Virus Leaves Iceland’s Post-Crisis Tourism Hopes in Tatters

(Bloomberg) --

After 2008, Iceland swore never again to build an economy only on banks. But its latest big export -- tourism -- might have left it exposed to a whole new world of trouble.

Currency traders recently started dumping the Icelandic krona in anticipation of bad news. The trigger was Icelandair Group hf, which lost almost a third of its market value last week amid fears the coronavirus is destroying the appeal of international travel.

Tourism dominates Iceland’s economy, making up almost half the country’s export revenue. So a severe blow to demand for travel could have devastating consequences.

Against that backdrop, “it would be unnatural if the krona didn’t weaken,” said Gretar Sveinsson, a currency trader at Arion Bank in Reykjavik.

“Not many things are going our way right now, economically speaking,” said Erna Bjorg Sverrisdottir, an economist at Arion.

In an interview with Iceland’s TV2 late on Wednesday, the governor of the central bank, Asgeir Jonsson, said the threat posed by the coronavirus “means more contraction of production this year than we anticipated, and that must mean that we will need to loosen the monetary policy.” The next meeting is March 18, and the rate is currently 2.75%. Jonsson also said that Iceland “can withstand temporary shocks and the coronavirus is temporary.”

Even before the virus hit, the prospects for Iceland’s economy were grim. The central bank said on Feb. 5 it only expects growth of about 0.8% in 2020, halving its November forecast.

Read More: Iceland Says Coronavirus Cases Rose by 10 Wednesday, to 26 Total

Finance Minister Bjarni Benediktsson says the government is ready to deliver a “strong response” should the coronavirus upend Iceland’s economic outlook.

“In the worst-case scenario, the effect will be very negative,” he said.

To contact the reporter on this story: Ragnhildur Sigurdardottir in Reykjavik at rsigurdardot@bloomberg.net

To contact the editor responsible for this story: Tasneem Hanfi Brögger at tbrogger@bloomberg.net

©2020 Bloomberg L.P.