CS1501665Republic of IcelandAn Established Platform for Stable Growth September 2015

1. Iceland Overview

3. Public Finances: Improving Credit Metrics and Debt Sustainability

5. Concluding Comments

4. Key Policy Challenges: A Measured Approach to Lifting Capital Controls

2. The Economy: A Stable Platform for Sustainable Growth

3

Iceland Credit Overview: An Established Platform for Stable Growth

• Economy continues to grow• Low unemployment and increasing wages• Inflation at moderate level• Exports continue to play a key role

Robust Economic Indicators

• Budget balance in surplus• Government debt on downward trajectory• Nordic Loans fully repaid and IMF reduced to just

17% of original programme size

Positive Trend inPublic Finances

• Unwinding estates of the failed banks• Repayment of 85% LBI priority creditors ($3.2bn)• LBI bond repayment extended to 2018-2026• Lifting of capital controls

Good Progress on Remaining Challenges

• High quality, educated labour force• Rich and abundant natural resources• Political and social stability comparable to

conditions in AA-rated sovereigns

Strong Underlying Fundamentals

Credit Considerations Outlook

Solid Platform for Continued Growth

Favourable LongTerm Prospects

A comprehensive plan for liberalization introduced in June

Healthy Fiscal PositionProvides Flexibility

1. Iceland Overview

3. Public Finances: Improving Credit Metrics and Debt Sustainability

5. Concluding Comments

4. Key Policy Challenges: A Measured Approach to Lifting Capital Controls

2. The Economy: A Stable Platform for Sustainable Growth

6

Key Economic Indicators Remain Positive

Low Unemployment Boosts GDP Growth

Projected Sustainable GDP Growth

Growth in Exports Continues to Play a Key Role

% Growth

% of workforceIndex, 2008=100

Inflation Forecast to Remain at Moderate Levels

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 201860708090

100110120130140150160

Goods and services export Goods exports Service exports

GDP Imports

Sources: Statistics Iceland - Economic forecast, spring 2015. Central Bank of Iceland. IMF - World Economic Outlook Database, April 2015. Directorate of Labour - 2015

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-6

-4

-2

0

2

4

Statistics Iceland Statistics Iceland - Forecast IMF - Forecast

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

2

4

6

8

10

12

14

Statistics Iceland Statistics Iceland - Forecast IMF - Forecast

Average, annualized rates, 12 month

%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 20190

2

4

6

8

10

Directorate of Labour Statistics Iceland - Forecast IMF - Forecast

7

Iceland Recovery: Faster and Stronger than Most of Europe

Out of recession faster than IMF programme countries

Source: IMF database 2015.

GDP Growth (% per annum)

Outperforming strongest EU members

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-10

-8

-6

-4

-2

0

2

4

6

Cyprus Ireland Portugal Greece Iceland

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019-8

-6

-4

-2

0

2

4

6

Germany Netherlands UK France Iceland

8

Fall in Exchange Rate Facilitated Current Account Turnaround

…Featuring a Positive Trade Balance…

Low Real Exchange Rate Enhances Competitiveness…

…and Rapid Growth of Tourism Receipts

…Supports an Improved Current Account Position…

Sources: Statistics Iceland – 2015. Central Bank of Iceland – Monetary Bulletin 2015/1. IMF - World Economic Outlook Database, April 2015

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

1450

60

70

80

90

100

110

120

Relative CPI

January 2000 = 100

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

-20

-15

-10

-5

0

5

10

Central Bank of Iceland Central Bank of Iceland - Forecast IMF - Forecast

% of GDP

2009 2010 2011 2012 2013 2014 2015

-80

-60

-40

-20

0

20

40

60

80

Imports Exports Trade Balance

ISK bn

2009 2010 2011 2012 2013 20140

200

400

600

800

1,000

1,200

1,400

1,600

-5%

0%

5%

10%

15%

20%

25%

30%

156 163 196 240 277 304

791866

9621,009 1,027 1,067

20%19%

20%

24%

27%28%

Tourism Total Export of goods and services Share of Tourism (R-axis)

ISK (Millions) Tourism (%)

9

Fundamentals Supported by Performance in Key Sectors

Price Indices of Marine Products

Energy

Foreign Passengers Through Keflavik Airport in 2014

Catch Value as a % of GDPForeign Passengers Through

Airports and Cruise Ships

TourismFisheries

0

200.000

400.000

600.000

800.000

1.000.000

1.200.000

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

Tourists via cruise shipsTourists via airports

22%

23%18%

12%

Annual generation of energy, GWh

Generation and utilization

1286371%

524529%

Hydro energy Geothermal energy

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

0

5,000

10,000

15,000

20,000

40%

45%

50%

55%

60%

65%

70%

75%

80%

Annual generation of energy (GWh Left Axis )

Generation and utilisation

Annual generation of energy (GWh, LHS)Utilisation (RHS)

Sources: Statistics Iceland – 2015. Icelandic Tourist Board - 2015

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

0

50

100

150

200

250

300

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

ISK price index (Left axis)XDR price index (Right axis)

