23 february 2017 - nordea markets · nokia's fall from grace has had a major impact on...

Corporate Research 23 February 2017

Contents

Finland: How to rise from the abyss? 1

How Finland plunged into the abyss 2

Finding a way out of the abyss 9

Interview: Finland in a view from the top 13

Interview: Finland (and Russia) through the eyes of the big retailer 17

Interview: Finland, how did it get so bad? 20

Disclaimer and legal disclosures 25

Nordea Markets

Corporate ResearchEquity Research 23 February 2017

Finland: How to rise from the abyss?Fallen angelBefore the global financial crisis in 2008, Finland's economy matched or beat its Nordic neighbours', but then it all went horribly wrong. The end of the commodities supercycle put pressure on important Finnish industries such as Metals, Mining, Capital Goods and Paper. Digitalisation is sounding the death knell for the Finnish paper industry and the ascent of Apple with its iPhone and iPad struck a mortal blow to former global no. 1 mobile phone maker Nokia, which alone represented perhaps 4% of Finnish GDP 15 years ago. Finland's GDP declined for three consecutive years and is today lower than in 2007, in stark contrast to Swedish growth of 20% over the same period. Finland has the highest unemployment and the highest unit labour costs of the Nordic countries, plus the highest share of government spending to GDP (58%) in the entire OECD.

When the going gets tough, the tough get goingThe going has been tough for years in Finland, and it is arguably high time to acknowledge and forcefully address this. A reluctance to see challenges as structural rather than cyclical has meant that until the past few years – when Finland suffered yet another blow from the collapse of key trading partner Russia's economy – no ambitious structural reforms for restoration of public finances and competitiveness were launched. We see no quick fix for Finland's economy. Monetary policy (and consequently to a great extent also the exchange rate) is set by the ECB, and is in any case already incredibly loose. We argue that Finland needs to consider a more flexible labour market, to institute measures to boost innovation, entrepreneurship and R&D, and to address the challenge of its ageing population by reviewing its pension system and work immigration policies.

A view from the top: Interviews with the CEOs of Nordea and StockmannNordea's CEO Casper von Koskull and retailer Stockmann's CEO Lauri Veijalainen share their views on Finland's economic woes and the possible ways forward, as does Pasi Sorjonen, Chief Economist at Nordea Markets Finland.

Finland lagging: Nordic and Eurozone GDP indexed to 2005 = 100

100

105

110

115

120

125

130

2005 2007 2009 2011 2013 2015

Finland

Sweden

Norway

Denmark

Euro Zone

Source: Thomson Reuters and Nordea Markets

MarketsIMPORTANT INFORMATION AND DISCLOSURES AT THE END OF THIS REPORT


How Finland plunged into the abyssLike its Nordic neighbours, Finland's economy was hit hard by the global financial crisis in 2008. Although it

recovered strongly in the next few years, it has since lagged dramatically, with Finnish GDP growth even

turning negative in 2012-14. The reasons for this include its great dependence on industries (and

companies such as Nokia) in structural and cyclical decline, the collapse in demand in top-three trading

partner Russia, high labour costs in a comparatively rigid labour market and weakened public finances

burdened by a rapidly ageing population.

Post-crisis recovery smothered by home-grown challengesSince the global financial crisis of 2008-09, Finland's economy has sharply underperformed those of its Nordic neighbours

What is wrong with Finland? It may seem like a silly question, but it captures the essence of this month's Nordea On Your Mind. All four Nordic countries suffered badly during the global financial crisis of late 2008 and 2009, but their economies recovered sharply from 2010, with their GDP now above pre-crisis levels. Except for Finland.

Coming from the strongest GDP growth among the Nordic countries in 2007, Finland saw the sharpest decline during the crisis, and has since underperformed its neighbours and the Eurozone. Following a rebound immediately after the financial crisis, Finnish GDP growth turned negative in 2012-14, levelling out in 2015, and Finnish GDP remains some 5% below its 2007 peak.

Finnish unemployment and labour costs are higher than in the other Nordic countries, its state finances are weaker and its population is older. In this report, we explore how this could happen, and what Finland could do about it.

GDP growth in the Nordic countries in 2005-15

‐10%

‐8%

‐6%

‐4%

‐2%

0%

2%

4%

6%

8%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Denmark Finland Sweden Norway

Source: IMF

Nordea Markets 2


GDP for Nordic countries and the Eurozone in 2005-16, indexed to 2005=100

100

105

110

115

120

125

130

2005 2007 2009 2011 2013 2015

Finland Sweden Norway

Denmark Euro Zone

Source: Thomson Reuters

Finland lost its last external top credit rating in June 2016, when Moody's downgraded from Aaa to Aa1

Finland is a wealthy, industrialised country with high living standards and a highly educated population. Despite this high starting level, it has seen dismal economic momentum for several years, sharply lagging its Nordic and European peers. This poor performance is also starting to show in Finland's creditworthiness. S&P downgraded it back in 2014, with Fitch and Moody's following suit in March 2016 and June 2016, respectively, meaning all three major rating institutes have cut Finland from its prior absolute top rating.

How could Finland end up in such dire straits? There is no single explanation for the stagnation, but we highlight and later review what we consider to be the key drivers:

Heavy reliance on struggling industries such as Paper, Shipbuilding and SteelThe demise of formerly world-leading Finnish telecom equipment maker NokiaCollapse in demand from Finland's former largest trading partner, RussiaHigh labour costs and a comparatively rigid labour marketAgeing population putting pressure on public finances.

"Steve Jobs took our jobs"The iPhone killed Nokia, and digitalisation is destroying the paper industry – both important for Finland

This quote is from Finland's Prime Minister in 2014, Alexander Stubb. He was referring to digitalisation in general, and specifically to former Finnish global telecom equipment icon Nokia, implying that Apple (co-founded and for many years led by Steve Jobs) championed products that sounded the death knell for both Nokia (whose smartphones were quickly marginalised after the launch of the first iPhone in 2007), and for Finland's very sizeable Paper and Forestry industry (where both newsprint and fine paper are rapidly being substituted by digital media, not least on Apple's iPads and computers).

As in most developed economies, services account for the bulk of Finland's GDP, at roughly 70%. The remainder is manufacturing, where the biggest industries in Finland are:

Metals, Mining and Machinery ~30%Paper & Forestry ~10%Electronics (including telecom equipment) ~6%.

Nordea Markets 3


Machinery and materials industries also struggling, owing to the shift from investment-led to consumption-led global GDP growth

As highlighted by Mr Stubb's remark, paper and electronics have declined significantly in importance in the past ten years. Materials and machinery have also faced headwinds. As drivers for global GDP growth have shifted from investment- to consumption-led, many Capital Goods niches are battling with subdued demand, and some are also seeing overcapacity issues. Examples of significant Finnish industrial sectors that are struggling include Shipbuilding and Steel. Moreover, there is a loss of Finnish competitiveness from an unfavourable labour cost trend, which we also review.

