Yesterday, October 11, 2016 the Icelandic Parliament unanimously approved the Bill to remove the currency controls that were put in place after the financial collapse in 2008. This has been a long 8 years, but I believe Iceland has fared lot better than most people would have imagined. That being said, are all problems solved? I don’t think so. There are still a number of issues, the krona overhang, overcapitalised banking system, wages rising faster in some roles and not across the whole spectrum of available jobs, high level of indebtedness within the Icelandic households and companies etc. Coming back to the bill, which was presented in August to the parliament and some of the salient features of the liberalisation are:
- That outward foreign direct investment be unrestricted but subject to confirmation by the Central Bank of Iceland.
- That investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans be permissible up to a given amount, upon satisfaction of specified conditions.
- That individuals be authorised to purchase one piece of real estate abroad per calendar year, irrespective of the purchase price and the reason for the purchase.
- That requirements that residents repatriate foreign currency be eased and that they be lifted entirely in connection with loans taken abroad by individuals for real estate or motor vehicle purchases abroad, or for investment abroad.
- That various special restrictions be eased or lifted entirely, including individuals’ authorisation to purchase foreign currency for travel.
- That the Central Bank of Iceland’s authorisations to gather information be expanded so that the Bank can promote price stability and financial stability more effectively.
As of 1 January 2017, the following are to take effect:
- The ceiling on investment in financial instruments issued in foreign currency, other monetary claims in foreign currency, and prepayment and full payment (retirement) of foreign-denominated loans will be raised.
- Transfers of deposit balances will be permissible for amounts below a certain ceiling. The requirement for domestic custody of foreign securities investments will be revoked. This will enable residents and non-residents to transfer deposits and securities to and from Iceland and to trade in securities abroad within the limits specified in the bill.
- Individuals’ authorisation to purchase foreign currency in cash will be expanded significantly.
You can read more about here.
It was rather interesting that I had to really dig around to find out more about the above news and decision. The Icelandic krona has been strengthening against all the major currencies this year. The central bank of Iceland estimates that this liberalisation could result in outflow of ISK 40 billion (approximate USD 450m) initially and could lead to outflow of up to ISK 165 billion (approximately USD 2b). The strategy of the Central Bank to keep a high interest rate (5% overnight
see table for more details) is to limit the outflow, but I think it is actually causing inflow like it always does. I believe that money is like water, it always finds the cracks and leaks to the highest yielding assets.
Iceland has the third highest interest rates in OECD countries only behind Mexico and Greece. It would be interesting to see what happens in the next quarter.
Given the election season, there is not much talk about this in the media. I really believe this is a pivotal decision for Iceland, Icelandic businesses and especially startups. You did not think that I was going to write about something that did not relate to Startups did you? The biggest advantage that I see is foreign investors interested in investing in Icelandic companies. This trend has already started, in case you did not notice Nova, the Mobile Telephone company in Iceland was acquired by Pt.Capital Advisors in a deal valued at more than $130m. Nova was a startup in its own right, founded by Thor Björgólfsson in 2007 and built like a startup that took on the incumbent telecom operators and gains significant marketshare to become a profitable, growing company. Investment by Pt.Capital Advisors is a testament of that.
Nova is just a tip of the iceberg, no pun intended. I believe that there is going to be a good flow of capital coming into Iceland and the Startup Ecosystem based on the above new legislation. In addition to the above, the release of the capital control allows some of the capital that is tied into Iceland to find other diversifications, although it is not the best of times to be investing in the global markets. One veteran investor told me that the best time to invest was 40 years back but the next best time is now. So, I don’t believe in trying to time the market, I am usually fully invested and work with the founders to build valuable companies.
This is also good for Startup founders who want to build their companies in Iceland, but they are not restricted to the local investors. They can raise capital from anyone around the world and build their business from Iceland to serve the world. I have written before that I believe that the first phase of building any startup, the most risky phase i.e the Product-Market fit phase can be done in Iceland with much less capital and much faster than any other place in the world. Once that is done, the founders are free to scale their business to any global market.
I see a world of opportunities sitting in this tiny rock in the middle of the Atlantic ocean. For those who think Iceland has nothing to offer… I will just say they have not looked hard enough.