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Iceland’s economic prosperity in recent years was invested in excellent telecom infrastructure, helping its citizens enjoy some of the highest mobile phone and broadband penetration rates in the world. Yet in coming years the telecom sector will be deeply affected by the financial meltdown which since mid-2008 has severely interrupted the country’s financial sector.

Icelanders had for several years invested internationally, in the process securing for themselves one of Europe’s highest living standards. This prosperity and high growth was secured on the back of an economy burdened with a foreign debt that peaked at ten times the national GDP.

The country’s major banks benefited from liberalised financial markets prevalent at the turn of this century by exploiting the low interest rates available elsewhere (notably Japan), in the process borrowing some €93 billion (ISK13.5 trillion). This money was in turn re-invested in international markets, largely in the UK’s retail and property sector. The narrow focus of these investments left little room to manoeuvre when the tide turned: as the UK’s property and retail sector crumbled, the snowballing financial turmoil saddled Iceland with enormous debts which will affect its citizens for many years to come. To maintain solvency, the government was obliged to secure a €9.7 billion loan from the International Monetary Fund (IMF).

The financial meltdown has led to a dramatic overhaul of Iceland’s banking sector: Of the major banks, Glitnir collapsed and was bailed out by the government, Landsbanki was nationalised and placed in receivership, Kaupthing went into administration. Following the collapse of the currency and banking system, the coalition government of Prime Minister Geir Haarde, which had been in power since May 2007, itself fell on its sword earlier this month, having squandered any remaining confidence among the electorate.

Iceland’s economy is expected to contract by up to 10% in 2009, leaving very little scope for telecom investments, while unemployment will increase dramatically until at least 2011, interest rates will settle at around 18% for the foreseeable future, and rising inflation will challenge the new government’s ability to manage the economy. According to Statistics Iceland, the Consumer Price Index (less housing costs) increased to 305 points in January 2009 from 251 points a year earlier.

As the international investments which once propped up the country’s wealth and high living standards have evaporated, the ability and willingness of consumers to buy or upgrade equipment has been dampened, and operators have had difficulty securing loans to pursue their investment commitments.

It is in such desperate times that the government can rescue the telecom market from years in the doldrums. Since 2006 the government has maintained a Telecommunications Fund to allocate money for projects aimed at developing the country’s telecom infrastructure, principally in areas where investment from the private sector was considered unlikely to be undertaken on market terms. Some ISK2.5 billion has been allocated to the Fund thus far, using the proceeds from the sale of the government’s stake in Iceland Telecom. The principal aims of the Fund were concentrated on securing universal broadband, extending mobile network coverage and providing the National Broadcasting Service on digital satellite TV. Whether by diverting money from the IMF or through its own tax revenue, the government is now in a position to follow those managing the major markets (the USA, the UK, France, Germany and Italy among them) by creating telecom-sector jobs while continuing to secure the country’s infrastructure for the future.

For more information, see the following reports:
Iceland – Telecoms, IP Networks, Digital Media and Forecasts;
Europe – Infrastructure – FttH & NGNs;
Europe – Regulatory Environment;
Global – Analysis – The Financial Crisis and Economic Stimulus Packages.

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This entry was posted on Tuesday, February 17th, 2009 at 4:28 pm and is filed under From Paul's Desk. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.