Finnish GDP growth in 2007-16 was zero versus Sweden's 20%

We could see in the chart from the IMF above that Finnish GDP in 2016 had been virtually flat since 2007, in sharp contrast to Swedish GDP, which had grown nearly 20% in the same period. An OECD report (OECD Economic Survey, FINLAND, Jan 2016) estimates the impact on Finnish GDP from what we could call the "Jobs effect":

Reduced value added from the electronics sector since 2007: -3%Reduced output in wood and paper production since 2007: -0.75%

Without the declines in wood and paper and in electronics, Finnish growth would have been nearly 4%

In other words, had the electronic and paper industries not faced their respective structural challenges, Finnish ten-year GDP growth would have been nearly 4% instead of zero.

Nokia – The rise and fall of a titanNokia evolved from a conglomerate in the 1980s to the global no. 1 mobile phone maker by 1998

Like any good drama, the story of Nokia contains both triumph and despair. Founded in 1865 as a paper mill, and named after the Nokianvirta river, by the early 1980s Nokia had grown into a widespread Finnish conglomerate whose businesses included aluminium, cable, chemicals, paper, rubber, power generation, hunting rifles and TVs. A venture into mobile telephones in 1982 really took off after the launch of digital GSM phones in the early 1990s, making Nokia the global no. 1 mobile handset maker by 1998. Thanks to this, Nokia focused on its telecom business (handsets and network equipment), and shed the rest.

In 2000, Nokia represented 70% of the market value of the Finnish stock market, and 20% of Finland's exports

Nokia's profit almost quintupled from USD 9.5bn to USD 45bn between 1996 and 2001. By 2000, the company accounted for 70% of the total market cap on the Finnish stock market, plus 20% of Finland's exports and 14% of the country's corporate tax revenue. Its global market share in mobile phones peaked at 41% in 2006, and Nokia remained no. 1, although with a sliding market share, until being overtaken by Samsung in 2012.

Nokia's mobile phone business was decimated after the launch of Apple's iPhone in 2007, the remnants being sold to Microsoft in 2014

A disruptive technology put an end to Nokia's days as a global powerhouse in mobile phones. When Apple entered the mobile phone market, pioneering the use of touch screen technology in its first iPhone in 2007, Nokia had no competing offering. Its market share collapsed in the subsequent years, and Nokia partnered its mobile phone business with Microsoft in 2011, selling the unit to its partner in 2014. What remains of Nokia today is its telecom networks business, merged with the corresponding units of Siemens and Alcatel-Lucent in 2007 and 2015, respectively.

Nokia has shed 70% of its staff in Finland since 2007

Nokia's fall from grace has had a major impact on Finland's economy. In the charts below we show how in 2007-15 Nokia lost 70% of its market cap, while Apple's grew by 350%, and how Nokia's number of employees in Finland fell from the peak of 23,000 to the current 7,000 over the same period. The impact on the economy is not just felt through the 16,000 jobs lost at Nokia, but also among its suppliers and partners.

Nordea Markets 4


Average number of Finnish employees at Nokia in 2007-15

0

5,000

10,000

15,000

20,000

25,000

2007 2009 2011 2013 2015

Num

ber o

f em

ploy

ees

Source: Nokia's annual reports

Market cap of Nokia and Apple in 2007-16

0

100

200

300

400

500

600

2007 2008 2009 2010 2011 2012 2013 2014 2015

EUR

bn

Nokia Apple

Source: Reuters

Trade with Russia has collapsedFinland's exports remain 20% below pre-crisis levels

Like its Nordic neighbours, Finland is a small, open economy, highly dependent on trade. Exports represent nearly 40% of Finland's GDP.All four Nordic countries saw their exports plunge during the global 2008-09 financial crisis, but unlike Sweden and Denmark, which have seen their exports recover to near pre-crisis levels, those of Finland and Norway remain ~20% below previous peaks. In the case of Norway, this is explained by the lower oil price. For Finland, there are other explanations.

Share of export as a % of GDP for the Nordic countries in 1960-2015

0

10

20

30

40

50

60

1960 1966 1972 1978 1984 1990 1996 2002 2008 2014

%

Denmark Finland Norway Sweden

Source: IMF

More consumption- than investment-led global GDP growth has limited demand for Finnish export goods

Finland's exports are heavily geared to raw materials such as paper, wood, metals and chemical, as well as capital goods. As global GDP growth in recent years has shifted from investment- to more consumption-led, demand for these products has not kept pace with total economic growth. As a result, demand for many Finnish goods has lagged.

Finland's trade with Russia has fallen from 14% to 8% of GDP since 2014

There is also a geographical explanation for Finland's sluggish exports: Russia is a top-three trading partner. Finnish trade with Russia went from virtually zero in the early 1990s to 11-14% of total trade in 2004-14, after which the collapse in the oil price and trade sanctions triggered by the issues in Ukraine caused a sharp contraction in the Russian economy. Trade with Russia has accordingly nearly halved in value, to 8% of total trade in 2015.

It is not all about the flow of direct exports from Finland to Russia, but to a great extent about Russian operations of Finnish corporates. Many have needed to scale back or even exit Russian activities in the wake of sharply lower local demand. Examples of large Finnish companies with significant Russian businesses include tyre maker Nokian Tyres, energy group Fortum, retailer Stockmann and construction group YIT, to name a few.

Nordea Markets 5


Finland's three largest trading partners, share of total, 1987-2016

5% 7% 8% 5%

8%

11%

12%13% 14%

12%

8%

0%

4%

8%

12%

16%

20%

1987 1991 1995 1999 2003 2007 2011 2015

Germany Sweden Russia

Source: Suomen Tulli

An argument sometimes heard among Finnish industrialists is that currency is a competitive disadvantage for Finland since it joined the EMU and adopted the Euro as its currency. This would be particularly directed at Swedish commodity and capital goods producers, who have potential support from a "soft currency", the SEK, in difficult times.

Currency (in other words, the EUR) does not explain Finland's economic woes

As the chart below shows, we find it hard to see any compelling evidence of a sustained advantage from being a SEK-based manufacturer over having a EUR-denominated cost base. In the past few years, the USD has strengthened significantly, but against both the SEK and the EUR. Over the past ten years, the SEK/EUR exchange rate has remained within a +/-10% band, with exception of a couple of quarters with an even weaker SEK during the financial crisis in 2008-09. The RUB has lost roughly half its value against both the EUR and the SEK since 2007. This is not so much an issue for Finnish or Swedish companies from facing Russian competition, as their Russian volumes and sales values taking a deep plunge. In short: a weak SEK does not explain Finland's economic woes.

