Denmark - Doing Business in Other Areas of Denmark; Faroe IslandsDoing Business in Denmark: Faroe

• The Faroe Islands have an open economy and multiple trade agreements with other countries.  For more than two centuries the Faroese economy has relied on fisheries and related industries.  Fisheries account for close to one-sixth of the total gross value added in the Faroe Islands and about 95 percent of goods exports, excluding ships and aircraft.  Salmon alone accounts for 45 percent of exports.  Increased catches of mackerel and herring, as well as higher prices for salmon globally, have contributed significantly to recent economic growth.  As a non-EU member, the Faroe Islands continue to have open access to the Russian market despite Russia's retaliatory trade embargo on certain food imports from the EU.  This has allowed the Faroese to sell increased quantities of salmon to the Russian market at higher than normal prices, even while prices have dropped significantly in the European market.

• The Islands exported approximately DKK 8.622 billion ($1.308 billion) worth of goods in 2017, 97.4 percent of which were fish products, with the remainder being marine vessels and aircraft.  In recent years, construction, transportation, banking, and other financial services sectors have grown, and offshore oil and gas exploration is developing, though commercially viable finds have not been made.  In 2017, the majority of exports went to Russia (28.2 percent), the United States (9 percent), followed by the UK (8.9 percent), Germany (8.8 percent), and Denmark (6.3 percent).  Goods imports totaled DKK 7.238 billion ($1.098 billion) in 2017.  The vast majority of imports came from Europe in 2017; 1.9 percent originated in the United States.  Denmark provided 37.1 percent of imports, Germany 10 percent, Norway 9.7 percent, China 5.6 percent, and Sweden 4 percent.  Imports consist of items for household consumption (21.5 percent), e.g. food, tobacco and beverages; input to industry (21.7 percent) machinery (11.4 percent) and fuels (13.1 percent).

• The Faroe Islands’ small, open, but non-diversified economy makes it highly vulnerable to changes in international markets.  The Faroe Islands have full autonomy to set tax rates and fees, and to set levels of spending on the services they provide.  Denmark upholds an annual block grant of DKK 642 million - roughly $97 million. 

• In 2013, the Faroese economy began a strong recovery, after several years of stagnation.  The Economic Council for the Faroe Islands estimates that nominal GDP rose 5.8 in 2014 followed by estimated growth of 6.2 percent in 2015, 6.8 percent in 2016, and 6 percent in 2017.  Growth in nominal GDP in 2014 was mainly export driven while growth in 2015 and 2016 was primarily driven by domestic demand.  GDP growth for 2018 is expected to slow, however, due to high demand for labor that is close to full employment.  Unemployment was historically low at 2.2 percent in December 2017, down from 8 percent in 2011. 
• Central and local government and publicly owned companies are planning massive investments in infrastructure and hospitals.  However, expansionary fiscal policy might put severe pressure on the job market which can lead to a labor shortage.  Investment in 2016-2018 is expected to total $1.7 billion ($258 million) or 10.2 per cent of GDP, which is 34 percent higher than in 2014.   Construction of the Eysturoy and Sundoy tunnels, with an expected cost of approximately DKK 2.64 billion ($400 million) or 16 percent of GDP are planned for the period 2016-21.  Salmon producer Bakkafrost, the Faroe Islands’ largest company, has made public its plans to invest approximately DKK 2 billion ($303 million) on processing plants in 2016-2020. 

• Announcement of these enormous investments resulted in the Danish Systemic Risk Council issuing an unprecedented official warning of the increase of systemic risk on the Faroe Islands in the fall of 2016.  By April 2018, the Council recommended increasing the banking sectors’ countercyclical capital buffer from 1 percent to 3 percent by 2020.  Seven in ten construction firms say that shortage of labor is an impediment to growth, and the magnitude of the public investments could further push the economy beyond its labor capacity limit.  The Economic Council for the Faroe Islands estimates that a permanent fiscal improvement of 5 percent of GDP will be required to stabilize government debt, which is currently at a low level.  As of April 2018, credit agency Moody’s maintain the Faroe Islands’ Aa3 rating of high quality and very low credit risk, with a stable outlook, reflecting its fiscal autonomy and revenue and expense flexibility with a track record of prudent budgeting.  The stable and historical relationship with Denmark is deemed an additional strength.

• The Faroe Islands opened their own securities exchange in 2000; active trading of shares followed in 2005.  The exchange is collaboration with the VMF Icelandic exchange on the Nasdaq OMX Nordic Exchange Iceland.

• The most recent figures available show Foreign Direct Investment into the Faroe Islands totaled DKK 1.6 billion ($243 million) in 2012, about half of which originated from Denmark.  The Faroese government has indicated interest in attracting further foreign investment. “Invest in the Faroes” is the Faroese government unit promoting Faroese trade.
  • The website is http://www.government.fo/ 
• According to the Danish Central Bank, the biannual confidence indicators show that Faroese firms and consumers are generally not as optimistic about the economy as they have been in previous years.  In particular, consumers take a less positive view of their own finances and the Faroese economic outlook in the near term.  Looking further ahead, the Faroe Islands face a demographic challenge.  Currently there are 4.5 people in the working age group “16 to 66”, for every person aged 67 or older.  By 2050, that number is projected to be less than half; an estimated 2.1 persons for every dependent retiree.

• The Faroe Islands have in recent years engaged in several disputes with the EU over fishing quotas.  The disagreements escalated in September 2012 when the EU adopted measures which allowed it to impose sanctions on the Faroe Islands.  In March 2013, the Faroe Islands unilaterally increased their quota for herring and mackerel.  EU member states responded by voting in favor of imposing sanctions which went into force in August 2013.  Sanctions were lifted a year later after a political understanding between the two parties was reached on herring catches.  Subsequently a five year agreement with the other coastal states in the North Atlantic was signed on mackerel quotas, reducing uncertainty for fisheries and improving profitability, since the agreement allows for more sustainable harvesting. 

• The Faroe Islands retain control over most internal affairs, including the conservation and management of living marine resources within the 200 nautical mile fisheries zone, natural resources, financial regulation and supervision and transport.  Denmark continues to exercise control over foreign affairs, security, and defense, in consultation with the Faroese Government.

• The labor force comprised about 26,358 people in November 2017.  In many areas, the Faroese labor market model resembles that of the other Nordic countries, with high standards of living, well-established welfare schemes and independent labor unions.  A majority of people in the Faroe Islands are bilingual or multilingual, with Danish and English being most widely spoken after Faroese.  The Islands boast well-developed physical and telecommunications infrastructure and have well-established political, legal, and social structures.  The standard of living for the total population (which exceeded 50,000 for the first time in the spring of 2017) is high by world standards, and Gross National Disposable Income per capita eclipsed that of Denmark in 2014. 

Contact

• Ulrik R. Jakobsen