Investment Trends and Opportunities in Iceland and the United States

Valgerður Sverrisdóttir Minister of Industry and Commerce


Ladies and gentlemen I am honoured and grateful for this opportunity to address this conference organised by the Icelandic American Chamber of Commerce - focusing on investment trends and opportunities in Iceland and the United States. Iceland went through a dramatic economic transformation in the last century; from being among the poorest nations in the Western hemisphere to enjoying one of the highest living standards in the world. This development is, of course, due to many factors, but the connection with the United States played a very important role. The arrival, first of British and then American troops during the Second World War, had tremendous influence on our economy and opened doors to new markets at the end of the war. Ever since, Iceland and the United States have had a close relationship built on co-operation and respect. This is important and this I wanted to underline in the beginning of my speech. Iceland has now enjoyed stable economic and political atmosphere for over a decade. This reflects in increased public and private saving and new opportunities for investors. The main export sector of the Icelandic economy has traditionally been the fishing sector. The heavy reliance on this single sector has reduced and it now accounts for around half of the currency earnings. The other main sectors are power intensive industry - mainly aluminium and tourism. New, knowledge-based industries, in fields such as biotechnology, prosthetics, pharmaceuticals and information technology, are also on the increase. And the latest “export” from Iceland is “money and entrepreneurship”. These last years, Icelandic investors have been making inroads into neighbouring countries as never before. The government has actively worked towards making the business climate friendly and attractive. For the last 15 years or so wide-ranging structural changes have taken place in Iceland, which have transformed the Icelandic economy. Both personal income and corporate taxes have been cut by a large margin. Today the corporate tax has been lowered from 51% to 18%, and is now amongst the lowest in Europe. Ten years ago the financial market was overwhelmingly in public hands, there was only one privately owned commercial bank and investment banking was scattered among various publicly owned "investment funds". Things look quite different now. Since 1992, Iceland has actively sold its state-assets. Actually, the largest privatisation in Iceland’s history was successfully executed only last year when Iceland Telecom was sold. The state also no longer holds share in any commercial bank after a string of successful privatisations, only retaining the Housing Finance Fund servicing private homebuyers. This has resulted in stronger banks, which are now more willing and more capable to take part in entrepreneurial activities and large-scale investments, domestically and internationally. In this context, one could mention the financial position of the Icelandic pension funds, which is very strong. The total asset of the pension funds amounts to 1.200 billion Icelandic Kronas, which constitutes about 20% more than Iceland’s national income. This means that there is a lot of capital available for investment purposes. Iceland has a unique energy situation. Its geographic location in the middle of the North Atlantic Ocean with large precipitation, glaciers and rivers provides abundance of hydropower potential. And being located on the crest of the Atlantic tectonic rift zone, Iceland has access to enormous geothermal energy potential which we Icelanders have learned to harness to our advantage. For over 40 years now, it has been the policy of all governments to promote the utilisation of the country’s clean and renewable hydro and geothermal energy resources for sustainable power development. We are very proud of our achievements in recent decades in utilising our geothermal resources, first for residential heating and, more recently, for the generation of electricity. Geothermal resources are located all across the country but it was not until early in the last century that technology made it possible to replace fossil fuels by utilising geothermal energy for house heating. This trend started on a small scale some 70 years ago and by 1970 around 50% of all house heating in Iceland was geothermal while 45% of housing was heated by oil. During the oil crisis between 1973 and 1979 the government stepped up the systematic development of heating utilities in the rural areas of the country where geothermal energy use was possible. Today, approximately 88% of Icelandic housing is geothermally heated and 11% is electrically heated. This means that practically all house heating comes from renewable energy sources. The use of geothermal resources for the production of electricity has increased over the past decade and it will increase more in coming years. The multiple use of geothermal energy is, therefore, an important part of the energy use as well as the quality of life in Iceland. Approximately 72% of the country’s total primary energy comes from renewable energy sources, a unique situation in the world. The use of these energy sources is of considerable economic significance for Iceland and one of the main pillars of the nation’s welfare and prosperity in recent decades. I have already mentioned the aluminium industry. Our environmentally clean and renewable resources are very attractive for power intensive industry in order to reduce the greenhouse gas emission often attached to the power production. For almost 40 years primary aluminium industry has played a major role in the economic development of Iceland. The first aluminium smelter was commissioned in 1969. Since then a second aluminium smelter has been built in the Southern part of Iceland and a new greenfield aluminium plant is now being built in East Iceland. By the end of this decade we will see the primary aluminium production increase to 760.000 metric tonnes annually. It goes without saying that these large projects, which I have mentioned, will have enormous impact on the relatively small economy of Iceland. An old saying tells us that where there is lot of sunshine there is also lot of shadows. We are also seeing signs of the shadow sides of the booming economy such as increasing inflation, temporary negative balance of accounts and the difficulties for our export industries due to the strength of the currency. The Government is aware of the signs and is challenged to deal with these temporary issues. Looking further ahead we are convinced that the positive impact on the economy due to the increased energy intensive industry will outweigh the negative one. We will see basic changes in the economic structure, a diversification, which makes Iceland less vulnerable to export fluctuations. The total share of manufacturing export will be 30% higher than 20 years ago. The permanent impact on the economic growth is estimated to be 2% higher annually when the situation stabilises after the new investments, measured by the annual Gross Domestic Product. As a result of the ongoing large investments in the aluminium industry, a number of renowned international aluminium producing companies have shown interest in investigating the possibility to build new smelter or to expand the ones already established in the country. New locations have been identified and investigated in co-operation between the Government and Municipalities. Yesterday, Alcoa announced that the company will make further studies on building a new aluminium smelter in Husavik in Northern Iceland. If this smelter is going to be built it will be the first aluminium smelter in the world using only geothermal power. Century Aluminium have also expressed their interest to explore the possibility of building a new aluminium smelter in the Southern part of Iceland. Ladies and Gentlemen, Iceland is internationally competitive in all the important areas for business operations as has been confirmed by a number of distinguished comparative studies. In one of the studies Iceland has been ranked first in Europe and fourth Worldwide in competitiveness, fifth in economic freedom, first in low corruption and third regarding quality of life. All these things matters when investors make their decisions – and of course many others as well. I hope you will all have an interesting morning, as I know that the following speakers have much to say. Hopefully this conference will further strengthen the business relation between Iceland and the United States. I thank you for your attention.