EUR versus USD, SEK and RUB, 2007-17, indexed with Q1 2007 = 100

30

50

70

90

110

130

2007 2009 2011 2013 2015 2017

USD/EUR

RUB/EUR

SEK/EUR

Source: Thomson Reuters

Finnish labour market: How to recover from a blunder?A generous multi-year wage agreement in 2007 had disastrous timing, causing a 10-15% cost-competitiveness disadvantage

Sometimes it is all about having done the wrong things at the wrong time. Finland has reasonably centralised wage negotiations between employers and unions, and in 2007 the outcome was a generous multi-year wage agreement that came into the effect just as the world plunged into a global financial crisis, and Finland's corporate champion Nokia suddenly faced off against Apple. As global demand and output fell off the edge of a cliff,

Nordea Markets 6


Finnish wages grew, creating a 10-15% negative cost-competitiveness gap for Finland. This in itself might not have been a death sentence for the Finnish economy, but together with the global financial crisis, Nokia's woes and Finland's main industries facing structural headwinds, it caused serious problems for the economy. Finnish unemployment rose from 6% to 9%, and remains firmly above its Nordic neighbours'.

Unit labour costs in 2007-15, Index 2007=100

100

105

110

115

120

125

130

2007 2008 2009 2010 2011 2012 2013 2014 2015

Denmark Finland Sweden Germany EU27

Source: ECB

Unemployment in the Nordic countries in 2000-16

0.0

2.0

4.0

6.0

8.0

10.0

12.0


Source: Eurostat

Labour market reforms are needed, but have proved politically difficult to anchor and implement

Finland needs to recover its lost competitiveness of the past several years, but this has proven politically difficult to accomplish. It is not only about austerity in public finances, which both the previous and the current government (which came to power in 2015) have pursued. It is also about the structural reform of the Finnish labour market, reducing its rigidity and lowering thresholds for working.

Finland is becoming the land of the elderlyAn ageing population and early retirement put further pressure on Finland's economy

Unfortunately, demographics have become yet another economic burden for Finland. The share of people aged 65 or more was almost identical for Sweden and Finland in 2015, but the share of elderly has increased at a much faster pace in Finland in the past couple of years. This trend is widely expected to continue, posing an even greater demographical challenge for Finland in the future than its Nordic peers. This challenge is exacerbated by Finland having a lower retirement age than its Nordic neighbours.

Share of the population aged 65 or more in the Nordic countries in 2004-15

12%

14%

16%

18%

20%

22%

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015


Source: Eurostat

Finland's government debt to GDP has doubled since 2008 to 64%

During Finland's home-grown crisis over the past five years, government debt has increased sharply to 64 % of GDP. Although this could be considered a moderate level compared with other European countries such as Italy, Spain or France, Finland’s debt to GDP has almost doubled since 2008 (33%). High unemployment, weak exports and an ageing population

Nordea Markets 7


have led to Finnish government spending increasing 10% between 2008 and 2014, taking the general government budget deficit above 3% of GDP for the first time since the mid-1990s. Even though proposed reforms include government spending cuts, Nordea forecasts Finnish government debt continuing to rise to almost 70% of GDP in 2018.

General government gross debt as a % of GDP in 1995-2015

0%

20%

40%

60%

80%

100%

120%

140%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

Finland Sweden Denmark Germany

France Italy Spain

Source: Eurostat

General government budget deficit/surplus in Finland in 1975-2015

‐10.0%

‐8.0%

‐6.0%

‐4.0%

‐2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

1975

1977

1979

1981

1983

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

2013

2015

Source: Statistics Finland

Populists have not caused turmoil in Finnish politicsFinland's political populists have not caused gridlock or mayhem, but entered government in a coalition in 2015

The strongest populist political force in Finland, the Finns Party, was formed after the dissolution of the Finnish Rural Party in 1995. While not as explicitly xenophobic as many European populist movements, it has an EU-sceptic profile and has capitalised on the wave of public discontent during the surge in refugees into Europe in 2014-15.

After the 2015 election, the Finns Party formed a government with two coalition partners, its party leader Timo Soini being appointed foreign minister and deputy prime minister. This firmly established the party as a mainstream political force, but at the cost of plummeting voter support in the polls, from nearly 18% in the 2015 election to 9-10% at present. The party is now feeling the effects of being associated with painful structural reforms and austerity in public finances.

Crucially, populism in Finnish politics has so far not been a strongly destructive force, causing political gridlock or destabilising society. On the contrary, the populists have entered government and have contributed to pushing through unpopular structural reforms.

Voter support for the four largest political parties in Finland between 1983 and 2016*

0%

5%

10%

15%

20%

25%

30%

Centre Party Na onal Coali on Party

Finns Party Social Democra c Party

*From the polls in December 2016

Source: Taloustutkimus

Nordea Markets 8


Finding a way out of the abyssSo, what could be Finland's way out of its economic crisis? As an EMU member, Finland is stuck with the

euro, so it can't let its currency do the job. Even if that were an option, it could cost in the form of inflation

later, and current monetary policy by the ECB is incredibly accommodative anyway. With no quick fix

available, we argue that Finland needs to reform its labour market to restore competitiveness, to encourage

innovation and R&D, and to review its pension system and immigration policies.

We see no easy, available quick fix for the Finnish economy

No quick fixHaving suffered multiple strong headwinds after the global financial crisis, it would be fully understandable for the Finns to look for easy solutions to their economic challenges. Unfortunately, there are no such viable solutions available.

Currency devaluation unavailable to an EMU member using the euro

A classic, historical "easy way out" for a major exporter with a competitiveness challenge would be to let its currency depreciate. Even without considering the long-term inflationary risks associated with such an approach, it is not even an option available to Finland today. As an EMU member, Finland uses the euro as its currency, and it simply has to accept the euro exchange rate against other currencies.

Interest rates are already ultra-low, and are set for Finland by the ECB

Monetary stimulus is another classic approach to economic growth stimulation (often in conjunction with currency depreciation or devaluation), but it can currently be considered irrelevant as a measure for Finland specifically. Virtually all central banks of developed countries are already pursuing ultra-accommodative monetary policies, with record-low interest rates. This includes the ECB, which sets the policy rates relevant for Finland.

Protectionism is not allowed within the EU, which accounts for the bulk of Finland's exports

What about protectionism, emulating the trade policies being championed by new US President Donald Trump? Using tariffs and duties to boost the competitiveness of domestic industries, thus supporting employment and economic output, could seem natural for a country with a labour cost and competitiveness issue. But here also, Finland has little manoeuvrability. As an EU member, Finland is bound to free trade with other EU members, which represent the clear majority of its exports and imports. And unlike the US, which is a huge net importer, Finland is highly dependent on both exports and imports. Any reciprocation by trade partners to Finnish protectionism could hurt the economy through rising costs for imports. Only applicable in North American and emerging markets, and with doubtful net benefits owing to import-related risks, we argue that protectionist measures are not a relevant quick fix tool for the Finnish economy at present.

The question is: What's left?

