Iceland’s sovereign CDS spread is higher than the underlying fundamentals warrant, and positive developments in the next few months could make quite an impact on it. Credit rating agencies and others have given us a clear indication of which factors are most important: reducing uncertainty about domestic financial institutions, resolving the Icesave dispute, and demonstrating signs of economic recovery. But where do we stand? Has the turnaround begun? According to the forecast published by the Central Bank last Wednesday, it has: seasonally adjusted GDP is projected to have grown between the second and third quarters of this year. This assumption is supported by various high-frequency indicators such as groceries turnover and payment card turnover. As the chart shows, we assume that this trend continued in the current quarter, although we expect growth to be somewhat less. In examining the chart, however, the viewer should bear in mind that quarterly GDP figures are quite volatile and measurements can show a small contraction in individual quarters, even though such a dip would not be considered to constitute an economic recession in the conventional sense. But in connection with the economic outlook, it is important to remember that consumer confidence appears to have taken a bit of a dive in the past few weeks (see Chart 2), concurrent with the beginning of the legislative session in early October and the demonstrations that took place at the time.
Monetary policy requirements also have highest priority when it comes to managing the foreign currency reserves. This is reflected, on the one hand, in the conditions on which we base our investment decisions, namely security, liquidity and performance. On the other hand, the primacy of monetary policy is also evident in the way we implement our investment policy. We proceed here with great caution to avoid causing distortions in the markets. We take account of the security and liquidity requirements for foreign currency investments by ensuring that a substantial part of our portfolio comprises high-quality government bonds. At the end of September, 83% of foreign currency holdings were invested in foreign government bonds or held as sight deposits at other central banks and the Bank for International Settlements (BIS). A further 5% were held in other investments, mainly corporate bonds. Approximately 96% of our fixed-income securities are rated AAA or AA. Around 12% of the foreign currency investments are in – exclusively foreign – equities. The SNB thereby holds equities to a value of about CHF 50 billion. I would like to emphasise that all of our equity investments are managed passively. We first decide in which markets we want to invest, and then replicate appropriate share indices. The primacy of monetary policy clearly differentiates the SNB from most other investors. In contrast to these, the exchange rate risk on our foreign currency investments cannot be hedged.