Survey
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
* Your assessment is very important for improving the workof artificial intelligence, which forms the content of this project
Iceland’s Economy, Financial Markets and Pension System Már Gudmundsson Chief Economist, Central Bank of Iceland* North European Pensions & Investing Summit Stockholm, May 30-31, 2002 * Views expressed are mine and do not necessarily reflect the views of the CBI Plan of the presentation The economy and financial markets: A summary The pension system Pension fund assets: Developments, composition and foreign investment Current developments Iceland is small but rich Iceland has a population under 300 thousand, a GDP amounting to 8½ b. USD, a foreign exchange market with a daily turnover of only 50 million USD and a stock market capitalisation around 1/10 of a moderate size US company GDP per capita (PPP) 2000: around US$ 28 thousand, or eighth among OECD-countries. Economic structure Diversified economic structure and foreign trade Fishing sector: No. 6 in the world in terms of net exports. 10% of GDP and around half of foreign exchange earnings Extensive hydro and geothermal energy resources High labour participation rates (77% on average) and a flexible labour market Figure 4.2 Breakdown of GDP by indus try in 2000 Government services 14.3% 14,3% Finance, insurance, real estate etc. 14.9% 14,9% T ransport and communic. 8,9% 8.9% Other 9,1% 9.1% Fishing and fish 10,1% proc. 10.1% Agriculture 1,8% 1.8% 12,9%act. Manuf industries 12.9% Commerce 14,2% 14.2% Construction 8,9% 4,9% 8.9% Electricity and water supply 4.9% Source: National Economic Institute. A typical industrialised service economy apart from the size of the fishing sector Financial markets Internal capital market liberalisation around the middle of the 1980s and capital movements free in the middle of the 1990s Traditional markets exist but are small Forex: Daily turnover of 50 m. USD (2001) Money: Daily turnover of 20 m. USD (2001) Bond: 6.2 billion USD (end 2001) Equity: 4.1 billion USD (end 2001) The bond market Major issues (>5 yrs) are linked to CPI Majority government guaranteed Most liquid issues are housing bonds (state guaranteed) 10 liquid bonds - state funded market making agreements in place to provide liquidity and transparency Duration between 2 to 13 years – most liquid issues 8 and 13 years dur. Real yields between 5 and 6%. The Icelandic bond market at end of 2001 in millions of USD Total size: 6.2 b.USD. Thereof government guaranteed 3.7 b.USD The equity market Fast growing during the 1990s Leading index: ICEX 15 5-10 liquid companies Greatest market value is in financial institutions Equity listed on the Iceland Stock Exchange 1991-2001 60 % of GDP Number of companies 80 Market capitalization % of GDP Number of companies 45 60 30 40 15 20 0 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 An organised equity market was born in the 1990s with market capitalisation going from almost zero to over 50% of GDP (from 2 to 72 companies) The problem of ageing Smaller than among most developed European countries: Younger nation High labour participation rates of the elderly Mandatory membership of fully funded pension funds (at least 10% of wages) The pension system The Icelandic pension system is developing according to the three pillar principle: – A tax financed and means tested public pension, – A mandatory membership in occupational pension funds – A free individual pension saving with tax incentives 43 fully operational pension funds: Thereof 13 with employer’s guarantee and 30 without, but with a high degree of risk sharing between members Net assets of pension funds 100 80 % Percentage of GDP Percentage of total assets of the credit system 60 40 20 0 1965 1970 1975 1980 1985 1990 1995 2000 Pension fund assets are predicted to be at least 1½ times GDP in the middle of this century Pension fund assets ( 2nd pillar) as a percentage of GDP in EU and EFTA-countries 1998 140 % 120 100 80 60 40 20 0 rg taly ain ay ece um nce and gal tria any ark and den and UK and nds u l la b I Sp orw re lgi ra inl rtu us m m rel e el r r e n r c w m e tz the N G Be F F Po A Ge De I S I i x Lu Sw Ne Source: EFRP. Iceland is fourth among EU and EFTA-countries Legislation and investments Total foreign exchange risk: 50% of assets Ceiling for equity, municipality bonds, bank bonds and other bonds is 50% for each class of assets 10% ceiling for unlisted securities (with conditions) Individual credit risk: 10% of assets, 15% of the stock of a single company and 25% of shares in mutual or equity funds Composition of pension fund assets 1990 and 2001 1990 Housing (33.9%) Financial institutions and mutual funds (21.2%) 2001 Financial institutions Fund members and mutual funds (23.6%) (21.8%) Housing (22.6%) Fund members (11.4%) Other (15.1%) Other (21.9%) Equity and equity funds (1.2%) Equity and equity funds (27.3%) The shares of lending for housing finance and direct lending to pension fund members have fallen but the share of investment in equity has increased very significantly …. Share of foreign assets in pension fund postfolios 25 % 21.2% 20 15 10 5 1.9% 0 1995 2001 … and the share of foreign assets has taken a jump Net real rate of return on pension assets fund 1991-2001 14 % 12.0 12 12 10 8 6.1 6,1 6 7.0 7 6.7 6,7 6.8 6,8 6.6 6,6 7 7.9 7,9 7.6 7,6 7.4 7,4 7,6 7,4 4 2 0 -0,7 -0.7 -2 -4 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Returns have become more volatile with a bigger share of equity and foreign assets ? 