It was no surprise when Fitch placed its AAA rating of Finland on a negative outlook last week.
The economy has remained weak for the past three years, and Euromoney’s country-risk experts had expressed concern about the impact on its debt profile.
Forecasts by the European Commission show slowly improving growth prospects for 2015-16 but with the debt burden still climbing above the EU’s 60% of GDP limit.
Finland’s total risk score of 83.2 out of 100 is 4.7 points worse off since 2010 and almost 11 points in total since 2007, before the global financial crisis took its toll on the eurozone outlook.
A perceptible increase in risk has seen the sovereign slide from fifth to seventh in the global rankings during the past 15 months, lying below Denmark, Norway and Sweden.
Overdue adjustment
Finland is still in Euromoney’s top tier – containing the world’s safest sovereigns – but country-risk experts downgraded several of its 15 risk indicators last year, among them the economic-GNP outlook and government finances.
S&P moved early, downgrading Finland to AA+ in October, but Moody’s has stayed loyal to its stable AAA rating, focusing on the borrower’s decent short-term liquidity profile and strong institutional underpinnings – with its yield depressed by the eurozone trend.
Tiina Helenius, head of economic research for Finland at Handelsbanken, believes the main driver of the current economic slump is the fall in labour productivity linked to the demise of the electronics, and pulp and paper industries – its two key export sectors.
“[The] global investment and growth slowdown had a dramatic impact on Finnish industry, with the decline in corporate profitability resulting in a loss of jobs,” says Helenius.
An unemployment rate of 8.8% (harmonized) in January is higher than its Nordic neighbours, and an employment/unemployment score of less than eight out of 10 reflects the fact this has been persistent.
Finland, moreover, is exposed to the EU-Russian diplomatic spat, given the high volume of cross-border trade. Affected by the embargo, the value of Finland’s exports to Russia fell 13.5% last year.
Political problems
It also has acute population ageing, highlighted by a low score of just 6.7 out of 10 for the demographics indicator, making debt cuts and supply-side reforms imperative to raise Finland’s competitive edge and its labour force.
However, that raises difficult political questions surrounding immigration.
The Centre Party, leading in the opinion polls for a parliamentary election on April 19, is promising to boost employment, but must also adhere to deficit-reduction – something all of the main parties are campaigning on.
The election outcome is uncertain and the main problem will be in forging a stable government in a country where multi-party coalitions are the norm, and where lately toxic disagreements over public spending cuts have brought instability and delayed reforms to local government, and the social and healthcare system.
Reijo Heiskanen, chief economist with OP-Pohjola Group, is fairly confident the budget deficit will be reduced enough to stabilize the debt-to-GDP ratio and attain the EU fiscal criteria.
However, this is a minimum requirement and he cautiously adds: “The outlook change [by Fitch] was a clear reminder the new government will need to take seriously the task of stabilizing the debt ratio in the next few years.”
This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.