This complicates the compilation of balance of payments statistics, in particular on factor income and factor expenditures, and on the stock of foreign assets. Official data shows foreign assets at market value where market prices are readily available. Otherwise, assets are recorded at their book value. In an article in the Central Bank’s most recent Monetary Bulletin 1 , an attempt is made to estimate the market value of inward and outward foreign direct investment using methods developed in other countries. This is done by estimating the likely market value of assets that do not have a readily available market price. The result of the calculation is that rather than being negative by 120% of GDP, the international investment position was negative by less than 30% of GDP at the end of quarter III of 2007. The large difference stems not the least from the fact that assets of Icelanders abroad are much larger than those of foreigners in Iceland. The lower figure is not necessarily correct. However, it shows that there is an overriding likelihood that the large negative net international investment position of Iceland is exaggerated in the official statistics which are compiled in accordance with IMF standards. The Icelandic economy is at crossroads. It is quite evident that the expansion of recent years is coming to an end. The forecast issued by the Central Bank on April 10 envisages a contraction of GDP in 2009 and 2010. The Ministry of Finance forecasts a milder and more short-lived contraction.
The Icelandic interbank market has operated smoothly with rates consistently staying comfortably within the interest rate corridor of the Central Bank. The Bank has also modified other rules towards ECB standards, including the rules on reserve requirements. The evolution of our financial system over the coming months and years will of course be very much affected by developments in the global financial system. Once conditions improve generally at the world level and the access of banks to financing improves, the most creditworthy banks will be at the head of the queue but others further back. Thus, it will take longer for Icelandic and other banks closer to the fringes of the international financial system to gain normal access to international financing. This is the scenario which the managements of banks will have to adjust their thinking, strategies and operations to. If they do that, I am sure that they will fare well. If they don’t, their business will be more difficult. The business of banking is much dependent on confidence. It is therefore of the utmost importance for the Icelandic banks and others to do everything that they can to strengthen confidence in their operations and not to postpone any measures to that effect in the misguided hope that the operating environment will recover soon. In conclusion, I would like to mention that on May 8 the Central Bank of Iceland will publish its 2008 report on financial stability. It will be available on the Bank’s website on that day.