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Iceland Country Report

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Introduction

Development of any given country is based on some vital economic pillars, which define a country development process. The Republic of Iceland is one of the nations that were profoundly affected by the global financial crisis in 2008. The over-reliance of the country's gross domestic product on unpredictable finance sector was detrimental to the country's focus on improving the country development process. The collapse of the country's banking system created significant challenges to the country's economy, which included a high rate of unemployment, inflation and weak business environment. However, the government sought to integrate critical measures through financial help from the International Monetary Fund and contributions from neighbors. The help created a favorable environment for economic growth, which has led to an upturn in country's development in economy and diversity of the country's economy, which has incorporated new sectors such as tourism.

Country background

Iceland is a small Nordic country located between Europe and Northern America. The current total population is approximately 320,000. The state has had a sustained period of economic stability since the global economic recession in 2008, which had a detrimental influence on the country development as well as the living standards of its population. The major industries that have been instrumental to the country's development process over the years include fish processing, aluminum smelting, geothermal power, and hydropower. The significant engagement of these industries has created a powerful position for the country to develop other sectors. The fishing industry makes up 40% of the country's export earnings, which is approximately 12% of the country's gross domestic product and a 5% of the workforce work in the fishing industry (Johnson, 2017).

The country has some strengths and weaknesses that play a crucial role in influencing the overall economic development. The string structural business atmosphere that has been developed in the country is essential in shaping the country's economic development environment. Being open for business is a vital aspect of the nation because it is aiming to develop a sustainable economic development. Tourism and innovation form key part of the country's potential development elements and thus it is possible to integrate critical processes to ensure that the state achieves important development goals. Therefore expanding into manufacturing and service industries such as tourism and software production offers the country (Bergmann, 2014). 

Stable macroeconomic policies have created a better focus on the country development. The challenges that have been witnessed in the country have created a higher level of concentration where the government has sought to integrate different measures that are aimed at ensuring that there is a particular performance environment. Stabilizing economy requires critical input among different sectors so that better standards can be integrated and help improve the country economic growth.

The market environment has been significantly influenced by the need to effectively put in place a better operating environment and thus due to increased demand within the market, there has been significant development of new markets in different industries which have indeed created an improved climate where there better consideration of business development. The emerging markets with populations that are young and growing are increasingly becoming a major point of focus in business since there is adequate capital, talent, and innovation. Most of the established companies have been significantly engaged in focus on the emerging markets due to the ease in operating unlike the established markets, which create a challenging environment where an organization can maximize their revenues (Erkens, Hung & Matos, 2012).

Innovation in business in recent past has become a critical factor, which determines the competitive advantage among companies in different industries. The continuous changes in innovation are significantly increasing the overall business organizational environment where business has focused on to ensure that they remain significantly relevant in the industry.

Financial crisis

Before the financial crisis that hit the country in 2008, Iceland had enjoyed a significant development, which transformed the country from the poorest to one of the prosperous nations in the west. However, lack of strong economic and financial position made it difficult for the state to sustain a significant commercial hit, which created a tough focus on the country's economy as well as political development.

The aggressive expansion into the foreign markets was done in the early 2000s since the privatization of banks created a significant focus on the development of financial markets. The excessive consumer and business borrowing in foreign currencies meant that the banking sector was vulnerable in case of any global economic risk since there was a likelihood of negative influence on the investments made by the Iceland banking system. The three largest banks in Iceland formed a crucial part of the country's gross domestic growth, which was totaling up to 10 times the country's gross domestic product. The significant investment in international; banking meant that there was no risk management strategy considering the financial crisis had adverse effects on the global economies (Bergmann, 2014). 

The international hedge funds created a tight focus on the country's financial system where they brought claims for cents on the dollar and thus owning a significant part of the country's economic policy. Hedging and speculating within a business environment describe critical processes that provide a productive situation where it is possible to develop possible influence in markets. Hedgers and speculators are terms that explain traders and investors. Speculation is a process that involves trying to make a profit from the price changes in security. Hedging attempts to reduce the risks that are arises based on the security’s price changes (Lane & Milesi-Ferretti, 2017).

Balancing gains and losses is a critical aspect that hedging considers in limiting the amount of risk associated with security price change. The high volatile situation within the security price change creates a very difficult environment where it would be possible to speculate due to increased risks. Therefore, speculation involves chances taken by investors in predicting the direction in which the asset is moving.

The sharp turn in economic development created a tough focus on the country's banking system that collapsed exposing the nation to unprecedented risks both economically and politically. The events at the time coincided with international developments, which included booming economies, which was followed by a severe financial crisis. Iceland had huge banking sectors, and thus it was adversely affected compared to other countries. The Iceland banking sector at the time was 10x GDP which meant that the state was bound to suffer significantly. The significant reliance on foreign trade, which makes up 40% of the gross domestic product, was bound to be hugely influenced and thus it destabilized the country's gross domestic product. Foreign currency denominated debts, which was critical in creating a challenging environment where the nation would quickly recover (Lane & Milesi-Ferretti, 2017).

The leading banks in the country were Kaupthing Bank, Glinir bank and Landsbanki collapsed in 2008 having defaulted around $62 billion of foreign debt. As a result of the closure of the country's most significant contributor to the gross domestic product meant that the GDP decreased significantly by approximately 6% between 2008 and 2009. Unemployment increased substantially from a low of 2.3% to 7.2%. The increase in the employment rate was majorly due to an unstable economy and weak business environment, which led to the closure of many businesses especially those operating in the financial industry and international trade. In 2008 and 2009, the inflation rate peaked at 12% (Jónsson & Sigurgeirsson, 2017).

