Finland: Risk Assessment
Country Risk Rating
Business Climate Rating
- Generally prudent economic policy, which leads to low interest rates for government bonds
- Favorable business climate and strong institutions
- High standard of living
- Economic growth not dependent on foreign tourists (Finland has a negative structural tourism service balance)
- Strong ICT sector that is rapidly adapting to global changes
- High green capital thanks to forests covering 65% of land
- Highly vulnerable to international economic conditions (goods & services exports = 40% of GDP in 2019, before the pandemic)
- Direct neighbor of Russia (common border is around 1,340 km long); Finland was part of the Russian empire between 1809 and 1917
- Dependence of the Finnish banking on the Swedish and Danish financial sectors, despite the return of a major institution in 2017
- Ageing population (33% of the population were pensioners at the end of 2021)
- Labor market inflexibility leads to relatively high structural unemployment (a 6% unemployment rate is considered as full employment)
Sanctions against Russia prevent a more robust economic recovery
At the beginning of the year, the Finnish economy was set for a solid economic recovery in 2022, with a push from the substantial growth dynamic of late 2021 and no further COVID-19-related restrictions. However, this outlook has been clouded by the Russian invasion of Ukraine and the reaction of the European Union, with several rounds of sanctions against Russia. Although the economic recovery should continue, it will likely be less dynamic. Finland is the most-exposed Nordic country to Russia regarding direct goods trade. While it had been noticeably higher before the annexation of the Crimean peninsula in 2014, Russia remained Finland’s fifth-most important export destination, with 5.4% of all exports going to their giant neighbor. On the import side, Russia accounted for 11.9% of all Finnish imports in 2021, which made it one of its three biggest supplying countries. By late March 2022, 6.9% of all Finnish exports to Russia were affected by EU sanctions. Nevertheless, more and more companies voluntarily reduce their trade business with Russia. On the export side, goods are diversified (manufacturing production goods and mining and forestry equipment) and could be sent elsewhere. On the import side, however, unprocessed fuels and lubricants accounted for 58.2% of all Finnish imports of goods from Russia. Another 39.1% were industrial production supplies, as many Finnish companies outsourced some of their production steps to Russia before importing the products back to Finland for the final stage. This production chain is now being reconsidered. Regarding the Finnish energy supply, within a month, 85% of its oil imports from Russia were substituted via imports from Sweden and Norway. Its gas imports (7% of all final energy consumption in Finland) remain an issue and should be compensated via imports of Liquefied Natural Gas (LNG). Finland will also become more independent from Russia via a new nuclear power plant that entered into service in March 2022, which by July should reach full capacity and cover 14% of Finland’s total electricity consumption. Another nuclear power plant project, for which construction should start in 2023, is now on hold, as the operating company is one-third owned by a Finnish subsidiary of a Russian company. Nevertheless, while Finland adapts quickly to the new circumstances, these changes induce higher costs and probably lower profits for Finnish companies. These are also mirrored in consumer prices. In March 2022, the Finnish inflation rate reached a 32-year high of 5.8%, and it should further increase until summer 2022 and then calm down only gradually. The European Central Bank is slowly reacting to this strong inflation dynamic: it is expected to end all its QE -purchases in Q3 2022 and decide to first increase its deposit rate towards the end of the year. However, the central bankers will probably be cautious with rate hikes, as they want to calm financial markets and keep yields of European bonds low. Nevertheless, the high increase in consumer prices will erode the purchasing power of households and limit the growth of private consumption (51% of GDP). In addition, the geopolitical uncertainty will weigh on personal investment growth (24% of GDP). Public consumption, which was expected to fall due to the end of the COVID-19 support measures for companies, is now set to be neutral, with higher expenditures on subsidies to cope with the higher energy prices planned, as well as solid investments in the defense sector.
The current account surplus melts away
After two years in slight surplus, Finland’s current account is set to be just about balanced in 2022. The main factor will likely be the goods trade surplus which should be noticeably lower, as exports will decrease until they adapt to the new geopolitical situation. In addition, the structural services deficit should broaden, as again more Finns will spend their vacations abroad. This is leveled out by high incomes from Finnish companies’ investments abroad, while the balance of transfer income will remain structurally damaging. The public deficit will likely widen a bit due to the higher public expenditures related to the war in Ukraine. This will slightly push the debt-to-GDP ratio, which remains relatively low.
Finland could give up its neutrality and join NATO
Social Democratic (SDP) PM Sanna Marin leads a center-left coalition with four other parties – the Centre Party (KESK), the Green League (VIHR, environmentalist), the Left Alliance (VAS), and the Swedish People’s Party (SFP, center). Since the last election in 2019, the conservative National Coalition party (KOK), the main opposition party, has gained support and is leading the polls. After the beginning of the war in Ukraine, their support reached 25% in late April, compared to 19% for Marin’s SDP. This is mainly because the conservatives have long tended to favor a future NATO membership. At the same time, Marin seemed more half-hearted as the debate bang, stating in January 2021 that membership was “doubtful.” Finland is neutral but has been a member of the European Union since 1995 and of the eurozone since its conception. However, the sentiment in the population had changed noticeably: while before the war, up to 30% of the people had been in favor of NATO membership according to polls, this had more than doubled by mid-March, when 62% were in popularity, and only 16% were against it. A decision regarding this topic is expected by late June. Even if Finland decided to join NATO, all existing member countries would have to confirm it, which would require from several months to a year. Meanwhile, Russia, preparing counter-fire, is threatening Finland and Sweden with a nuclear build-up around the Baltic Sea region should both countries join NATO (a step already taken in 2018 in the Russian Kaliningrad exclave between Poland and Lithuania). The next parliamentary elections are scheduled for April 2023.