economic Coop-
eration and Development (OECD) fore-
casts a global growth rate of 3.5 and
under 2% for most developed coun-
tries. They also predict an increase
in prices and wages. Their biggest
concerns are increasing oil prices and
growing trade wars and their assess-
ment for Iceland is broadly in line
with the global trend. Some econo-
mists see a recession coming in the
new year. Public institutions have rosy
outlooks, but individual economists
are more pessimistic. Analyst Jórg
Angele told Market Watch that the US
economy is overheating due to stimu-
lating tax cuts. If US President Donald
Trump continues to escalate his trade
wars, that too could lead to a reces-
sion. Former Bill Clinton economic
advisor Brunello Rosa is much more
pessimistic about the future. In The
Guardian recently, he wrote a litany of
reasons why the economy will crash,
and speculated that it could be worse
than the 2008 meltdown. But he gives
us another year.
If there is a recession, large or small,
Iceland will be hurt severely. Tourism
is a luxury good and near the top of the
list when it comes to cutting costs.
Words:
Colin Arnold
Dalrymple
Photos:
Art Bicnick
Is Iceland
Cruising or
Crashing?
It Depends
Who You Ask...
Different takes on Iceland's economy
Please come and save our economy! Or, stay the hell away! We don't know!
Tourism! It's growing! No, shrinking! No, saving us! No, killing us!
12 The Reykjavík GrapevineIssue 21— 2018
“We shall see if the
island nation has
reached cruising
altitude or will
come crashing
down once again.”