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 favourable business climate
  • Cutting-edge industries
  • High standard of living

Weaknesses

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

Current Trends

Activity is slowing, but will remain solid

Growth will be resilient in 2019 despite cooler domestic demand. Household consumption is set to slow, but should still put in a dynamic performance, driven by the fall in unemployment (7.4% in September 2018) and the consequent rise in wages, against a backdrop of moderate inflation. Business investment is also expected to ease, while making a strong contribution to growth in a supportive environment featuring low interest rates and resilient domestic and external demand. In addition, the emergence of supply constraints in terms of equipment and labour will also promote investment.

After building permits peaked in 2018, residential construction will continue to support activity due to strong demand for apartments in urban centres, particularly in the Helsinki region, before slowing down by 2020.

Exports are expected to remain brisk thanks to gains made possible by the Competitiveness Pact – labour costs fell in real terms by 3.5% in 2017 – and strong performances by Finland’s main partners, Sweden and Germany. Tourism, focused around natural sites and the Northern Lights, will continue to grow thanks to inflows of tourists from Russia (number-one source) and China (35% increase in 2017). At the same time, imports will grow relatively less quickly, echoing domestic demand. As a result, trade should contribute positively to growth in 2019.

Current and public accounts almost in balance

Even though 2019 is an election year, the government will continue to pursue a prudent fiscal policy. After lowering income taxes between 2016 and 2018, in return for the austerity measures of the Competitiveness Pact (extended annual working hours, partial transfer of employer contributions to employee contributions, wage freezes), the government will introduce only minor tax measures in 2019, including reducing the vehicle tax and increasing the excise duty on tobacco. At the same time, as revenues increase thanks to the favourable economic situation, the deficit, which is already well below 3%, is expected to decline. In addition, after being postponed several times, reforms to public social and health services are expected to be approved in 2019 and will involve merging the existing entities to create an intermediate level of 18 “counties”, in a move that will ultimately generate savings estimated at €3 billion a year. Scheduled to come into force in 2021, these structural reforms aim to address the challenge posed by a rapidly ageing population to the social security system and public accounts. Against the backdrop of this prudent fiscal policy, public debt – which in 2018 fell below the threshold set by the European Stability and Growth Pact (60% of GDP) – will continue to decline.

With exports outstripping imports, the country will continue to enjoy a trade surplus, which is expected to improve in 2019. Exports will be driven in particular by the automotive sector, whose exports doubled between 2013 and 2017 to reach €4.8 billion (7% of the total), and by the wood and paper industry, the largest exporting sector, with 20% of the total. Despite tourism growth, the balance of services shows a recurring small deficit, as does the income balance, due to the repatriation of dividends by foreign investors. However, the current account is expected to show a surplus.

The outcome of the upcoming elections is uncertain, but the centre-left opposition has a slight lead

Although it has a tiny majority (104 seats out of 200), the governing coalition – led by Juha Sipilä’s Centre Party, with the support of the centre-right National Coalition Party and the Blue Reform Party, which emerged from the split with the far-right Finnish Party in June 2017 – will remain in power until the parliamentary elections in April 2019. However, with less than six months to go before the elections, polls show coalition members getting between 35% and 40% of the vote. The centre-left Social Democratic Party, led by former Minister of Economy Antti Rinne, would come out on top with 22% of the votes and be well-positioned to try to assemble a coalition with other parties such as the Left Alliance, the Green League (environmentalist) or the Swedish People’s Party (centre). However, uncertainty persists over the potential outcome and coalition combinations given how votes are fragmented across many parties.

The business environment is very favourable. The country is ranked 17th (out of 190) in the World Bank’s Doing Business 2019 report, thanks in particular to its remarkable performance in insolvency settlement (2nd in the world).

 

Source:

Coface (02/2019)
Finland