Standard & Poor’s Ratings Services (S&P) has lowered its long-term foreign and local currency sovereign credit ratings for Finland to AA+ from AAA. At the same time, S&P affirmed the country’s A-1+ short-term sovereign credit ratings. The outlook on the long-term ratings is stable.
The downgrade reflects the ratings agency’s view of the risk that the Finnish economy could experience protracted stagnation due to an aging population and shrinking workforce, weakening external demand, loss of global market share in the key information technology sector, structural retrenchment of the important forestry sector, and relatively rigid labour market.
S&P commented that, over the past decade, Finland’s economy has lagged most peers, with GDP per capita shrinking by an estimated 0.26% (based on an average of actual and projected per capita GDP growth for 2008-2017). This is well below the level the agency consider to be the norm for economies at a similar level of economic development. S&P expects 2014 to be the third consecutive year of negative real GDP growth. The estimated 2014 real output remains 6% below the 2008 level.
Moreover, Finnish exports have underperformed world trade since 2008, which the agency interprets as a sign of lower competitiveness, rendering an export-driven recovery unlikely. Despite weak economic performance, and low underlying inflation, between end-2007 and 2013, Finnish labour costs increased by over one-fifth compared with about one-eighth for the eurozone as a whole (based on Eurostat data).
Downside risks to the weak economic growth outlook exist if global demand softens further. S&P also considers that Finland remains vulnerable to Russia’s economic weakness and, more significantly, to any slowdown of economic activity in the eurozone. Exports to Russia account for one-tenth of total Finnish exports or about 4% of GDP. The agency estimates that a slowdown in exports to Russia could impede Finnish growth, causing a one-off reduction in GDP growth of 0.8%.
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