Finland may need several ingredients to revitalise its economy

Potential boost no. 1: Modernised labour marketSo what does Finland need to do to revitalise its economy? The business cycle comes and goes; Finland may need to be prepared that global demand for the metals, forest products and machinery it produces could remain subdued for some time. But its industry, representing some 30% of GDP, needs to be competitive. This may require labour market reforms, which could also be even more critical for the remaining 70% of the economy represented by services.

Nordea Markets 9


A comparably rigid labour market could benefit from more flexible local wage-setting

A key weakness we see in the Finnish labour market is the built-in rigidity in centralised wage settlements between employers and trade unions. Room for flexibility in final wage-setting on the local level is limited, sometimes leading to a disconnect between macroeconomic realities and wage negotiation outcomes in certain industries or areas. Too many are too heavily bound by central agreements, hindering better calibrated allocation and price of labour.

Unemployment benefits could be reviewed to give better incentives for active job seeking

Finland's unemployment benefit system also brings competitive disadvantages versus its Nordic neighbours. Benefits are comparably generous, their tapering is slow and activation of the unemployed is late in the process. Norway and Denmark have slightly better benefits initially, but they taper more quickly, and more resources are spent on active than passive labour market policies.

Labour laws could be eased to reduce risks in hiring, particularly for small firms and startups

There is also some rigidity in Finland's labour laws that could be reviewed to reduce risks in hiring staff, particularly for small firms and startups. These include potentially longer trial periods for new hires, looser restrictions on fixed-term contracts for work periods of less than a year and eased requirements for offering employment to previously laid-off staff.

Finland's employment rate is lower than neighbours, partly among low-income mothers taking home-care allowances instead of working

Finland's employment rate (68% for women, 69% for men) is lower than in the other Nordic countries. In addition to the unemployment benefit system, there is an impact from the home-care allowance system for children, reducing work incentives, particularly for women with low potential earnings. 40% of women with children aged below seven receive the home-care allowance rather than make use of public day care. The nature of these benefits, in conjunction with personal income taxation, could be reviewed with a view to increase incentives to work.

The government launched a competitiveness package in 2015

What has been done in Finland so far? In April 2015, the new government, headed by Centre Party leader Juha Sipilä, set out a path to close the 10-15% cost-competitiveness gap through three sets of measures, each yielding roughly a 5% improvement:

A one-off cut in labour costsWage moderation in the coming yearsProductivity gains from local-level (individual firm) flexibility in wage negotiations.

Accompanied by a EUR 4bn austerity package and a " Competitiveness Pact"" in 2016

This was topped off with a EUR 4bn fiscal austerity package. Four attempts to get employers and unions behind the proposed measures failed, resulting in mass protests. A fifth attempt in January 2016 resulted in a “Competitiveness Pact”, which includes:

Wage freeze for 2017Reduced pay for public sector employees.

More labour market reforms needed in Finland, according to the OECD

In the longer term, Finland arguably needs labour market reforms to ensure sustainable competitiveness. The OECD highlights urgent reform needs in several areas in its report OECD Economic Survey, FINLAND, Jan 2016:

Increased minimum pension age and limits on early retirement pathsShift taxation from labour to property and indirect taxStrengthening of labour market activation and improved incentives in unemployment benefitsIncreased competition in retail trade and network industries.

Nordea Markets 10


Finland lags the rest of OECD in startup rates and contribution from startups to job creation

Potential boost no. 2: Entrepreneurship, innovation and R&DThroughout the OECD, young firms are creating the majority of new jobs in the economy. Despite having a well-educated population, Finland is lagging badly in this area. Startup rates in Finland have been among the very lowest in the OECD, both before and after the global financial crisis. Startups represent some 7% of total companies in Finland compared with 12-25% in most OECD countries. The contribution of startups to job creation in 2001-11 was 27% in Finland, the lowest in the OECD, while most other OECD countries were at 35-50%.

R&D in Finland has not recovered from the demise of Nokia's mobile handset business

A favourable regulatory environment for entrepreneurs and small businesses has not been able to offset the hangover from the Nokia era. R&D and innovation have been disproportionately concentrated on telecommunications and electronics, and related areas. With the demise of Nokia's mobile handset business, R&D activity has continued to be scaled down. Total R&D in other industries has not been able to make up for the vacuum left by Nokia, even in aggregate.

Potential benefits from consolidating research units in higher education and support for new forms of startup funding

Finland could potentially benefit from consolidating its higher education, which is fragmented with many inefficient small research units. Fewer and larger centres of excellence could have higher profiles and integrate easier into international research networks.

While funding in general is not problematic in Finland, the country could seek to review its regulatory framework for the new forms of SME and entrepreneurship funding growing in popularity internationally, including alternative forms of debt, crowd-funding, hybrid instruments and asset-based lending.

Finland has a rapidly ageing population

Potential boost no. 3: Pensions and immigrationFinland stands out as being even worse off than its Nordic neighbours in having a rapidly ageing population. The strain on the shrinking working population to support the elderly could be mitigated by additions to the workforce from immigration.

Immigration to Finland is very limited

Only 5% of Finland's population is foreign born, and gross inflows have been quite small over time. In recent years, gross immigration to Finland has averaged 0.3% of the population annually. Half of this is work immigration, nearly all from other EU countries, and the other half refugees.

Eased work immigration could help solve demographic challenges

While it might not be realistic for a small, remote country to be able to attract enormous work immigration, there are things Finland could do to promote such flows, such as abolishing the "work test", requiring work immigrants to have a job offer in an occupation where there is a local lack of supply. Systems for recognising foreign qualifications and integrating workers' families could also be improved.

Finland's government spending is nearly 60% of GDP, highest in the OECD

The growing burden on Finland's welfare system from pensions is showingin its public finances. Gross government debt has risen from below 40% of GDP before the 2008 crisis to now more than 60%. Government spending as a share of GDP is 58%, the highest in the OECD. In response, pension reform is being implemented that will raise the retirement age from 63 to 65 by 2020 and link retirement age to longevity thereafter. Possible paths to early retirement are also being narrowed. This reform would cut expected government debt to GDP substantially, but alone is not –according to the OECD – sufficient to prevent a rising debt-to-GDP ratio.

Pension reform and fiscal austerity should cap debt to GDP at 70%

Therefore, a fiscal consolidation plan of some EUR 4bn (2% of GDP, mostly spending cuts) in addition to the pension reform, aims to cap the debt-to-GDP ratio at around 70% by 2030.

Nordea Markets 11


Projections for benefits from pension and public spending reforms assume no macroeconomic shocks, something against which Finland's public finances do not really have any buffer at present. It goes without saying that it is therefore critical for Finland to calibrate its pension system to a level of benefits the economy can sustainably carry. Any worse-than-expected macro development could require further adjustments to retirement ages or benefit levels, and any positive contribution to the size of the workforce or employment levels from work immigration would be more than welcome.

