Skift Take

As Skift reported in a recent deep dive on Iceland, the country is struggling to adjust to the changes that came with a huge tourist boom.

When the Kardashians show up, you know you’ve hit the big time.

Catering to a surging number of visitors eager to explore glaciers, volcanoes and Reykjavik’s nightlife has helped tourism dethrone fishing and aluminum smelting as Iceland’s biggest industry. However, with officials still dealing with the aftereffects of a banking boom that spun out of control eight years ago, the north Atlantic island may already be staring at a new bubble.

“Tourism is one of the most promising sectors in Iceland today,” said Tryggvi Thor Herbertsson, an adviser to the prime minister during the financial crisis who is now part owner of a restaurant in downtown Reykjavik. While he’s “not particularly worried” about a bust, he concedes it “may well happen.”

“If it happens, it happens. But if you look at this for the next two, three years, this is a good bet,” the former banker and lawmaker said in an interview.

Taking business as it comes may well be part of the national psyche of a country built on fishing. It certainly helps explain a history of booms and busts. And the jury’s still out on the future. Moody’s recently upgraded its sovereign debt, but Standard & Poor’s still gives it a rating of BBB+, three steps above junk. What’s more, parliamentary elections due on October 29 could yet produce an upset for established parties.

Investment Opportunities

The outlook, for now, is bright. The number of visitors this year is expected to grow nearly 40 percent from last year’s record 1.3 million arrivals. The forecast for 2017 is for another increase of about 35 percent, Islandsbanki, the island’s second largest bank, said in a September 7 note. That would see tourists outnumber the local population of 330,000 by a factor of seven to one.

The resurrected lenders that brought down the economy in 2008 are also getting in on the action. Landsbref, a subsidiary of Landsbankinn that manages 100 billion kronur ($869 million) in assets, has set up a dedicated Icelandic Tourism Fund with 4.1 billion kronur at its disposal. Investors include pension funds and Icelandair.

With the market in Reykjavik now already close to saturation, the tourism industry is moving its footprint farther out into Iceland’s untouched wilderness.

One of the more spectacular projects is a 500-meter tunnel dug through the belly of the Langjokull Glacier. The nearest town is 65 kilometers (40 miles) away.

Opened in June 2015, this 500 million kronur investment project attracted 22,000 tourists during the first seven months of operations. “This year we’re predicting about 40,000 visitors,” said Sigurdur Skarphedinsson, the managing director of Into the Glacier.

The visit of Kim Kardashian and Kanye West in April also cast the spotlight on a remote hotel, Hotel Ranga, which is geographically closer to the infamous ash-spewing Eyjafjallajokull Volcano than to the country’s capital city.

Helgi Juliusson, who operates the Icelandic Tourism Fund, sees plenty of investment opportunities, given that the “industry is still quite fragmented.”

His company has already bought stakes in Borea Adventures, which offers skiing and kayak trips in northwest Iceland, and Into the Glacier. Juliusson expects mergers and acquisitions to take place in the transport sector.

Overheating Risks

Actually, Iceland’s tourism sector is doing so well that it may become a victim of its own success, says Grimur Saemundsen, the CEO of Iceland’s best-known tourist attraction, the Blue Lagoon. While he sees “huge demand for investment opportunities,” his chief concern is an export-led strengthening of the krona.

“For all the export industries, the strong exchange rate is closing in on a pain threshold,” Saemundsen said. “What the government needs to do is continue with the removal of capital controls and push down interest rates.”

Another concern is over-capacity. The number of airlines serving Iceland has gone from seven to 25 within the last seven years, car rental licenses have tripled between 2003 and 2015, while 2,450 hotel rooms are expected to be added between now and 2018, according to Islandsbanki. Although operators argue that tourism is a fairly stable business, it is still susceptible to changing fashions and tastes.

Back in the late 1960s, over-fishing in the northern Atlantic led to the depletion of one of Iceland’s staple products, herring. It took decades for stocks to recover. The risk of a tourism glut should not be underestimated.

“I’ve always wanted to come here,” said Steven Rose, a young Londoner, before complaining about there being too many foreigners in Reykjavik.

“This place seems to be all about tourists.”

©2016 Bloomberg L.P.

This article was written by OMAR R. VALDIMARSSON from Bloomberg and was legally licensed through the NewsCred publisher network.

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Tags: iceland, overtourism, tourism

Photo Credit: Iceland tourism is booming, leading some to worry about an eventual bust. Shown here is Askja, Iceland. Lev Glick / Flickr

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