Standard & Poor’s warns that Finland could lose its AA+ credit rating if it fails to carry out structural reforms.
The credit rating agency points out that if the much-needed reforms were to be unsuccessful, it could lead to weaker growth or a substantial deterioration of fiscal performance and, thereby, to a sharp increase in the debt levels of Finland.
“In our view, the structural challenges from an ageing population and a declining employment pool will wear on the economy's growth potential over the longer term. To contend with these developments, alleviate skill mismatches, and incentivise labour force inclusion, further reforms to the labour market will be needed,” it states in its country report.
“A reform of the social security system has recently been brought for consideration, and in our opinion, its implementation could be a positive step in this direction. However, we do not expect any traction on major reforms to surface until after the 2019 elections.”
The social, health care and regional government reform, it adds, is at risk of not being completed by the end of the year due to the looming elections and could therefore also be high on the agenda of the next government and stall other key reforms.
Standard & Poor’s reaffirmed its AA+ credit rating and stable outlook for Finland on Friday, saying it expects the economy to continue to grow – albeit at a slower clip – and support the fiscal consolidation in the country.
It added that it would consider upgrading the credit rating if the Finnish economy showed strong and sustained current account surpluses.
“If the government successfully navigates the growth challenges posed by a decreasing and ageing workforce, and notably revives growth potential so as to secure the long-term sustainability of public finances, it would build additional upside momentum to the ratings,” stated Standard & Poor’s.
As Finland enters a more mature phase of its economic cycle, the credit rating agency believes the drivers of growth will shift away from investment and exports toward domestic consumption, which has thus far been muted due to the government’s consolidation efforts.
“We expect Finland’s economic cycle to peak in 2018, with output expanding by 2.9 per cent for the full year,” it said.
While the strengthening labour market is expected to boost private consumption and sustain domestic demand over the years to come, the continuing trend of low investment in research and development is to limit opportunities to diversify the industrial structure of Finland, according to Standard & Poor’s.
Jan von Gerich, a chief strategist at Nordea, says Finland has a number of obstacles to clear before it can re-claim the coveted triple-A rating. “We have to raise potential economic growth,” he commented.
Aleksi Teivainen – HT
Source: Uusi Suomi