Speech by Prime Minister of Iceland Halldór Ásgrímsson
at the Millennium Hotel
“Icelandic investments in the UK – an invasion?”
Ladies and gentlemen,
It is a pleasure for me to be here today and have the opportunity to address this distinguished audience. Let me also thank Kaupthing Limited, Singer & Friedlander and New Bond Street Asset Management for organising this event.
In the last few years Icelandic investments abroad have increased dramatically. According to a recent survey, foreign firms owned by Icelandic investors employ approximately 104 thousand people in 14 different countries. This is a 25% increase in only one year. For comparison, the labour market in Iceland constitutes some 165 thousand people.
Almost 70% of those employed by Icelandic investors abroad are located in Britain. And indeed, we have seen headlines such as “Britain invaded” and “hostile takeover” in both domestic and foreign newspapers, and cartoonists are tireless in illustrating Icelandic businessmen sailing to the coasts of Britain wearing Viking helmets and waving swords.
The question I would like to pose here, and hopefully answer, is whether the Icelandic investments abroad, particularly in the UK, are indeed an Icelandic invasion of some sort, or a mere result of what is frequently referred to as globalisation. Or perhaps a combination of both.
But first, let me say a few words about the Icelandic economy. Since 2003, Iceland has been one of the fastest growing economies in Europe. Economic growth has been averaging at or above 5% annually. Unemployment is almost non-existing, in fact we have to import labour from other countries in order to fulfil demands in certain sectors, such as the construction industry. Iceland also enjoys one of the highest standards of living in the world. The fiscal situation is sound and the level of public debt is amongst the lowest in the world.
This favourable description of the economic situation in Iceland is not only recognised by the Government and our supporters but also by international organisations such as the OECD and the IMF, as well as the major international rating companies, Moody’s, Standard and Poor’s and Fitch International. Furthermore, Iceland tops the league of European nations when it comes to competitiveness, and comes fifth worldwide. Obviously we have our problems, but as a nation we cannot complain when we compare our situation with that of many others.
Having said that, let me quickly add that Iceland´s prosperity is a relatively recent phenomenon. Less than a century ago Iceland was a colony and one of the poorest populations in Europe. Also, and less than 25 years ago, the economy was to a great extent isolated. Price setting was centralised and tariffs on trade were high. Corporate taxes were also very high. Imports and exports were both highly regulated and subject to governmental intervention. Furthermore, the economy was very much a one-product economy as fish and fish products were almost the only export items of any value. A good example of our dependence on fish at that time is that until 1973 Iceland was categorised as a developing country by the World Bank because of its excessive dependence on fish.
Consequently, the economy was subject to large fluctuations and the main economic policy tool of the Government was the exchange rate. This was a tool that was time and again used by the Government in order to mitigate the effects of external shocks. As a result, the labour market was unstable with strikes further destabilising the economy. In addition, entrepreneurial activity was limited due to other factors, such as a small domestic market and restraints on expansion to foreign markets. Competition between firms was further limited resulting in low quality output and limited production range. Furthermore, the infrastructure of the country was in many ways unsatisfactory.
Ladies and gentlemen,
How the isolated island in the north became the modern Iceland of today leads me, at least partly, to answering the question I posed in the beginning. For the last 15 years or so wide-ranging structural changes have taken place in Iceland, which have transformed the Icelandic economy. Let me mention, in my view, the milestones in this respect.
Firstly, since 1992, Iceland has actively sold its state-assets. Actually, the largest privatisation in Iceland´s history was successfully executed only last year when Iceland Telecom was sold. Moreover, the privatisation of the three state-owned banks in 1998-2003 has resulted in stronger banks, which are now more willing and more capable to take part in entrepreneurial activities and large-scale investments, domestically and internationally. One of these banks, the host of this event, Kaupthing Bank, has operations in 10 countries and is on the top ten list in Scandinavia when it comes to measuring size, and ranks number 180 worldwide. Later in the week, I will be visiting the other two, which also run branches in various countries with the world as their marketplace.
Secondly, the market and tax structure has been modernised allowing businesses and competition to thrive. Here, the EEA agreement has served Icelandic interests well and provided Icelandic businesses and entrepreneurs with good access to European markets. The tax system has gone through a complete overhaul resulting in a much more favourable business climate. Both personal income and corporate taxes have been cut by a large margin. Today, the personal income tax is around 36%, and the corporate tax has been lowered from 51% to 18%, and is now amongst the lowest in Europe. Last but not least the capital income tax, levied on all types of capital income, i.e. capital gains, dividends and interest income, is only 10%.