The value of the country's official currency Iceland's Krona decreased by 50% against the euro within the same period. The ISK was predicted to remain weak over the period until the economy stabilizes. The central government of Iceland deficit increased significantly from 0% to approximately 14% of the country's GDP. The government debts were significant exceeding 100% of the gross domestic product (Halldorsson & Zoega, 2010).

Recovery steps

The road to recovery for Iceland was not easy considering the damage that the financial crisis had to the country's principal sectors. It was tough to develop a basic strategy that would have created a better setting where it would have been possible to achieve a higher level of success in its objective to transform the country's economy and lives of its citizens. In a bid to turn the country's economy, the government sought to reduce interest rates falling to 4.25% in 2011 and then significantly decreased to meet the government's low inflation target (Lane & Milesi-Ferretti, 2017).

The banks were not bailed out due to massive losses that they had incurred earlier creating a very difficult focus where it would be possible to achieve increased economic development. The government sought an injection of capital to help in stabilizing its operations. Iceland received a rescue loan of $10 billion from the International Monetary Fund, which was aimed at improving the country in its recovery process. Iceland also received approximately $2.5 billion from its neighboring countries.

The government, therefore, embarked on protecting is domestic deposits and maintain ISK from devaluing further. The protection of the country's deposits created a favorable environment where it has been able to sustain its economic growth within a brief period. Iceland began repaying back the IMF loan earlier than expected due to strong economic growth. The initial repayment was made in 2012 with a 20% of the credit (Benediktsdóttir, Eggertsson & Þórarinsson, 2017).

To stabilize the country's financial sector, the financial regulator (FME) took control of the banks and the establishment of new banks after the enactment of emergency legislation, which was aimed at ensuring that all financial institutions comply with the underlying economic laws. The introduction of capital controls in 2009 was a temporary measure on foreign currency, and the stock was lifted in 2017 after integration of strong long-term measures, which are aimed at protecting the country from external financial risks (Jónsson & Sigurgeirsson, 2017).

The government also resorted to buying back ISK assets that had been frozen at a discounted rate and develop better strategies to ensure that they are plowed back into the economy and advance the growth of diverse sectors. The focus on other areas to improve the economy has had a significant influence on the country development agenda. Tourism is one of the major sectors that Iceland has invested to ensure that there is no over-reliance on a single industry to drive the economy. Therefore, the development of tourism assured that there were increased employment opportunities. The county has also focused on tightening its monetary policy to reduce the existing rate of inflation and ensure that it is stabilized within manageable limits (Halldorsson & Zoega, 2010).

Outcomes

The significant development of the country's economy after the financial crisis has had a substantial influence across different sectors of the economy since the mistakes that led to considerable effect of the financial risk to Iceland have been largely identified and formed the basis of the recovery process. Iceland has been able to maintain its economy where some elements have been efficiently considered in creating a pleasant operational setting. The rate of unemployment has significantly decreased to under 3% compared to 7.2% during the financial crisis. The Iceland Krona has stabilized against the Euro, and thus the development of a higher level of engagement has been vital in developing a profoundly transformed economy (Benediktsdóttir, Eggertsson & Þórarinsson, 2017).

The continued attraction of the direct foreign investment has been integral to the country's focus on developing a sustainable economy. International business organizations always focus on investing in a market that is highly productive where they are more likely to have a high return on investment. Therefore ensuring that there is favorable operational environment provides a greater need to ensure that better measures are put in place to improve the operational business environment. International business is very involved based on the significant challenges that foreign companies have to overcome in developing their executive focus (Bergmann, 2014). 

Iceland has a stable socio-economic environment where the majority of the citizens are within the middle class, which provides a ready market across different sectors considering the availability of the market. The diversity within the country creates a positive environment where it is possible to combine a higher level of understanding where foreign companies can readily embrace the Irish culture and implement favorable strategies that can help them improve their overall engagement within the global business setting (Lane & Milesi-Ferretti, 2017).

Conclusion

The financial sector is vulnerable, and thus there is need to ensure that the economy is diversified where it would be able to have a more significant positive influence on the overall economic development. Over-dependence of Iceland on its high developing financial, sector before financial crisis created a tough setting where it would be possible to counter the financial crisis. The collapse of the country's currency. The transformation of the country's economy has highlighted the need to embrace diversity across different sectors of the economy. Iceland has focused on developing new sectors such as tourism, innovation, and biotechnology that are crucial in improving the country's economic growth.

References

Benediktsdóttir, S., Eggertsson, G. B., & Þórarinsson, E. (2017). The Rise, Fall, and Resurrection of Iceland: A Postmortem Analysis of the 2008 Financial Crisis. Brookings Papers on Economic Activity, 2017(2), 191-308.

Bergmann, E. (2014). Iceland and the international financial crisis: Boom, bust and recovery. Springer.

Erkens, D. H., Hung, M., & Matos, P. (2012). Corporate governance in the 2007–2008 financial crisis: Evidence from financial institutions worldwide. Journal of corporate finance, 18(2), 389-411.

Halldorsson, O. G., & Zoega, G. (2010). Iceland’s financial crisis in an international perspective. Institute of Economic Studies Working Paper W, 10.

Johnson, A. (2017, May). Island in the storm: Iceland and the financial crisis of 2008. In Anthropology Book Forum (Vol. 3, No. 1).

Jónsson, Á., & Sigurgeirsson, H. (2017). The Icelandic Financial Crisis: A Study into the World ́s Smallest Currency Area and its Recovery from Total Banking Collapse. Springer.

Lane, M. P. R., & Milesi-Ferretti, M. G. M. (2017). International financial integration in the aftermath of the global financial crisis. International Monetary Fund.