Iceland's external balance swung sharply in the second quarter, with the current account deficit reaching 120.3 billion kronur. The central bank said the shortfall more than quadrupled from the previous three months after revisions. According to Bloomberg's compilation, the deficit reaches its highest level since that corresponding quarter of 2008, a period when Iceland's banking sector was on the verge of collapse. It also marks the widest level since the island's financial crisis 18 years ago.
"The large deficit these days can be traced to unusually large investments in certain sectors, mainly the data center industry which for a tiny economy like Iceland moves the figures a lot," said by phone Jón Bjarki Bentsson, Islandsbanki hf's chief economist. That surge in capital spending helps explain why the numbers look so outsized for a small economy.
Bentsson noted that the dynamic is not playing out the way textbooks might suggest. He said that, although such dynamics would normally be expected to weaken a currency, it "rather has a positive effect on the krona's exchange rate." With "part of the payments, fully funded from abroad, going to pay workers and contractors in Iceland and needing to be converted from foreign currency into kronur," he added, they are likely causing "more inflow than outflow of foreign exchange."
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A bigger current account gap usually raises eyebrows, but here the driver is foreign-funded data center buildouts and, per Bentsson, the related currency conversions are supporting the krona. If you are earning, spending, or traveling in Icelandic kronur, that twist in the flows is the part to keep an eye on.
