Finland: Risk Assessment

Country Rating¹

Rating: A2

Business Climate Rating¹

Rating: A1

Risk Assessment²

Economic growth is expected to slow slightly in 2011 amid less buoyant world trade
After suffering a deep recession, GDP growth rebounded in the 2010 second-quarter, driven by increases in exports and residential investment. The restocking process, the recovery of consumption and, especially, the upturn in corporate investment developed at a more gradual pace. Manufacturing production was driven by a range of sectors including wood/paper, metallurgy, chemicals, energy, and electrical/electronic equipment. Economic activity is expected to slow slightly in 2011. While households have regained some confidence, as a result of rising incomes and assets, and declining unemployment, companies have remained relatively tentative in view notably of the prospective slowdown in world trade. The export trend will depend on the pace of growth in both the European Union (56% of sales), which is likely to weaken, and Russia (9% of sales), which is expected to be more dynamic. In case of a decline in property prices, moreover, growth forecasts will have to be revised downward. Inflation, meanwhile, will likely remain under control in view of the proportion of unused production capacity.

Although public sector finances have deteriorated, they present little risk in the near-term
Public sector finances have been in deficit since 2009 under the combined effect of the recession and the implementation of a growth-supporting policy. They are expected to improve slightly in 2011 thanks to restrictive measures. Finland's fiscal position compares favorably with that of many other regional countries. The budget deficit will likely ease below the 3% threshold with public debt remaining at sustainable levels (46% of GDP mid 2010). Despite the improvement in the employment rate among older people, the aging of the population could jeopardize the long-term viability of public finances.

Companies affected more than households, but a resilient banking sector
The severity of the recession in 2009 was mainly attributable to the fall of capital-intensive exports. Households and many SMEs have been spared to some extent by the crisis. Unemployment, not as high as expected, began to ease by the 2010 second quarter. Low interest rates and a good income trend quickly restored household confidence. Companies came into the crisis armed with relatively healthy balance sheets but had to contend with a marked slowdown of credit and a contraction of their markets. After increasing 26% in 2009, bankruptcies were nonetheless down 15% in the first nine months of 2010. The competitiveness of Finnish industry abroad, although deteriorating somewhat, has remained at acceptable levels, as attested by a continuing current account surplus. The manufacturing sector is particularly dependent on the economic situation of Finland's main European trading partners and two thirds of exports are vulnerable to trends in global investment (telecommunications, machinery) or have to cope with a potential decline (paper). The Finnish industrial flag-bearer Nokia remains the country's leading employer and pivotal research and development actor, but its influence has nonetheless waned. And the banking sector has been very resilient to the crisis thanks to a satisfactory level of capitalization and conservative management. Although its exposure to vulnerable countries and risky products has been limited, it will have to control its appetite for property lending. With the sector moreover majority-owned by foreign interests, international cooperation on banking supervision will have to be strengthened.

Strengths

• Prominence of technologically advanced industries in the economic fabric
• Corporate competitiveness spurred by favorable tax rules
• Near-term viability of public sector finances
• Good record on fiscal management
• Heavy spending on research and development

Weaknesses

• Labor market affected by scarcity of skilled labor
• Rigidity in setting wages
• Heavy taxes on households
• Strong dependence on international economic conditions
• Concentration of exports (notably telecommunications and paper)
• Aging population