20

05

20

06

20

07

20

08

20

09

20

10

20

11

20

12

20

13

20

14

0

2

4

6

8

10

US 16%

UK 19%

Poland 2%Germany 9%

Norway 6%Denmark 5%

France 6%

Other 27%

Sweden 4%

Netherlands 3%

Canada 4%

12

Demographics Favorable for Economy and Public Finances

Comparison of Pension System Funding

Strong Demographics and Pension System

Comparison of Selected Dependency Ratios

0

10

20

30

40

50

60

2005 2006 2010 2015 2020 2025 2030 2035 2045 2050

EU-25 Denmark Finland

Germany Iceland Ireland

Projected Old-age Dependency Ratio (%)

· Young workforce

– Only 12% in retirement age (> 67 years)

– 35% younger than 25 years old

· Pension system substantially fully funded

– Healthy pension fund asset base as at year end 2014 of ISK 2,920 bn (or 146% of GDP)

– Pension funds are net investors in the economy

Sources: OECD Global Pension Statistics, EUPHIX, UN Population Statistics, Statistics Iceland and Central Bank of Iceland 2015

Total Population and % aged 65+

30

35

40

45

50

55

60

65

70

0 20 40 60 80 100 120 140 160

Old-age Dependency Ratio in 2050 (%)

Spain

Italy

Portugal

Poland

HungaryIreland

Denmark

Finland UK

NetherlandsIceland 2011

Total Net Assets of Pension Funds 2011 (% GDP)

Iceland 2014

2007 2008 2009 2010 2011 2012 2013 2014

305,000

310,000

315,000

320,000

325,000

330,000

335,000

11.0%

11.5%

12.0%

12.5%

13.0%

13.5%

14.0%

12%

12% 12% 12%

13% 13% 13%

14%

1. Iceland Overview

3. Public Finances: Improving Credit Metrics and Debt Sustainability

5. Concluding Comments

4. Key Policy Challenges: A Measured Approach to Lifting Capital Controls

2. The Economy: A Stable Platform for Sustainable Growth

14

Primary Surplus: Major Step Towards Fiscal Consolidation

Gross Expenditures on the Decline(1)

Iceland Fiscal Consolidation: A Global Comparison

Surplus Achieved in 2014 Expected to Continue

Continuous Growth and Improved Fiscal Position

· Positive primary balance since 2012– 5.2% of GDP in 2014– 3.7% estimated in 2015 (due to one-offs)

· Overall surplus achieved in 2014

· Accumulated surplus of over 5.3% of GDP expected during the forecast period (2016-19)*

· Expenditures peaked at 34% in 2009– Expected to reduce to 25% by 2019*

% of GDP

15.0 14.714.2

11.3

9.6

8.5 8.5

7.5

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

Finland 1993 Denmark 1982 Sweden 1993 Iceland 2009 UK 2009 Ireland 1986 UK 1993 Latvia 2009

% of GDP

(1) Excluding irregular items.Sources: Ministry of Finance and Economic Affairs – Budget proposal 2016

2014 Primary Surplus: 5.2%2014 General Surplus: 2.2%

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-15%

-13%

-11%

-9%

-7%

-5%

-3%

-1%

1%

3%

5%

Total balance excl. irregular itemsTotal balance

Forecast

2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0%

5%

10%

15%

20%

25%

30%

35%

40%

Excluding irregular items

Forecast

15

Government Debt Ratio on Declining Trajectory

Overview of Government Debt

Forecast

Gross Interest Payments

Source: Ministry of Finance and Economic Affairs – Budget proposal 2016Notes: Figures exclude loans from IMF and Norway (Central Bank is Borrower and covered within Central Bank reserve fund); and unfunded pension liabilities (ISK408 bn at year-end 2013); adjusted for impact of Nordic drawdown. FX

rate: $1/ISK 127

Forecast

$bn eq.

16

13

10

6

3

0

-3

-6

$m eq.

790

710630

550

470

400

320

240160

80

02007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

0

10

20

30

40

50

60

70

80

90

100

0%

1%

2%

3%

4%

5%

6%

Interest expenditure,constant price (Left axis) Interest expenditure % of GDP (Right axis)

ISK bn. % of GDP

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

-800

-400

0

400

800

1,200

1,600

2,000

0

10

20

30

40

50

60

70

80

90

100

Net fin. pos. (Left axis) Municipalities Central Government debt Gross General Government debt (Right axis)