2001 The pension funds are big players in domestic financial markets (2001) P.f. assets equivalent to 34% of the zise of the credit system (13% in 1980) 44% of the stock of marketable bonds Hold around half the stock of housing bonds P.fs. owned domestic equity and shares in equity funds amounting to 11% of the size of the organised equity market Outlook for the pension funds Reforms in the late 1990s: – Comprehensive legislation on pension funds – Reorganisation of public sector pension funds – Tax incentives for private pension saving Not major changes ahead: – The challenge of earning satisfactory return for rapidly growing funds in a less favourable environment – Mergers and bigger funds The economic boom is over and the big current account deficit is shrinking rapidly Output gap and inflation 1991-2002 4 3 2 1 0 -1 -2 -3 -4 -5 % of GDP % Output gap (left-hand axis) Inflation (righ-hand axis) 9 8 7 6 5 4 3 2 1 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 The overheating is turning into a slack, leading to a reduction in inflationary pressures General government financial balance 5 % of GDP 4 3 2 Structural 1 0 -1 -2 Actual -3 -4 -5 -6 1994 1996 1998 2000 2002 2001: Estimate. 2002: Projection.Sources: National Economic Institute, Central Bank of Iceland Government finances were consolidated during the upswing but a small structural deficit is currently emerging Monetary policy Interest rates were increased during the upswing and the exchange rate appreciated The current account deficit, inflationary pressures and worse growth prospects created significant pressures on the exchange rate from the spring of 2000 Iceland adopted inflation targeting and floating exchange rate on March 27th 2001 Inflation targeting 2½% long run target (2003) ±1½% tolerance limits Higher tolerance ceilings 2001 and 2002: 6% and 4½% The nominal effective exchange rate of króna January 1998 - May 2002 (end of month)1 Dec. 31 1991=100 100 105 110 115 120 125 130 135 140 145 150 Inflation target Fluctuation limits (abolished in March 2001) Exhange rate J MM J S N J MM J S N J MM J S N J MM J S N J MM J S N 1998 1999 2000 2001 2002 1. Lates t value is M ay 16 2002. Sour ce:C entral B ank of Iceland. Iceland abandoned exchange rate targeting at the eleventh hour and went on an inflation target under very difficult conditions on March 27th 2001 Exchange rate volatility 0,8 % 12-month moving average % 4 0,7 0,6 3 Daily volatility (left-hand axis) 0,5 0,4 2 0,3 0,2 0,1 1 Monthly volatility (right-hand axis) 0,0 0 J MM J S N J MM J S N J MM J S N J MM J S N J M 1998 1999 2000 2001 2002 Exchange rate volatility increased considerably Central Bank inflation forecast Verðbólguspá Seðlabankans % % 1010 88 1010 50% confidence interval 75% confidence interval 90% confidence interval Upper tolerance limit 66 44 88 66 CPI 44 Inflation target 22 22 00 00 Lower tolerance limit -2-2 1998 1998 -2-2 1999 1999 2000 2000 20012001 20022002 2003 2003 2004 2004 Sour ce:C entral B ank of Iceland. But the imbalances were finally contained and inflation is currently falling rapidly Central Bank Repo- rates Jan u ary 5 , 1 9 9 9 - May 2 2 , 2 0 0 2 12 % 11 10 9 8 7 6 5 4 1999 | 2000 | 2001 | 2002 The CB has therefore started the process of interest rate cuts Long-term nominal treasury bond yields 12.0 11.5 11.0 10.5 10.0 9.5 9.0 8.5 8.0 7.5 Daily data % Latest: May 24 1½ yrs. to maturity 5 yrs. to maturity 11 yrs. maturity 11 to yrs. to maturity J F M A M J J 2001 Á S O N D J F M A M 2002 Nominal bond yields have also fallen along with lower inflationary expectations and lower CB rates. The slope of the nominal yield curve reflects confidence in lower inflation. Yields on indexed long-term bonds 6.5 % End of month Latest: May 24 6.0 5.5 5.0 4.5 4.0 15 year treasury bonds Housing bonds 3.5 J M M J S N J M M J S N J M M J S N J M M 1999 2000 2001 2002 But real interest rates have remained high The equity market 31/12 ’97 =1,000 Monthly turnover and daily equity prices on ICEX B.kr. 1,900 1,800 1,700 1,600 1,500 1,400 1,300 1,200 1,100 1,000 900 40 ICEX-1 5 35 ICEX-MAIN 30 Total sh ares turn o ver 25 20 15 10 5 0 2000 | 2001 | 2002 The equity market has recovered. ICEX-15 has inreased by 30% from its low in late summer 2001 and by 11% in 2002. Some useful websides The economy: – Central Bank of Iceland: www.sedlabanki.is – National Economic Institute: www.ths.is – Statistics Iceland: www.statice.is Financial markets: – For foreign investor: www.bond.is – Iceland Stock Exchange: www.vi.is – Financial Supervisory Authority: www.fme.is Pension funds: – National Association of Pension Funds: www.ll.is