The war in Ukraine has not affected trade directly  Although the war in Ukraine has affected Iceland’s terms of trade, the net effect is ambiguous, with the prices of both imports and exports rising. Iceland is an exporter of both metals (mainly aluminium) and food products and thus has both gained and suffered from rising raw material and food prices. Terms of trade have remained favourable, although they have declined from their recent peak. Despite access to abundant domestic renewable energy, imported fossil fuels impact the Icelandic value chain both through the price of imported fuels, various imported goods and generally the cost of transportation, which is high given Iceland’s remoteness from major markets. Fuel is also an important cost item in fisheries. Rising import prices, however, result not only from the war in Ukraine, but can be partly explained by supply-chain disruptions and the container cost crisis triggered by a reallocation of resources in the global economy as it recovered from the pandemic. The cost increases seep into the global value chain and affect inflation globally. Eventually those mismatches are being resolved from the supply side, as firms respond to price signals, and from the demand side, with global tightening of monetary conditions and the withdrawal of fiscal stimulus. Mismatches are being resolved by increased supply and global tightening  The post-pandemic recovery in Iceland has two distinguishing features that set it apart from the recovery in most other OECD economies.
When margin levels are set more conservatively, firms are likely to have more flexibility in responding to stress and are less likely to take action that might amplify the market shock and exacerbate the reduction in liquidity. When competitive pressure drives margins down, markets may be less resilient. Third, we believe the major financial institutions need to continue to improve their capacity to measure their exposure to risk in a less benign market and economic environment. The discipline of stress testing and scenario analysis that is designed to measure tail risk is at the frontier of this challenge. Senior management and boards of directors need to understand the limitations and uncertainty that pervade the tools we use to assess these risks, to try to better understand the potential scale of losses the firm may face, and to carefully examine how well risk exposures reflect the overall risk appetite of the firm, and the size of the capital and liquidity cushion maintained in relation to those exposures. Let me conclude by reiterating the fundamental view that the wave of innovation underway in credit derivatives offers substantial benefits to both the efficiency and stability of our financial system. The extent of these benefits will depend, in part, on the degree to which market participants can keep up with the pace of change in the market through continued investment in both risk management and in the processing infrastructure.