Finland

The recovery post Covid-19 will be slowed by the past loss of competitiveness

AA1

LOW RISK for entreprise

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

Economic risk
Business environment risk
Political risk
Commercial risk
Financing risk

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GDP	USD271.23bn (World ranking 41, World Bank 2020)
Population	5.53mn (World ranking 115, World Bank 2020)
Form of state	Republic
Head of government	Sanna Marin (Prime Minister)
Next elections	2023, legislative

Strong business environment
High R&D spending
Low fiscal deficit
Contained public debt
Improving competitiveness
High-skilled workforce
Robust welfare state

Exposure to Russia still high
Rapidly deteriorating current account balance
High private debt, notably linked to the housing loans
High labor costs
Weak demographics

GDP is not likely to return to pre-crisis levels before early 2022

Finland’s economic activity was already below peers’ performance in late 2019. Unlike in neighboring countries, Finland’s GDP fell in Q4 and the drop was broad-based. The Covid-19 outbreak intensified the GDP downturn, with the labor-intensive service sectors being hardest hit by the lockdown. Although the sanitary crisis seems to have been handled better compared to other European countries, as equipment scarcity was not really an issue and there was a higher testing capacity, the government remains cautious in reopening the economy.

We expect the Finish economy to contract by at least -8% in 2020 due to the national lockdown and the severe collapse in private consumption and firms’ investment, but also the sharp recession of the main trade partners (U.S., Eurozone, Sweden and China). More importantly, the very gradual return to pre-crisis levels for the global economy, at the end of 2021 at the earliest, means that Finnish export growth will remain below potential. In addition, the loss of cost competitiveness of Finnish exports over the past years is likely to pose further downside risks. The Covid-19 crisis has pushed companies to reduce significantly their volume of investment and Finnish export industrial goods needed such investment, notably in digitalization. This will weigh on potential growth prospects in the medium run.

Business insolvencies are likely to rise by +25% by mid-2021

The permanent damage of the crisis will be visible in the fact that not all sectors will reach pre-crisis levels in the medium run and there will be permanent job losses. We estimate Finland’s unemployment rate could rise to above 8% in 2020 and remain at a high level in the absence of active employment policies and stimulus for key sectors. Finnish companies are quite highly indebted even if a bit less than some of their European peers such as Sweden, France, Belgium or Norway. Hence the fiscal relief measures implemented by the government (partial unemployment schemes, state guarantees for loans to avoid a liquidity crisis, as well as tax payments rescheduling) for a total of 2% in direct financing and 18% in state guarantees have been key to give some breathing space for companies and avoid a massive wave of insolvencies during the crisis. Similar, to other Eurozone countries, Finland was running into a fiscal deficit before the Covid-19 crisis but it had a more moderate level of public debt. We expect the fiscal deficit to rise above -9% of GDP in 2020 (after -1% in 2019) and public debt to rise to above 72% of GDP.

However, at the exit of the crisis, while activity will remain below pre-crisis levels as long as there is no vaccine and social distancing measures are required, we fear that several companies will enter into financial difficulties in the absence of prolonged and targeted fiscal relief. Hence, we expect business insolvencies to rise by +25% by mid-2021.

Trade structure by destination/origin

(% of total, 2020)

Exports	Rank	Imports
Germany 13.5%	1	15.4% Germany
Sweden 10.4%	2	11.0% Sweden
United States of America 8.3%	3	9.7% Russian Federation
Netherlands 6.5%	4	9.0% China
China 5.2%	5	4.6% Netherlands

Trade structure by product

(% of total, 2020)

Exports	Rank	Imports
Paper and paper manufactures 10.0%	1	9.0% Road vehicles
Specialised machinery 8.0%	2	8.3% Petroleum, petroleum products and related materials
Petroleum, petroleum products and related materials 6.5%	3	6.5% Electrical machinery, apparatus and appliances, n.e.s.
Road vehicles 6.4%	4	5.0% Other industrial machinery and parts
Electrical machinery, apparatus and appliances, n.e.s. 5.5%	5	4.7% Metalliferous ores and metal scrap

The payment behavior of domestic companies is excellent with payments taking place in 25 days on average, and the EU framework provides reliable tools when it comes to late payment.

Low
Medium
Sensitive
High

Payments
Court proceedings
Insolvency proceedings

Payments
Court proceedings
Insolvency proceedings

Legal action for undisputed debt is usually resolved quickly (between 3 to 6 months), however, when the debtor’s assets are difficult to locate, or the debt is disputed, it can become time consuming.

Although insolvency law aims at rescuing companies facing financial difficulties in order to increase repayment possibilities, most reconstruction procedures spread over years (or fail) thus leaving the creditors with no or very few dividends, while liquidation procedures leave very low recovery chances to unsecured creditors.