Dec 18 2008

Iceland can not trust on aluminium to solve the economic crisis

Bloomberg – Iceland’s planned economic recovery, based on raising exports of aluminum, may take longer to achieve than the government expects as the global slowdown forces down commodity prices, Fitch Ratings said.

The island is relying on aluminum sales, which have overtaken marine exports as its biggest export, to pull it out of the worst recession in more than half a century. The metal made up about 40 percent of total exports in the first 10 months, compared with 27 percent a year earlier, according to the statistics agency. Still, increased reliance on aluminum comes at a bad time as prices have slumped more than 30 percent since the start of the year.

“Much new aluminum smelting capacity — the second string to Iceland’s export bow — has started to come onstream at the very point when world market prices are falling and production is being subject to steep cutbacks,” Fitch said in a note yesterday.

The failure of Iceland’s biggest banks in October forced the government to go cap in hand to the International Monetary Fund for a $2.1 billion loan plus $2.7 billion from the Nordic countries and Poland. They won’t prevent the economy contracting about 10 percent next year, the IMF estimates. At the same time, much of the IMF funds will be used to support a budget deficit next year that Fitch estimates will amount to 14 percent of gross domestic product.

“While the authorities have set considerable store by a sharp reversal in the current account deficit, albeit driven mostly by a decline in imports, this adjustment could be complicated by an adverse global economic environment,” Fitch said.

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