Iceland Outlook Revised To Positive On Strengthening Fiscal Position; 'A+/A-1' Ratings Affirmed
On March 6, 2026, S&P Global Ratings revised the outlook on its long-term ratings on Iceland to positive from stable. At the same time, the long- and short-term foreign and local currency sovereign credit ratings were affirmed at 'A+/A-1'.
The positive outlook primarily reflects the potential for Iceland’s budgetary performance to strengthen over the next two years, leading to a further sustained decline in net general government debt. S&P currently forecast it will decline to 35% of GDP by 2029, from an estimated 41% in 2025, as the rating agency projects the authorities will achieve a balanced budget after 2027.
Under S&P´s existing baseline, it is projected that Iceland’s general government deficit will reduce to just 0.2% of GDP by 2027 from an estimated 1% of GDP last year, before moving to a balanced budget from 2028, broadly in line with the authorities’ medium-term fiscal strategy. However, budgetary performance could prove even stronger under a scenario of more buoyant economic growth; stronger results from the government’s focus on limiting nominal expenditure growth and rationalizing spending within departments; or if privatization of publicly owned assets led to extra fiscal dividends that were used to reduce government debt.
S&P could raise the ratings if Iceland's fiscal performance proves stronger than they currently forecast. This could be the case, for example, if growth turns out faster, the authorities’ efforts to contain spending growth deliver a higher impact; or the government privatizes additional assets leading to one-off fiscal windfalls that are used to pay down government debt. S&P also consider that continued gradual diversification of Iceland’s economy with emergence of new economic sectors–such as data centers, biotech, and pharmaceuticals–could enhance its resilience over the longer term.
The outlook could be revised back to stable if Iceland's growth performance was weaker than S&P expect, for example if persistently disruptive volcanic activity or higher fuel prices in the wake of conflict escalation in the Middle East hampered the country's tourism sector or if Iceland was more significantly affected by global trade tensions. S&P could also revise the outlook to stable under a scenario of weaker budgetary outturns, for instance, as a result of weaker growth outcomes or if Iceland was forced to sharply increase defence-related expenditure and did not put in place offsetting measures.