Nordea Markets 12


Interview: Finland in a view from the topWe interview Casper von Koskull, CEO of Nordea, asking him a number of questions. What has caused

Finland's economic crisis? Why has it persisted for so long? What could be a viable way out of it? How

have Finland's challenges affected Nordea as the country's biggest bank? What could be a vision for

Finland in 2050?

JT: In the years prior to the global financial crisis of 2008, Finland's economy matched or beat its Nordic neighbours. Since the crisis, Finland has underperformed sharply, with GDP growth even turning negative for three years until 2015. From knowing many CEOs and CFOs of Finland's biggest companies, what is your impression of what happened?

CvK: To put things in perspective, I have been told that in the mid-1950s, Finland's GDP per capita was roughly half that of Sweden. By the late 1990s it was on par and over the past 15 years or so, it has fallen 20% below. Those are big numbers, more than just a cyclical blip.

A symbolic way of trying to describe what happened could be to say that Apple killed Finland – in two ways. Apple's success in tablets, its iPads, helped speed up substitution from print to digital media, putting pressure on what is for Finland the very important paper industry. Apple's success with its iPhone also led to the demise of Nokia's previously world-leading mobile phone business.

I believe Finland started gradually losing competitiveness from these structural challenges in key industries 15 years ago, and then suffered a real death blow from introducing a very generous multi-year collective wage agreement just as the global financial crisis struck. Many other countries adapted immediately to the crisis, but in Finland it was assumed there would be a quick recovery and competitiveness was lost through rising wages during collapsing demand.

JT: Of the various factors dragging down the Finnish economy, which would you say were most critical?

CvK: I would really highlight Nokia's woes as a key factor. I think its tremendous journey to becoming a world leader helps explain the level of confidence in Finland, holding back a sense of urgency in quickly and decisively responding to the financial crisis. The end of the supercycle for commodities was also critical, causing double pain for Finland, both directly hurting its metal and mining industries, and triggering a deep recession for one of Finland's top trading partners, Russia.

Perhaps even more important is time. It took a remarkably long time for the Finns to acknowledge that the big downturn was more structural than cyclical in nature, thus requiring a more forceful response than assuming and waiting for the business cycle to bounce back. I think there were five or six different commissions launched by the government in the years after the crisis, headed by business leaders such as Jorma Eloranta of Metso, Kari Stadigh of Sampo and Pekka Ala-Pietilä of Nokia, each being a variation of "What should we do?". I sat on a panel discussion in Finland some years back and was asked what Finland should do. My reply was that with such a plethora of suggestions from all these commissions, acting on at least some of them would be a good start.

Nordea Markets 13


At another panel discussion, perhaps five years ago, a Finnkampen (Swedish-Finnish Athletics International annual competition) in economics, I was invited to open the discussion. I highlighted Finland's structural rather than cyclical challenges, including poor demographics. The next speaker was Juhana Vartiainen, Finnish economist and now member of parliament, who gave similar views. And so did all the other speakers. We were certainly not rocket scientists, but we all agreed on the nature of the challenges back then. Juhana wrote a big report on Finland together with Sweden's former finance minister Anders Borg a couple of years later, on behalf of the Finnish government. It was released in 2015. Their recommendations for Finland were more competitive salaries, more workforce to fund the welfare state and raised productivity.

JT: What have Finnish companies done in response to struggling Russian businesses? Is there anything Nordea can do to support them, with our capabilities in Russia?

CvK: The exact challenges in Russia vary from company to company. For those hit by trade sanctions, there is unfortunately not much that can typically be done. Some have decided to exit after suffering political risks. Others are just struggling with weak demand.

Overall, I would say funding did not evaporate in Russia and was not a major driver for weakness among Finnish companies with business there. For them, as well as for us, it has become a matter of hunkering down and living to see another day, trying as best as we can to cope with weak demand.

JT: Finland is a small, open economy and a major exporter. Its share of exports to GDP is nearly 40%, three times as high as for the US. Do you think Finland can remain a big exporter with its current industrial base? Or would it need new success stories like Nokia? If so, what could they be?

CvK: I have some concerns that there seems to be something of a naive expectation in Finland that once the business cycle turns up, Finnish exports will return. For exports to reach new highs, I think there is a need to both strengthen Finland's competitiveness and to broaden the industrial base, possibly into areas such as biotech, healthcare and clean tech. This will require both corporate and state-sponsored investments in R&D. To those who argue that exports will recover automatically, I usually say "But what if this is the upturn?". The US is still in the midst of its longest upturn for many years.

JT: Finnish labour costs have grown much faster than those of its Nordic neighbours since 2007 and Finland has clearly higher unemployment. Do you hear from Finnish companies that they consider labour costs or regulations to be a challenge? What changes would they like to see?

CvK: There is a wish for moderation in wage growth and, with the current outlook for flat wages, this is no longer a crucial concern for the near future. It is not so much about actual wage levels today. What I usually hear is a desire for flexibility and local decision-making in labour agreements. In Finland, the whole workforce, unionised or not, is bound by central wage agreements. I know an example from the paper industry, where a unit had a local agreement between the employer and the unions, but was in the end forced to close, as they were not allowed to deviate from the terms of the central agreement.

Nordea Markets 14


The concept of collective bargaining would be described by some almost as a religion in Finland and it has proven very difficult to challenge politically. In difficult times it is understandable that political decision-makers revert to ideology and look to a more prosperous past for solutions. I would encourage trade unions to look beyond their borders, perhaps share experiences with neighbours, compare what has worked and what has not. I am thinking specifically of Sweden, which has a powerful central trade union – LO – with 1.8 million members, but has still undergone major welfare system and tax reforms, and enjoys higher economic growth and lower unemployment than Finland.

JT: Do you think joining the EMU and adopting the Euro has been good or bad for Finland? And why?

CvK: I think it has been economically challenging, but a big geopolitical advantage. It has proven difficult for Finland to make adjustments in its economy to a new, harsh economic reality, and the monetary and exchange rate policies have not been available as national tools to help them cope. But at the same time, turning the argument around, having its own currency would not have helped Finland in any way to avoid the challenges it is continuing to face.

JT: Have you seen Finland's economic challenges made worse in any way by funding or banking constraints? If so, have those been resolved?

CvK: Not really. In recent years, the corporate sector has in aggregate seen pretty flat revenue development, has kept investments low and has kept limited indebtedness. The same goes for households. While that lack of growth is cause for some long-term concern, it is currently a manageable situation, with quite healthy and profitable corporates and banks.

The ECB does regular surveys about the availability and cost of credit in EU countries. There is a fresh one again putting Finland at the top, despite being among the weaker economies in the EU. Finland has been scoring well for several years.

JT: Has Finland's depressed economy caused specific challenges for Nordea? If so, how have they been addressed?

