Finland Trapped in Recession as Investment Fades: Nordic Credit

Finland is shuttering factories that make up the backbone of its export industry faster than it’s investing in new companies.

“The overall weak development of investments is worrying,” Juhana Brotherus, an economist at Danske Bank A/S in Helsinki, said by phone. “Future growth potential is eroding.”

Finland is losing its industrial base as the government commits to austerity policies designed to protect a AAA credit rating and keep borrowing costs down. Budget cuts have coincided with the loss of some of Finland’s biggest growth engines as erstwhile technology giant Nokia Oyj falters and a paper industry that used to provide thousands of jobs is overtaken by electronic media.

The strains on the economy are driving public debt higher, and Finland estimates it will breach the European Union’s 60 percent limit of gross domestic product for the first time this year.

The yield on Finland’s benchmark 10-year bond traded at about 1.9 percent yesterday, compared with a Feb. 3 low of 1.76 percent. Though it costs less to insure against losses on Finnish debt than it does on bonds issued by Germany, five-year credit-default swaps on Finland have risen to 22.2 basis points from a low of about 18 in October, according to data compiled by Bloomberg.

Economy Contracting

The government of Prime Minister Jyrki Katainen has struggled to find ways to jumpstart growth without abandoning austerity policies that he’s championed since Europe’s debt crisis started. So far he’s failed to stop the losses.

Finnish industrial investments have been outpaced by depreciations since 2008, according to data by Statistics Finland. The economy, which shrank 0.3 percent in the fourth quarter, has contracted for three years of the past five years and unemployment jumped to 8.5 percent in January from 7.9 percent at the end of last year.

Investments will drop 4.4 percent this year, the Confederation of Finnish Industries forecast last month. Industrial production fell an annual 7.5 percent in January, the 15th consecutive month of contraction, the nation’s statistics office said on March 10.

Export Key

Fixed investment has dropped more in Finland than in neighboring Sweden and Denmark, according to the Organization for Economic Cooperation and Development.

“Everything hinges on exports,” Brotherus said. He estimates Finland’s sales abroad should start to pick up by the end of the first half of the year.

The International Monetary Fund today cut its forecasts for the Finnish economy to 0.3 percent this year and 1.1 percent in 2015, citing smaller exports to Russia. It had previously forecast growth of 0.7 percent and 1.3 percent for those years, respectively.

Finland faces a similar loss of competitiveness to that seen in Italy and France, European Commissioner for Economic and Monetary Affairs Olli Rehn said in an interview with newspaper Kauppalehti today.

The government has sought to temper some tax increases, such as higher levies on energy, and has reduced the corporate tax rate to 20 percent from 24.5 percent in January.

Yet efforts to support industry through direct investment have attracted criticism as the government is accused of backing firms doomed to fail.

‘Wasted Money’

Keith Silverang, who heads Finland’s biggest business park operator Technopolis Oyj, this week lashed out against the government for “wasting” money through its investment strategy.

Investments aren’t profitable due to the cost of labor, the cost of wood, the public sector and the tax burden, UPM-Kymmene Oyj Chairman Bjoern Wahlroos said in a January interview on YLE TV1. He’s also the chairman of the biggest Nordic bank, Nordea Bank AB. “Finland is being de-industrialized,” he said. “We need to come up with ways to make people want to invest in Finland.”

Some companies have managed to escape the mood of economic doom. Startups such as “Angry Birds” maker Rovio Entertainment Oy and Supercell Oy, valued at $3 billion in a stake sale to Softbank Corp. last year have broken away from the pack to become Finland’s new success stories.

Yet to turn those few cases into a national industry that can create jobs is another matter, according to Ville Kaitila, a researcher at Helsinki-based ETLA Research Institute.

“New industries can’t be conjured up just like that,” he said.

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