Icelanders in shock as tourism collapse hits economy

Reykjavik

GUDRUN Asta Gunnarsdottir found herself at ground zero of Iceland's latest crisis. Four months into her second pregnancy, the 33-year-old check-in desk operator was told she was one of 315 workers being laid off at Reykjavik's international airport.

The news came as a shock and "caused a lot of sadness for everyone, especially because a lot of people are now looking for work at the same time", said Ms Gunnarsdottir, who was able to return part-time to her airport job.

The collapse in March of Wow Air is sending ripples through the tiny north Atlantic island, whose spectacular recovery from financial collapse a decade ago was built to a large extent on attracting foreign visitors, thanks in part to its location for the filming of popular television series like Game of Thrones.

The latest numbers look dire. The number of visitors plunged 24 per cent in May from the same period last year and the all-important summer season is looking shaky.

The central bank last month pulled the emergency lever to cushion the blow and delivered a half-a-point rate cut, while the government has pledged to boost stimulus if needed.

"We are prepared for the possibility of a deeper recession, and the numbers we are getting on tourist arrivals seem to indicate that may happen," central bank governor Mar Gudmundsson said in a recent interview.

After 20 quarters of uninterrupted growth - the longest upswing in its recent history - Iceland is bracing itself for a sharp downturn. Forecasts for 2019 vary widely, with Arion Bank predicting a slump as deep as 1.9 per cent, but there's a general consensus that the nation is facing its worst contraction since the financial crisis.

Unemployment, while still low in an international context, has risen to 3.6 per cent. It was below 3 per cent at the start of the year. For all of 2019, the number of visitors could drop 17 per cent, according to forecasts from the Keflavik Airport's operator.

Hotel owners are already feeling the pinch, with overnight stays falling an annual 5 per cent in April and the total number of employees in tourism-related sectors decreasing by a similar percentage in May.

"May's drop in tourist numbers is larger than what we were expecting," said Skapti Orn Olafsson, a spokesman for the Icelandic Travel Industry Association.

Despite those concerns, the country is now better positioned to weather the storm. Almost a decade of solid growth has replenished the state's coffers, while the central bank has ample margins to cut rates (the benchmark rate now stands at 4 per cent). Also, the capital controls that were introduced in the wake of the financial crisis have now been removed.

"We have never been as well prepared in our history to deal with adverse situations as we are now," Mr Gudmundsson said. "We have policy space, with a lot of scope to cut rates if necessary."

Sedlabanki is due to announce its latest rate decision next week. Investors are also so far bullish that Iceland will come out relatively unscathed.

The country last week sold 500 million euros (S$766 million) in five-year bonds, in a deal that was almost five times oversubscribed. The government hasn't yet announced any specific plans for the tourism sector, but Parliament is currently discussing how to spend a 1 per cent budget surplus dividend originally pencilled in for 2019. Still, the impact can be clearly felt on the ground.

Haukur Einarsson, the owner of the 10-room Alfholl guesthouse in the centre of the capital, said he has had to cut prices by as much as 30 per cent in the face of a sharp drop in demand. One silver lining is the currency's recent swoon. After rallying sharply since 2015, it has weakened about 20 per cent against the dollar.

"If the krona were as strong as last summer, it would be very bad," he said. BLOOMBERG