CvK: Our challenges have been largely the same as for the Finnish corporates. Low growth and negative short-term interest rates have made it necessary for us to ensure that we are also streamlined for a healthy financial performance in this environment. We have kept a close watch on our exposures to Russia, but we have not had any incidents.

JT: Let me finish by inviting you to go crazy for a moment, and imagine a Finland in 2050. What could its economy look like in a positive future scenario?

CvK: Although the paper industry has suffered badly from digitalisation, I think it will still have a role to play. It has recovered to become Finland's biggest export industry again, and parts of it are evolving into a biotech industry. I am convinced it will be able to renew itself further. As I mentioned earlier, I think biotech, healthcare and clean tech will be featured in the Finnish economy to a greater extent in the future.

Nordea Markets 15


Finland is starting off with a well-educated workforce and a modern society and economy. This is a very solid foundation to build upon, with investments in education and R&D. You could even argue that its demographic challenge – a rapidly ageing population – could give Finland an opportunity to be a pioneer in artificial intelligence and automation. Although on the fringes of Europe geographically, I could easily see future Finland being quite a cool place, provided there was an appealing combination of a skilled, competitive workforce, tax environment and R&D.

Nordea Markets 16


Interview: Finland (and Russia) through the eyes of the big retailerWe interview Lauri Veijalainen, CEO of listed Finnish retailer Stockmann, a company that has been at the

epicentre of several of the shocks to the Finnish economy: major exposure to Finnish private consumption,

a big domestic workforce, and a significant business in Russia. But as Mr Veijalainen tells us, it is not all

doom and gloom.

JT: The Finnish economy matched or beat Nordic neighbours in the years before the global financial crisis of 2008, but has since then underperformed dramatically, even showing negative GDP growth for three years. What went wrong, and how could it become so dramatic?

LV: Finland came under pressure from several things. Apart from a general cyclical downturn, critical industries for Finland, like paper and telecom equipment, saw demand collapse. And a few years later the same happened with Russia, one of our biggest trading partners. All of these consecutive big blows somewhat shattered business and consumer confidence in Finland. And I think to this day, we still haven't fully recovered our confidence.

Also, when the global financial crisis broke out, Finland had not suffered a serious economic crisis since 1991. We were simply not prepared for the hardships which were to come. I think this helps explain why our country's response to all the headwinds has not been quicker or more decisive. You don't know if you don't try.

JT: How would you describe the market challenges in Russia? And what has been Stockmann's response for its Russian business?

LV: Russian challenges include both the weak economy hurting consumption, and a volatile rouble which greatly affects Russian tourism and tax-free consumption abroad, including retail trade in Finland, especially by the border. I would argue that volatility of the rouble is as great a challenge for us, as is any rouble weakness. Knowing what to expect and plan for would make managing sales to Russian consumers much more feasible.

Russia can be quite a lucrative market to be in, but it is a very bureaucratic market. You need to know the local rules, business practices, your counterparts and culture. I sometimes describe it as having to follow the rules to 110%. In practice, it means that comparable operations need to be run with more resources than in Finland or in Europe, to operate effectively in Russia.

We have sold Stockmann's department store business in Russia, and we closed our Russian Lindex stores. We still have a real estate operation in Russia, and we continue to operate the Nevsky Centre shopping centre in St Petersburg as a landlord. This leaves our focus on running our department store and online retailing businesses in Finland and the Baltics, and our Lindex retail chain.

Nordea Markets 17


JT: How do Finnish labour costs and regulations compare with the other countries in which you operate? Are there any changes you would like to see?

LV: Labour costs are important. For a retailer, the top cost items in the P&L are labour and rents. But it is not only about costs. To us, customer service is extremely important as it is such a vital part of the customer's shopping experience.

Finnish regulations on store opening hours were earlier stricter than in some other markets in which we do business, but improved significantly in early 2016. I believe demand factors will drive this further. Time is an increasingly scarce resource for most households. Just looking at myself, I struggle to spend as much time as I would like with my two kids. If, on occasion, I get some more time to spare, there is just no way that I would spend it going shopping during business hours, rather than spending it with my children. I would try to push shopping time to occasions during the day which I could spare, and do my shopping then, in a store or online.

Having said all this, we have a very good dialogue with the unions in Finland and I don't see opening hours as a big constraint to our business anymore.

JT: Are exchange rates a significant risk for Stockmann? Do you benefit from Finland being an EMU member and using the euro?

LV: Lindex has some FX exposure, which we monitor and hedge. For the rest of the group, it is not a significant issue. I would say that Finnish EMU membership and the euro are overall neutral for us. There was much discussion in Finland about higher domestic prices after the introduction of the euro, but I have not really seen that happen. It is a benefit for Stockmann's various businesses to operate in the same currency area, as it reduces potential exchange rate volatility and streamlines pricing and reporting. This has given us an advantage since the Baltic countries joined the EMU.

JT: How do you see the outlook for Finnish private consumption? Are there any potential real game changers, positive or negative?

LV: The real driver for Finnish consumption is consumer confidence. Do we believe enough in our future to dare to spend? Confidence improved in 2016, though people still prefer saving over spending. Regarding game changers, I think what will be crucial is a change in mindset – a shift in attitude to focus on what is positive instead of what is negative. Finland is a safe and good country to live in. There are also already successes in Finland, like the comeback for our shipbuilding industry. People might need something to generate enthusiasm around, like when they rally around national teams in sports. Finland's 100th anniversary as a nation this year could be an occasion to use for restoring self-esteem and contribute to building a positive spiral.

JT: Do you consider the current political situation in Finland stable? Are there any critical political issues for Stockmann which would need to be resolved?

LV: I don't want to comment specifically on politics, but prefer to leave the political stage to the politicians. As a very general comment, I think it is helpful, when you have an action plan and policies, and you believe in them, to have some patience and stamina to see them through. Not to change them and give them a chance to work.

Nordea Markets 18


JT: There are potential threats to free trade from Donald Trump's presidency in the US, Brexit, and political pressures on the EU and its single market. Could this affect Stockmann and its sourcing?

LV: I don't think the protectionist winds blowing represent any immediate threats to Stockmann's business. For us, sourcing from Asia depends on EU-Asia trade relationships. The UK is a rather small market for us through Lindex. Any populist-driven disruptions to the EU could be a theoretical risk, but would anyway be more major "event risks", which could affect consumer confidence and demand even more than actual sourcing costs.

JT: If you had the chance to make a wish list for structural reform in the Finnish economy, what would be on it which could benefit both the economy and Stockmann's business?

LV: Like a Christmas list...? Well, joking aside, I think the big wish would be a surge in Finnish consumer confidence, a restored self-image and belief in the future. If I have to think about something more specific, to be able to sell wine together with food or groceries might be nice at some point. But this is currently not an option in Finland, where state-owned Alko has exclusivity for all retail sales of alcoholic beverages of over 4.7%.

