Finland could lose its AA+ credit rating if it fails to carry out structural reforms, according to the credit rating agency Standard & Poor’s. It warned 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.”
As reported by The Helsinki Times, the social, health care and regional government reform 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 last week, 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 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.