Tourists are pouring into Iceland to catch a glimpse of the northern lights, to detox or simply explore the locations of popular TV series Game of Thrones.
Day tours of the locations have become hugely popular. One such is Thingvellir National Park where visitors can walk down the impressive Almannagja gorge, the stomping ground of the “White Walkers” and the trail of the “Wildlings” from “North of the Wall.” A guide at Thingvellir informs visitors of the symbolic significance of the setting in the plot of the smash-hit series.
Jökulsárlón, meanwhile, the glacier lagoon that formed the backdrop for an improbable James Bond car chase in 2002's Die Another Day, is now one of the country's top tourist spots, attracting about half a million visitors each year.
Iceland received a record 1.8 million foreign visitors last year, a 40 per cent annual jump that followed a 30 per cent increase in 2015, official data show. Overwhelmed by the tourism boom, Iceland’s government is even considering ways of raising taxes in the tourism sector. GDP rose 11.3 per cent in the fourth quarter from a year earlier, after growing 9.6 per cent in the previous three months.
While this is good news for the hospitality sector, it has also helped to turn its currency, the kroner, into a world-beater. Iceland’s interest-rate cuts should have slowed gains yet the currency has surged 4 per cent against the euro and 6.4 per cent against the dollar since March 31, taking its gains in the past year to 21 per cent and 15 per cent, respectively. That is the biggest advance among global currencies for both periods. Islandsbanki sees it rallying a further 2.5 per cent to 113 per euro by the final quarter of this year.
The kroner’s gains have accelerated as record tourist arrivals, economic growth that exceeded 11 per cent in the final quarter of 2016 and western Europe’s highest yields fuel fund inflows. Iceland’s two rate cuts in the second half of last year have not eroded the currency’s appeal, while a government move in March to lift most of the capital controls put in place after the 2008 banking collapse only caused a temporary pullback.
“While volatility did increase when controls were lifted, the trend has been toward further appreciation and we expect some further appreciation throughout the summer,” said Jon Bjarki Bentsson, a Reykjavik-based economist at Islandsbanki. “The surge in tourism has outpaced the growing deficit on goods trade.”
The kroner traded at 115.85 per euro and 106.18 per dollar on Wednesday.
Sedlabanki, the nation’s central bank, reduced borrowing costs last year amid concern the krona’s appreciation will imperil its inflation target and hurt exporters. Its benchmark rate is now at 5 per cent, compared with the European Central Bank’s deposit rate of minus 0.4 per cent.
The nation’s reserve assets climbed 12 per cent to 824 billion kroner (Dh28.5bn) in March from a year earlier, the latest data show, suggesting the central bank bought foreign exchange in a possible attempt to slow the kroner’s appreciation. Measures introduced last year that prevent offshore investors from pulling out all their money too soon, intended to reduce volatility in capital flows, have not deterred the investment inflows.
“Overall, the fundamentals look supportive of the exchange rate and the central bank has reserves that exceed all adequacy measures,” said Hafsteinn Hauksson, an economist at Gamma Capital Management. “Judging by the central bank’s continued foreign-exchange purchases during April, market pressures seem geared toward appreciation.”
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