Thirdly, and obviously related to the above-mentioned changes, asset prices have risen dramatically as witnessed by the Iceland Stock Exchange index, which has more than tripled in the last three years. As a matter of fact, the equity market capitalisation as a percentage of GDP in 2005 was 186% in Iceland, compared to 139% in the UK, 136% in the USA, 121% in Sweden and 69% in Norway, to name a few examples. Also, the financial position of the Icelandic pension funds is very strong and their total assets amount to 1.200 billion ISK, which constitutes about 20% more than Iceland´s national income. This means that there is a lot of capital available for investment purposes.
Finally, let me say that we have had our fair share of ups and downs in our investments abroad. At first, Icelandic investors invested in the fish industry, often in firms that had run into difficulties. These did not always turn out to be good investments. Then, Icelandic investors started investing in more versatile and better-run companies with growth potentials and strong management teams. These proved to be better investments and, nowadays, Icelandic investors have the self-confidence and, indeed, the capital to take more risks in their investments.
These changes have, in a relatively short time-span, contributed to the transformation of the Icelandic economy from being a primary goods producer to a diversified high-technology and service-oriented economy. Although I take great pride in, and even some credit for, these changes, they are not entirely home-made. These changes were vital for Iceland and its business community to face the new challenges, and indeed grasp the opportunities, in an increasingly integrated and interdependent world.
In my view, it is this environment, these changes - globalisation if you want - that have sparked the dramatic rise in foreign investments amongst Icelandic businessmen here in Britain. So don´t blame our Viking heritage! Instead, we should thank the forces of globalisation!
Some still wonder whether there might be an Icelandic element at play here, perhaps an Icelandisation within the globalisation. Some would argue that Icelandic investors are different from, say, Danish investors, or British investors for that matter. A popular notion, again, refers to the Icelandic culture, even mentality - that Icelandic investors are more bold and prone to taking larger risks than others. That there is, after all, a touch of Viking blood in their business approach.
While I would hesitate to totally refute this popular notion, because I do think there is some grain of truth in this, I would like to add another explanation, which has to do with smallness. Namely, that Iceland is different in at least one other, and perhaps important, respect. Only last month, Iceland celebrated the birth of its 300.000th inhabitant. And how is this relevant? Well, we are different in the sense, that there are so few of us. The Icelandic companies, for example Baugur Group, Bakkavör Group and Avion Group, which have been actively investing on British soil, or the banks, are after all not that big. It is a well known fact that smaller companies tend to be more focused and can escape from endless administration layers and long decision-making processes. Consequently, Icelandic companies act quickly when the business opportunity reveals itself. And, as we know, when the competition is fierce, acting quickly can determine “the making or breaking” of deals. I think the UK experience bears this out.
Ladies and gentlemen,
It is not a conincidence that the UK market is so attractive for Icelandic investors. The UK is an open market, which has a liberal and progressive approach to international trade and activities by foreign enterprises. Moreover, Iceland and the UK have a long-standing trade relationship. The UK is Iceland´s biggest export market with 19% of our total export in 2004. Similarly, looking at Icelandic foreign investments, the UK tops the league with 26% of our total investments abroad. These figures do not include our football players, the best of whom we tend to export to England. I believe we now have three players in the Premier League, and I´m hoping to see one of them, Eiður Smári Guðjohnsen, play on Stamford Bridge tonight.
Also, and I have heard this on many occasions, we find it quite pleasant to do business in Britain, and with the people of Britain. People here are solid and trustworthy, which are crucial elements when investing and conducting business. Some might add that there are strong similarities between our two island peoples and I think there is an element of truth in that. I also believe that the Icelandic investments here in Britain are beneficial to both countries. According to the survey I referred to before, over 73 thousand people in Britain earn their salaries by working for Icelandic employers. That is a significant number by any standards. Similarly, if Icelandic investments abroad prove profitable, stakeholders in Iceland get their fair share of the profit.
While I have been looking at the successful Icelandic investments abroad with great pride, I have also given a profound thought to how we can attract foreign investments to Iceland, especially since evidence shows that the business climate in Iceland is considered one of the most favourable in the world by any standards. While I think the opportunities for foreign investors are abundant in Iceland, I would like to mention one thing in particular. Recently I appointed a high-level commission to look into the necessary prerequisites for attracting international banking and finance to Iceland and explore Iceland’s competitive stand in this respect. As it happens this commission is chaired by Sigurður Einarsson, the chairman of the board of Kaupthing Bank. In a speech I delivered the other day, I articulated the vision that by the year 2015 Iceland would have become an international financial centre. I firmly believe that Iceland has all the foundations for this vision to be realised – a high level of education, favourable business environment and a good infrastructure.
Ladies and gentlemen,
I have often said that small states must think big. That also applies to the business community. Icelandic investors certainly think big, and they can act quickly. That, along with the changes spurred by increased globalisation, and our long-standing good relations with the people of Britain, ultimately explains why Icelandic investors have chosen Britain as their “battleground” with, however, no invasion or hostile takeover in mind.