You don't need a loop or PL/pgSQL for this. You can do this with a single statement:

Assuming the following setup:

create table  tablename
(
  id integer primary key,
  country_list text
);

create table lookup
(
  iso_code varchar(3),
  country text
);

insert into tablename
values
(1, 'Germany, Austria, Italy'),
(2, 'Austria, France'),
(3, 'France, Switzerland');

insert into lookup
values
('de', 'Germany'),
('at', 'Austria'),
('it', 'Italy'),
('fr', 'France'),
('ch', 'Switzerland');

You can unnest the countries using:

select s.id, trim(unnest(string_to_array(s.country_list, ','))) as country
from tablename s;

Given the sample data above that returns the following:

id | country    
---+------------
 1 | Germany    
 1 | Austria    
 1 | Italy      
 2 | Austria    
 2 | France     
 3 | France     
 3 | Switzerland

This can be joined to your lookup table:

with normalized as (
   select s.id, trim(unnest(string_to_array(s.country_list, ','))) as country
   from tablename s
)
select n.id, n.country, l.iso_code
from normalized n
  join lookup l on l.country = n.country;

This returns the following:

id | country     | iso_code
---+-------------+---------
 1 | Austria     | at      
 1 | Germany     | de      
 1 | Italy       | it      
 2 | Austria     | at      
 2 | France      | fr      
 3 | France      | fr      
 3 | Switzerland | ch      

You can aggregate the list of ISO codes back into your de-normalized structure:

with normalized as (
   select s.id, trim(unnest(string_to_array(s.country_list, ','))) as country
   from tablename s
)
select n.id, string_agg(l.iso_code,',') as iso_list
from normalized n
  join lookup l on l.country = n.country
group by n.id;

And that can be used to replace the values in the target table:

with normalized as (
   select s.id, trim(unnest(string_to_array(s.country_list, ','))) as country
   from tablename s
), translated as (
  select n.id, string_agg(l.iso_code,',') as iso_list
  from normalized n
    join lookup l on l.country = n.country
  group by n.id
)
update tablename st
  set country_list = t.iso_list
from translated t
where t.id = st.id;

After that the contents of tablename is:

id | country_list
---+-------------
 1 | it,at,de    
 2 | fr,at       
 3 | fr,ch       

A much better solution would be to properly normalize your model and create a many-to-many mapping table between tablename and the lookup_table