Nordea Markets 19


Interview: Finland, how did it get so bad?We interview Pasi Sorjonen, chief analyst, Nordea Markets Finland. What are the main reasons for the

Finnish slowdown? How do people in general view Finland's economic challenges? What has been done

so far and will it be enough? Do we expect political turbulence going forward?

KK: What has gone wrong with Finland since the global financial crisis? The Finnish economy used to compare favourably with Nordic peers but has underperformed on all key metrics since the crisis, and has even had three years of negative growth since 2012. Are there cyclical or structural problems, or both?

PS: Since other economies, especially the Nordics, have had some good years in terms of GDP growth, it has been quite clear that the Finnish issues have been caused by structural problems. I would say that the biggest issues are related to lack of competitiveness, composition of export goods, the labour market and demographics.

A year or two after the financial crisis, there were some signs of recovery in the Finnish economy and most people thought that things would go back to normal after some time. But now we know that they haven't. A key problem is that people in general don’t like reform. People are reluctant to make sacrifices and focus on the big picture, the greater good. The same goes for politicians; they don’t like reform either, since it typically means reduced public support.

Most of the structural problems, such as the ageing population, have been discussed for many years. Still, very little has been done about them. The common view seems to have been that “there is plenty of time for reforms” or “the situation has not become bad enough”.

KK: Raw material industries like metals and forestry weigh heavily in the Finnish economy but are not so labour-intensive and may lag if global growth in the coming years is less investment-led. Do Finnish paper, metal and capital goods companies have a magic formula for being globally competitive or does Finland need new industries for future growth and employment?

PS: Well, it is not easy to change the composition of the products that are being made. If it was, I believe that many companies would have already made the transition. However, there is not much that the government can do about it; it is up to the companies to be profitable and competitive. Even if we have many old companies in Finland, their history is no guarantee of success in the future.

In Finland, we’ve also seen that fixed investments in the manufacturing sector have actually been lower than depreciation in past years. Hence, the capital is being consumed rather than increased. We see the same pattern for intangible investments, which are at their lowest level in a decade. That is a bad development, as intangible investments in, for example, education and R&D provide the muscle to create new products and develop existing ones.

Nordea Markets 20


KK: Russia has halved from peaking at 14% of total Finnish trade a couple of years ago. How big has the impact on the Finnish economy been? What do you expect going forward?

PS: The poor performance of the Russian economy in combination with the sanctions on Russia as well as the counter sanctions from Russia has definitely had a negative impact on trade between the countries.

But it is not only trade that has suffered. The number of Russian tourists that come to Finland has decreased significantly. Before the Russian crisis, the number of Russian tourists was as large as the number of tourists coming from the entire EU to Finland. Hence, the plunge in Russian tourism has had a negative impact on restaurants and hotels but also on the retail sector. However, there are some signs of Russian tourists coming back to Finland now.

The other big consequence from the Russian economy on Finland is the big fall in Finnish exports to Russia. But I believe that there will be no further fall from here. As the Russian economy will probably recover at a low pace – we expect a growth rate of around 1% only – Therefore the rise in exports to Russia will be modest.

KK: How big a factor would you say that Nokia’s fall from grace has been for Finland’s weak economy? Could something new arise from what remains of Nokia and its suppliers in Finland?

PS: Even though it is difficult to calculate the impact from one single company, we have made some estimates. If we look at exports, Nokia’s products are part of a subcategory called “Communications and equipment”. In 2008, the share of this category of total goods exports from Finland was a little over 13%. That is huge! In 2009, that share fell to 9%. In 2005, it had fallen further to 5% and today the share is just above 1%. Hence, Nokia’s contribution to exports has fallen quite remarkably.

Furthermore, if we look at Nokia’s contribution to GDP, we don’t have our own estimates, but there are some made by the Research Institute of the Finnish Economy (ETLA). It argues that Nokia’s contribution to GDP was about 4% in 2000 and fell to 1.6% in 2009. I expect that figure to be even lower today. When it comes to Nokia’s growth contribution, I remember seeing figures that during the best years, say in 2000, Nokia’s contribution to GDP growth was about 1.5 percentage points.

When it comes to the other part of the question, if something could come out of what remains of Nokia, I would say of course it could. We have a lot of skilled and experienced engineers that can be employed somewhere else, within the gaming industry, for example. That industry is not that big in Finland yet, though.

KK: How does Finland’s labour market compare to its Nordic and European neighbours? Finnish labour costs and unemployment are both comparatively high. Is this being addressed? How? Is more needed?

PS: The labour market is one of Finland’s biggest issues, and should be reformed. One should remember that the Finnish labour market is not that inflexible in a European context, but compared to the other Nordic countries Finland is lagging. If we compare the Finnish employment rate to Sweden, for example, there is certainly room for improvement. In Finland, it is 68-69%, compared to well above 75% in Sweden. I would argue that the difference between Finland and Sweden is due to two major factors:

Nordea Markets 21


First, it has to do with Finnish mothers staying out of the labour market much longer than Swedish mothers after giving birth. Secondly, it has to do with Finnish men aged 55-plus, who tend to have a lower employment rate compared to Swedish men of that age.

Recently, there has been quite a bit of discussion on the first topic, driven for example by Juhana Vartiainen, a well-known Finnish economist and current MP. The idea is simple – if a woman stays at home for, say, about two years per child, she will naturally lose work experience. And if she loses work experience, she will most likely have a less steep wage increase trend compared to other women and her male colleagues who don’t stay at home with children. Not only will she earn less, but it will most likely be harder for her to be promoted. And if she isn't promoted, she will not become a manager, and then she will be less likely to become a board member in the future. In the Finnish press, you quite often see headlines about the wage differences between the genders, and the lack of female board members. The politicians don’t seem to see the root of the problem –that it all starts from being away from the labour market.

Currently, there are social benefits that actually make it more beneficial to stay at home than go to work, especially for low-skilled women. Juhana Vartiainen argues for removing these kinds of social benefits in order to increase the incentive to go back to work earlier after having a child.

We also have mismatching issues in Finland. Finns are not very eager to move to a new city to find a job. I believe that we need to increase incentives for people to move for work. Another type of mismatching issue is that we don’t always have the right people for the open positions; the applicants just don’t have the right skills.

Furthermore, in many cases, it is actually more beneficial to stay away from the labour market and just live on social benefits instead of taking a job. If you are unemployed, you get several different kinds of benefits, such as unemployment compensation, housing benefit and additional support if you have children, etc. All these different kinds of benefits can actually make your effective marginal tax rate much higher. Hence, accepting a job offer could actually mean that your income would decrease in some cases.

There have been some political measures put in place though. For example, the duration of social benefits has been cut from 500 days to 400. Many experts would like to see it shortened even more to 250 or 200 days. They usually argue that unemployment compensation is a form of insurance and if you believe that you need insurance that would cover more than, say 200 days, you should pay for it yourself. Why should society pay for it?