1. Iceland Overview

3. Public Finances: Improving Credit Metrics and Debt Sustainability

5. Concluding Comments

4. Key Policy Challenges: A Measured Approach to Lifting Capital Controls

2. The Economy: A Stable Platform for Sustainable Growth

19

Key Policy Challenge: Lifting Capital Controls

Offshore ISK holdings

ISK300bn (or 15% GDP) FX auctions to

facilitate reinvestment

Strengthened FX reserves

Extended Government Debt

Repayment of priority creditors

LBI bond extension

Strengthened capital positions of new banks

Nov ’08: Introduction of Capital Controls- Apply equally to the

domestic assets of residents and non residents

- Residents under repatriation

- Stabilised ISK Exchange Rate

Mar ’11: Liberalisation strategy published- Initiation of reserve neutral

auctions to release liquid ISK held by non-residents

Mar ’12 / Mar’ 14: Amendments to Foreign Exchange Act- Capital control exemptions

enjoyed by failed institutions removed

Background

Domestic assets of Wound-up Banks

ISK850bn (or 42% GDP)1

Capital Movements

Actions to DateStatus Challenge

Resident portfolio rebalancing

ISK450bn (or 22% GDP)

1. Gross amount, which includes book value of equity holdings in DMBs plus LBI bond. Net amount would be 40% GDP based on 95% held by foreign creditors.

· Comprehensive strategy for capital account liberalization announced early June

· ISK 1200 billion problem solved, stability ensured

· Stability conditions and stability tax on failed banks´estates

· Currency auction for holders of offshore ISK late 2015/ early 2016

· Estimated Treasury revenues arising from the execution of the liberalization strategy amounts up to 450 - 850 bn. ISK

· The funds that will accrue will firstly be used to offset the special tax on financial institutions 40 bn. ISK - other funds will be used to reduce public debt

· Steps will be thoroughly estimated as time progresses as decisions shall not risk economic or financial stability

Strategy on capital account liberalization

20

· The effects of the tax are clear

· More uncertainty is around the stability conditions and possible outcome of the multi- product auction

· In the fiscal plan it is estimated to use the first part of the possible revenues to pay down the bond Treasury issued for recapitalization of the Central Bank

· No other effects are taken into account in the medium-term fiscal plan

· More clarity is expected before the budget is finalized

Stability conditions / stability tax

21

· Stock of offshore krónur amounts to 300 billion ISK

· The stock has already been reduced by half through auctions

· The problem will be solved with a multi-product auction, where holders can bid for currency and ISK - and EUR denominated bonds with a maturity profile consistent with Iceland´s BOP

· Third option is locked non-interest bearing accounts

· Final terms are yet to be decided

· The auction process ensures that all offshore ISK will no longer be a risk for the BoP

Currency auction for holders of offshore ISK

22

25

Policy Framework and Oversight Has Been Strengthened

Monetary Policy Committee

Improvements cover both framework for monetary and macro prudential policy

· Establishment of a monetary policy committee responsible for policy implementation and enhanced requirements to transparency with regards to policy decisions and deliberations.

· Changes in the structure of macro prudential policy-making with the foundation of both a Financial Stability Council and a Systemic Risk Committee tasked with working for the Council.

Financial Stability Council and Systemic Risk Committee

· The council is a formal co-operation forum of public authorities for financial stability. Its role is to promote and safeguard financial stability, increase financial system resilience and prevent the accumulation of systematic risk.

· New liquidity rules for financial institutions were introduced in December 2013. Rules are based on the Basel framework (LCR) and adapted to Iceland specific conditions, in part through the inclusion of requirements on foreign currency liquidity . They assume that banks must always have sufficient high quality liquid assets to cover net outflows for the next 30 days under stressed conditions.

· The Central Bank of Iceland has adopted new rules on commercial banks’ foreign currency funding ratios. The funding ratio, which is based on the net stable funding ratios (NSFR), is intended to ensure a minimum level of stable one-year funding in foreign currencies. It will restrict the degree to which the commercial banks can rely on unstable short-term funding to finance long-term foreign currency denominated lending.

· New organic budget law has been presented to parliament. It proposes a number of important changes to the way fiscal policy will be formulated in Iceland. Forecasts for medium term (5 years) and for long term (25-30 years). Improvements in fiscal policy coordination between the central and local governments. New fiscal rules that direct public finances towards a balanced budget over the cycle while preserving flexibility for the government to undertake countercyclical policies when needed.

A new bill later this year which will fully implement European banking rules into Icelandic law

A total revision on the law on financial institutions will follow

1. Iceland Overview

3. Public Finances: Improving Credit Metrics and Debt Sustainability

5. Concluding Comments

4. Key Policy Challenges: A Measured Approach to Lifting Capital Controls

2. The Economy: A Stable Platform for Sustainable Growth

28

Key Investor Highlights

Government debt to GDP ratio on downward trend

Well-developed government debt

market with regular auctions Fiscal balance in

surplus from a 27% of GDP

deficit in 2008

Educated labour force, solid

infrastructure and social stability

Substantially fully-funded

pension system

Tourism growth on average of

20% during the past 5 years

Abundant natural resources helps fuel economic

growth

Robust political institutions, deep democratic roots

Profitable and globally

competitive fishing industry

Republic of Iceland

For more information:

·Ministry of Finance: www.fjr.is/

·Central Bank: www.cb.is/

·Statistics Iceland: www.statice.is/

·Government Debt: www.bonds.is/