|Wednesday, May 23, 2012||Publisher: Íslandsbanki Research - firstname.lastname@example.org - Resp.Editor: Ingólfur Bender|
OECD optimistic about future outlook
The European Organisation for Economic Co-operation and Development (OECD) published a new economic forecast yesterday. The organisation is optimistic about the future outlook for the Icelandic economy and forecasts a growth rate of 3.1% this year, which is broadly similar to the growth observed last year. The OECD then expects growth to be slightly less next year, i.e. 2.7%. The OECD is forecasting higher growth for this year than other official bodies have in their recently published forecasts. The Central Bank of Iceland (CBI) and Statistics Iceland are forecasting a growth of 2.6% this year, for example, and the economics department of the Icelandic Federation of Labour (ASÍ) is predicting a growth of 2.2%. The difference between these forecasts and that of the OECD is primarily due to differing views with regard to investment. Thus the OECD expects a higher growth in investment this year, but has a similar view of the growth in private consumption. Statistics Iceland also expects to see a considerable growth in investment this year, but less growth in private consumption. The OECD predicts investment will increase by 16.5% this year and 10.3% next year. The OECD predicts investment will increase by 3.2% this year and 2.3% next year.
In the OECD's opinion, inflation will slow, but will still be over the CBI's inflation target by the end of the forecast horizon, when inflation will measure at about 4%. Unemployment will be down to 5% at the end of the forecast horizon, which is at the end of 2013. The OECD says it is vital that the government continues to implement its fiscal adjustment plan and that the legal framework around budgeting be reinforced. The OECD also says that the monetary stance needs to be gradually tightened to facilitate the capital account liberalisation strategy.
High growth by international standards
Few European countries can expect to see the same level of growth that the OECD is forecasting for Iceland this year. The outlook for the global economy is still subject to high uncertainty, in the OECD's opinion, and the economies of the world are emerging in very different states from a long and arduous winter. Japan and the US seem to be on the road to recovery and emerging market countries also seem to have pulled through the worst. Europe has not quite recovered yet, however, and unemployment is rising, for example, whereas the labour markets in Japan and the US seemed to have picked up again. According to the OECD forecast, the eurozone will contract by 0.1% this year before growing by 0.9% next year. The US economy is set to grow by 2.4% this year and 2.6% next year, whereas in Japan the economy is set to grow by 2% this year and 1.5% next year. The economies of all OECD countries as a whole are expected to increase by an average of 1.6% this year, according to the forecast. From this, one can see that the forecast for the Icelandic economy is very good by international standards at the moment, since few of the countries covered by the OECD's forecast will grow as much over the next two years, with the exception of emerging market countries. Australia is expected to grow by a similar percentage this year, i.e. by 3.1%, while Korea and Turkey are expected to grow by 3.3%, Mexico by 3.6% and Chile by 4.4%. The OECD forecasts that the Greek economy will contract by 5.3% this year, Portugal by 3.2% and Spain by 1.6%.
Króna less volatile
The Icelandic króna was considerably less volatile in May than it has been in the previous months of this year, according to the ISK trade-weighted index, which measures the króna in relation to Iceland's main trading currencies. At the moment of writing (09:00 hrs), the index measures at 223.9 points, which is similar to what has been its May average. Following the passing of amendments to the Foreign Exchange Act in March, the króna appreciated somewhat in April, whereas before this the króna has been depreciating, due to, among other things, the fact that domestic companies were paying off foreign loans and because financial undertakings were building up currency reserves to be able to honour foreign currency obligations. Seasonal fluctuations in currency flows generated by tourism are also a factor here. In April, the ISK trade-weighted index averaged at 227.8 points, which means that the króna was 1.8% stronger in May than it was in April.
