STOCKHOLM (Dow Jones)--Fitch Ratings on Tuesday said it has revised the outlooks on Iceland's foreign and local currency Issuer Default Ratings (IDRs) to negative from stable.
The long-term foreign and local currency IDRs are affirmed at 'AA-' and 'AAA' respectively. The country ceiling is also affirmed at 'AA' and the short-term foreign currency rating at 'F1+'.
"The negative outlook has been triggered by a material deterioration in Iceland's macro-prudential risk indicators, accompanied by an unsustainable current account deficit and soaring net external indebtedness," said Paul Rawkins, senior director in Fitch's sovereign debt team in London.
Fitch said that signs of economic overheating - rising inflation, rapid credit growth, buoyant asset prices, a steep current account deficit and escalating external indebtedness - have exceeded the rating agency's expectations.
It noted that annual credit growth was now exceeding 30%. Iceland's current account deficit expanded to 15% of GDP in 2005 and net external debt has climbed to more than 400% of current external receipts, said Fitch in its review.
Credit to the private sector stood at an estimated 218% of GDP at end of 2005, having doubled in three years. "Yet Icelandic banks and corporates continue to pursue ambitious expansion plans abroad, accumulating external debt at an unprecedented rate in the process," Fitch said.
Fitch criticized Iceland's policy mix, arguing that monetary policy hasn't slowed borrowing and that the government's fiscal policy remains expansionary with promised tax cuts over the next two years.
Because households enjoy easy access to long-term housing credit, Fitch said, 12 successive interest-rate increases since May 2004 "have succeeded only in driving up the real exchange rate and further worsening the current account deficit."
(END) Dow Jones Newswires