Last but not least, we have very inflexible wage setting in Finland. What happened in 2007 is a very illustrative example of how bad Finnish wage setting can be. The outcome in 2007 was very generous. The Finance Minister of the new government supported generous wage increases for nurses. Other sectors and industries demanded high wage increases as well, and the public sector came out as a winner from the round of wage bargaining. The final outcome was that wages increased 5.5% in 2008. Shortly after, by end-2008 and 2009, the financial crisis was a fact. Still, the wage increases were quite generous for the subsequent years as well. Looking back, I believe that we had a total wage increase of close to 25% in 2007-15, while the real economy fell by 5%. If you compare that with a single company it is like increasing wages by around 25% when you have lost 5% of your sales volume. That is not a great combination! What wouldyou do then? Either you could get rid of people, or you could increase the price of your products. I believe that many companies within the service

Nordea Markets 22


sectors in Finland did the latter, increased prices. We have seen annual service price increases of 2% or even more since 2008. As a matter of fact, Finland’s inflation rate has been higher than in many other European countries, and especially compared to Sweden, Germany and the Euro Area, since 2008. Current expectations for wage increases for this year and next aren’t very high though. Most likely, there will be very modest increases, if any. Going forward, the trade unions need to lose power and wage setting has to be more flexible, closer to the companies, which know what is going on in the economy, within the company itself and among their customers. But it’s a long road.

Finland: Wages and GDP, indexed to 2007=100

90

95

100

105

110

115

120

125

130

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Nominal wages and earnings Real GDP

Source: Macrobond and Nordea Markets

KK: Do exchange rates explain any of the Finnish economy’s challenges today? Has Finland benefited from adopting the euro and being an EMU member?

PS: The initial feeling when we became an EMU member was stability and predictability. It’s easy to imagine that the euro would be more stable than the Finnish markka over a longer period of time. We had a turbulent time in the early 1990s, with attacks against the currency. We don’t imagine that happening as long as we have the euro. I also believe that it was beneficial for us to have the euro during the latest financial crisis. Some argue that it could have been advantageous for Finland in terms of trade if we had kept the markka and it had plunged during the crisis. But, people tend to forget the flip side of the coin. If the currency had depreciated, imports would have been more expensive and consumer prices would have risen, driving inflation.

But what really went wrong when it comes to the EMU was that the member states didn’t do their homework from the very beginning. They should have put more reforms in place before rolling out the euro. That would have prepared them for the trouble that we saw during the debt crisis. The EMU still needs to do many things today which should have been done 15 years ago.

KK: How do you see the political environment in Finland today? Do you expect stability or turbulence going forward? What are the key risks and opportunities?

PS: Life is easier these days, compared with the era of the previous six-pack government. Currently, there is a coalition between the National coalition party, the Centre party and the Finns party. They can actually work together. Going forward, there could be some trouble for the Finns party, as it has clearly lost momentum. The polls say that it has lost a lot of

Nordea Markets 23


support. It needs to find itself again for the next parliamentary election in 2019. I don’t know what will happen to its current leader and founder, Timo Soini. Maybe he will step down. I don’t see much turbulence, though. The Finns party were big opponents to the EMU membership previously but not anymore. Perhaps they will play the EMU card in the next election, but I don’t see that as a major political risk at the moment.

KK: Finland’s public debt is higher than that of its neighbours, and its economy is more sluggish. What could break this trend? Are demographics a factor? Today or in the future?

PS: The Finnish public sector actually includes the pension system, which constantly creates a surplus. This means that the Finnish economic situation looks better than it actually is. Exclude the pension system and you see that the remainder has run a fiscal deficit since 2009. It is this deficit that has been driving the need for additional borrowing and caused public debt to surge.

As we have an ageing population, the deficit is becoming an even greater problem. We should have a surplus in order to finance future retirements and increasing age-induced expenditure. Instead, the debt/GDP ratio will increase even further.

KK: Do you consider the private credit environment sound and healthy in Finland today? Any differences between mortgages, consumer debt and corporate debt?

PS: I would like to highlight two things.

First, if we look at households, only one-third of them have a mortgage. That is partly due to the rental market, which is quite large compared to the other Nordic countries. Also, most elderly people have already paid off their mortgages. Hence, I’m not very concerned about household debt as long as interest rates do not rise sharply. If something were to happen with the housing market, only a limited number of people would be directly affected. Furthermore, housing prices have only increased in the capital area.

Secondly, if we look at corporate debt, the stock seems to have increased quite linearly. When I look at new corporate debt, I cannot see any change in pace on a yearly basis; it seems to be rather constant. One could instead argue that it would be nice to see stronger growth in debt within the corporate sector. We would like to see a lot more applications for financing traditional investments. That seems to be lacking still.

Nordea Markets 24

Nordea Bank AB (publ) Nordea Danmark, filial af Nordea Bank AB (publ), Sverige

Nordea Bank AB (publ), filial i Finland

Nordea Bank AB (publ), filial i Norge

Nordea Markets Division, Equities

Visiting address: Smålandsgatan 15 SE-105 71 Stockholm Sweden


Visiting address: Strandgade 3 (PO Box 850) DK-0900 Copenhagen C Denmark


Visiting address: Aleksis Kiven katu 7, Helsinki FI-00020 Nordea Finland


Visiting address: Essendropsgate 7 N-0107 Oslo Norway

Tel: +46 8 614 7000 Fax: +46 8 534 911 60

Tel: +45 3333 3333 Fax: +45 3333 1520

Tel: +358 9 1651 Fax: +358 9 165 59710

Tel: +47 2248 5000 Fax: +47 2256 8650

Reg.no. 516406-0120 Smålandsgatan 17 Stockholm

Disclaimer and legal disclosures Disclaimer

Nordea Markets is the name of the Markets departments of Nordea Bank AB (publ) and its branches Nordea Danmark, filial af Nordea Bank AB (publ),Sverige, Nordea Bank AB (publ), filial i Finland and Nordea Bank AB (publ), filial i Norge. The information provided herein is intended for background information only and for the sole use of the intended recipient. The views and other information provided herein are the current views of Nordea Markets as of the date of this document and are subject to change without notice. This document is not investment research. This notice is not an exhaustive description of the described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the judgment of the recipient. The information provided herein is not intended to constitute and does not constitute investment advice nor is the information intended as an offer or solicitation for the purchase or sale of any financial instrument. The information contained herein has no regard to the specific investment objectives, the financial situation or particular needs of any particular recipient. Relevant and specific professional advice should always be obtained before making any investment or credit decision. It is important to note that past performance is not indicative of future results. Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters in any jurisdiction. This document may not be reproduced, distributed or published for any purpose without the prior written consent from Nordea Markets.

Completion date: 22 February 2017, 11:01 CET

23 february 2017 - nordea markets · nokia's fall from grace has had a major impact on...

Documents