Össur share prices rose by 3% yesterday and ended at ISK 208 per share, which means that Össur share prices have now risen by 12.4% since the beginning of the year. The reason for yesterday's rise was the announcement that William Demant Invest, Össur's largest shareholder, has made a voluntary public offer for all of the company's outstanding shares at the price of ISK 202 per share or DKK 8.2 per share. The offer was based on the share price at the end of trading on the day before the offer was announced. The Financial Supervisory Authority will now examine whether all the requirements were fulfilled, after which the offer document will be made public. The offer period will be four weeks and will commence four days after the offer document has been made public.
William Demant Invest (WDI) is Össur's largest shareholder and holds 39.58% of the company's issued share capital. According to the announcement, WDI does not intend to delist the company after the offer, but the offer is designed to ensure that WDI will have flexibility in deciding its controlling stake in Össur and increasing it to 40-50%. There is some legal uncertainty regarding whether WDI would have to make a mandatory offer, if it increases its stake beyond the current level. According to the announcement, the offer is being made to eliminate the uncertainty regarding potential mandatory takeover obligations, although this is something the Financial Supervisory Authority will now have to determine. One cannot expect to see a high level of participation in the offer, since the market price is now considerably higher than the offer price.
Less demand for MCI bond auction
There was considerably less demand at the bond auction of Municipality Credit Iceland Plc. (MCI), which was held yesterday that there has been at the fund's previous auctions. Total bids for the two series that were being auctioned amounted to over ISK 1.0 bn., compared to ISK 2.0 bn. at the April auction and over ISK 3.0 bn. at the March auction. As was the case in the previous two auctions, investors were slightly more interested in the longer series that was being offered, i.e. the LSS34 series, than the shorter LSS24 series. Bids for the LSS34 series amounted to a nominal value of ISK 730 m. at yields of 3.30% - 3.50%. MCI accepted bids for a nominal value of ISK 270 m. at a yield of 3.40%. The final yield was therefore the highest since this series was first launched last March. The yield at the April auction was 3.25%, compared to 3.32% at the March auction. This is in line with the change in yields on HFF34 bonds during this period and the gap between the end of trading yields on the Housing Financing Fund bond series and the LSS34 bonds was slightly narrower than at the last auction, i.e. 100 points against 106 points. The total size of the series has risen to ISK 1.4 bn. following this third auction.
As has been mentioned, there was considerably less interest in the LSS24 bond series, although there was more demand for bonds in this series than there was in March and April. Bids in the series amounted to a nominal value of ISK 300 m. at yields of 2.78% - 2.94%. Bids were accepted for ISK 200 m. at a yield of 2.80%. This was a slightly higher yield than at the April auction when it was 2.75%. However, the gap narrowed slightly between the end of trading yields on HFF24 bonds and LSS24 bonds yesterday in relation to April, i.e. it was 111 points compared to 122 points. Following this auction, the size of the series remains unchanged, however, i.e. at over ISK 28.3 bn., since previously issued bonds were sold.
Íslandsbanki's Research News & Reports are compiled by the staff of Íslandsbanki's Research Division. The information contained in these summaries is based on domestic and international sources and news networks, which are considered to be reliable, in addition to official information and the division's own estimates and opinions in each case. Íslandsbanki cannot, however, be held liable for the accuracy, reliability or correctness of this information. Íslandsbanki's Research News & Reports are only published for informational purposes and should therefore neither be looked upon as recommendations/advice to partake in or not partake in specific investments nor as an invitation to buy, sell or register with any specific financial instruments. Íslandsbanki and its staff cannot be held liable for any trading that may be carried out on the basis of the information published in Íslandsbanki's Research News & Reports. Any parties that intend to engage in trading are advised to seek expert advice and to fully acquaint themselves with the various investment options available. Investors will always be exposed to various types of financial risk, including, among other things, exchange rate volatility. One should bear in mind that past results are no guarantee of future results. Íslandsbanki's Research News & Reports offer brief summaries that should not be looked upon as exhaustive coverage of all the available information on the topics it focuses on in each case.
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