Tourism Industry Lending Sees 5.4% Year-on-Year Growth

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Iceland’s tourism industry has experienced a significant boost in lending, with total loans to companies in the sector reaching 324 billion krónur (BKR) at the end of Q2/2023, a 5.4% increase from the same period last year.

Car Rental Agencies Drive Growth

The growth is largely attributed to car rental agencies, which have seen a surge in demand due to the increasing number of tourists visiting the country. The number of rental vehicles in operation has risen by nearly 28% since last year, with many companies expanding their fleets to meet the growing demand.

Other Tourism Operators See Contraction

Meanwhile, lending to other tourism operators has contracted by 4% over the same period, indicating that the industry is shifting towards more specialized services such as car rentals.

Financial Position of Tourism Companies Improves

The Central Bank of Iceland’s recognized impairment of loans to tourism operators has continued to decline, now sitting at around 3.5% of the claim value of the loan portfolio, down from a peak of 9% in Q1/2021. This suggests that the financial position of tourism companies is improving and arrears are declining.

Equity Markets Rebound

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Global equity markets have gained momentum this year, with many indices rising by double digits. The European Euro Stoxx 50 index has risen by over 11%, while the S&P 500 in the US is up more than 15%. However, not all markets have performed well, with the Shanghai and London indices being virtually flat.

Nasdaq Iceland OMXI10 Index Declines

The Nasdaq Iceland OMXI10 index, which tracks Icelandic stocks, has declined by 7% year-to-date. This is partly due to the swift rise in policy interest rates, which has been higher than in other countries.

Stock Market Turnover Contracts

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Despite the rebound in equity markets, stock market turnover on the Nasdaq Iceland exchange has contracted by 25% year-on-year, with total trade count also declining by 25%. Only four companies have seen their share prices rise this year, while 18 have seen their prices fall.

Bond Market Yields Rise

The breakeven inflation rate in the domestic bond market has fallen somewhat after peaking in May, but is still above the Central Bank’s inflation target. Bond market yields have risen in tandem with higher interest rates abroad, with ten-year government bond yields up by around 0.5-0.7 percentage points in major economies.

Conclusion

Overall, the tourism industry’s lending growth and improving financial position are welcome signs for Iceland’s economy, while the rebound in equity markets and decline in breakeven inflation rate suggest a more stable economic environment ahead.