Country Risk Rating

A2
The political and economic situation is good. A basically stable and efficient business environment nonetheless leaves room for improvement. Corporate default probability is low on average. - Source: Coface

Business Climate Rating

A1
The business environment is very good. Corporate financial information is available and reliable. Debt collection is efficient. Institutional quality is very good. Intercompany transactions run smoothly in environments rated A1.

Strengths

  • Prudent economic policy
  • Skilled workforce and favorable business climate
  • Advanced industries
  • High standard of living

Weaknesses

  • Highly vulnerable to international economic conditions
  • Industrial crisis and loss of competitiveness
  • Dependence of the Finnish banking sector on the Swedish and Danish financial sectors, despite the return of a major institution in 2017
  • Aging population 

Current Trends

Resilience of activity, driven by domestic demand

Growth is expected to remain resilient in 2020, thanks to the rebound in domestic demand. After slowing sharply in 2019, household consumption will pick up after substantial wage increases were agreed on during sector collective bargaining at the end of 2019, in line with the low unemployment rate (6.1% in August 2019). After stalling, business investment will also accelerate as supply constraints persist – both in equipment and labour – in an environment that remains supportive, with low-interest rates and resilient domestic demand. The recovery in equipment investment will help to offset the pronounced slowdown on the way for residential construction, with the number of building permits falling by 21% in the first seven months of 2019 after already declining 11% in 2018. Moreover, as the regional context remains unfavourable – the country’s two main partners, Sweden and, above all, Germany (25% of exports in total), will continue to be sluggish – exports will slow down in 2020. In addition, while the economy made substantial competitiveness gains in 2017 as a result of the Competitiveness Pact (labour costs fell by 3.4% in real terms), significant wage increases in the following two years have somewhat eroded these advances. Imports will accelerate, driven by domestic demand. As a result, foreign trade will be a drag on growth in 2020.

Fiscal rigor despite a more expansionary budget

The new coalition’s first budget will be relatively expansionary. Additional public expenditure will be mainly allocated to “green” investments (transport and energy infrastructure, for a total of €750 million or 0.3% of GDP) and education (€256 million). On the tax side, the main measure in the 2020 budget is the income tax reduction (€200 million) achieved through bracket adjustments for the least well-off households. This measure will be paid for by an increase in excise duties on alcohol and tobacco (€100 million in total) and especially by an increase in fuel tax from August 2020 (€250 million). Revenues will remain high thanks to the resilient economy and low unemployment. Consequently, even if the government deficit deteriorates, it will remain well below 3%, and public debt, which has now fallen below the threshold set by the European Stability and Growth Pact (60% of GDP), will decline slightly. However, rapid population ageing will be a challenge for the social security system and public accounts in the medium term. Reforms to public social and health services with this goal in mind and designed to generate estimated annual savings of €3 billion have been repeatedly postponed and even led to the resignation of the Sipilä government in March 2019.

In terms of external accounts, Finland features a structural deficit in the balance of services and a surplus in trade in goods, although this has shrunk over the past decade. While wood and paper remain the main export sectors (21% of the total), the automotive industry (8% of the total) has been particularly vibrant in recent years, with exports almost doubling between 2016 and 2018. The tourism sector has also grown strongly, particularly around protected natural areas and the northern lights, and is now much less dependent on Russian visitors (12% of foreign tourists, down from 28% in 2013), thanks to the arrival of Asian tourists (18% of the total). Like the balance of services, income is structurally in deficit due to the repatriation of dividends by foreign investors. As a result, the current account balance will remain in deficit in 2020, but will continue to be comfortably financed through foreign investments (direct and portfolio).

Unstable center-left coalition with five parties

Social Democrat (SDP) Antti Rinne, who was forced to form a centre-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, centre) –, following his narrow victory in the April 2019 parliamentary elections (with 17.7% of the vote), resigned less than eight months later, under pressure from KESK, in a context of social protest. Sanna Marin (SDP) has taken the lead in the coalition which - while the party of the outgoing prime minister, Juha Sipilä (KESK), is still in government - has rallied around a much more left-wing agenda, including increases for public spending, the lowest pensions and energy taxes. Despite a solid majority in parliament (116 MPs out of 200), the coalition is very fragile, both because of the number of parties and the political spectrum they cover - from the left (VAS, former communist party) to the liberal centre (KESK, which governed with the far right in the previous term).

Despite potential political instability due to party fragmentation, the business environment remains very favourable, particularly with regard to insolvency settlement (1st worldwide), according to the World Bank's Doing Business 2020 report.

Source:

Coface (02/2020)
Finland