Operating environment

In 2017, Finland returned to economic growth after a period of 10 years. The Bank of Finland raised Finland's GDP growth forecast to more than 3 per cent for 2017 and to 2.5 per cent for 2018.

SMEs that seek growth and internationalisation are now investing in corporate development

No less than half of companies strongly oriented towards growth and a third of companies operating on international markets intend to apply for external financing for their operations in the coming year, indicates the SME barometer survey.

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Russia’s desire to develop its own production may open markets for Finnish export companies

Finnvera estimates that demand for financing for Russian trade will pick up this year. “Relations and the trading partner’s trust are important,” says Team Leader Anu-Leena Koskelainen of Finnvera.

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The South American giant is ready for new growth

Finnish companies’ business deals with Brazil are traditionally very large. SMEs also have good export prospects. The developing economy attracted Valmet to Brazil over 50 years ago.

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Globally, we are experiencing the final acceleration of the economic boom, which different forecasts predict to last for another two or three years. If development continues undisturbed, 2018 will still be a year of positive growth. However, looming ahead, there are the end of central bank driven stimulus and the tightening of fiscal policy, and it can be forecasted that the interest rate level will start rising in the coming years.

Improved financing situation for SMEs

The situation for SMEs improved in 2017, for the third year in a row. Production volumes, order books and investments continued to grow. The profitability and capital adequacy of companies have also improved as a result of economic growth and an increasing number of enterprises will strive to manage on cash flow financing in the future.

The improved financial situation among enterprises has also alleviated the financing-related challenges facing SMEs. This became particularly clear from the second SME barometer survey of the year 2017, published in the autumn. As in the previous years, the survey was commissioned by Finnvera, the Federation of Finnish Enterprises and the Ministry of Economic Affairs and Employment. In the SME barometer survey, only 3 per cent of enterprises that had applied for financing reported having received a negative decision. In this respect, the situation in Finland is exceptionally good compared to some developed EU Member States, where 30–40 per cent of loan applications submitted by SMEs are rejected. Another indicator of the improvement of the financing situation is the fact that now only 9 per cent of SMEs listed financing among the top three obstacles to operational development. Also among companies strongly oriented towards growth, the availability of financing has improved significantly.

The offering on the financial market has become increasingly diversified, which has, for its part, improved the availability of financing. The non-banking providers of financing that operate in the market have increased their financing volumes, and many banks have started to use the European Investment Fund’s risk-sharing guarantees. Market diversification has had an impact on the demand for Finnvera’s financing solutions.

Caution reigns in investments

In 2017, demand from SME and midcap enterprises for financing and their investments did not take as sharp an upturn as could have been expected in a market situation characterised by economic growth. After many years of slow growth, some of the enterprises are still cautious.

However, the responses given in the SME barometer survey of autumn 2017 indicate that especially SMEs that seek growth and internationalisation aim at the intensive development of their operations and intend to apply for financing for that purpose. The main uses of financing included growth financing, development projects, internationalisation of business operations and the need for working capital.

Emerging growth in major export markets

At the end of 2017, Finnvera’s exposure for export credit guarantees and guarantee applications encompassed 90 countries. The main country exposure is still the United States. Although the U.S. economy has developed favourably, the development has been more difficult to forecast. The United States has questioned the global free trade system, and plans for introducing import taxes have regularly come up as an obstacle to export trade.

The economy of Russia, a country important to Finnvera’s exposure for export credit guarantees, took an upward turn, growing approximately 1.5 per cent annually. Russia’s development is still overshadowed by the country’s tense relations with the West. Western countries have continued with sanctions that restrict, among other things, the import of technology needed for oil production and impair the oil production outlook. Even though investments in the country’s infrastructure and new industrial capacity are still cautious, imports into Russia increased clearly in 2017. The interest of Finnish enterprises in the market opportunities to be found in the neighbouring country increased, too. The fact that Finnvera’s export financing takes risks for projects of various sizes has, for its part, enabled enterprises to increase exports to Russia.

In 2017, the Brazilian economy showed a slight upswing after decreasing by a total of 8 per cent during the two previous years. Growth is predicted to strengthen somewhat in the next few years when necessary structural reforms have been carried out after political crises. Increased raw material prices and improved domestic demand also contribute to economic growth. The country has adopted a more favourable approach towards free trade. Brazilian institutions have proven to possess independent competence and the country’s financial sector is relatively well regulated. Nevertheless, the legislative environment has posed challenges that have become concrete in connection with the debt restructuring of the teleoperator Oi, involving Finnvera’s exposure.

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Strong new markets in the East

In Southeast Asia, economic growth in the Philippines, Indonesia and Vietnam continued at a level of more than 5 per cent in 2017. The countries aim to modernise their economic structures and to diversify their exports as well as to improve infrastructure and the living conditions of their citizens, which creates good export prospects for Finnish enterprises, too.

Indonesia, the largest economy in Southeast Asia and a G20 member, is the most important country in the region in terms of Finnvera’s exposure for export credit guarantees. Exports from Finland to Indonesia increased in 2017, whereas exports to a more traditional export destination, Vietnam, decreased. Vietnam is a well-known development cooperation partner for Finland, so concessional credits that utilise development cooperation funds have been widely used in project financing. However, financing is gradually moving towards commercial financing. At one time, the Philippines was an important country of exports for Finland, and now, after years of decline, trade is again showing signs of growth.

The countries belong to the region’s economic cooperation organisation ASEAN (Association of Southeast Asian Nations). The EU and ASEAN are seeking closer cooperation. Finnvera has good possibilities of granting export credit guarantees to Finnish enterprises for all three countries, and the Team Finland cooperation has good prospects in Indonesia and Vietnam, countries with Finnish embassies and Business Finland operations.

In 2017, Finnvera granted, for the first time in many years, export credit guarantees for exports to Iran and exposure increased clearly during the year. Trade to Iran continued regardless of the fact that the United States has been reluctant to ratify the Iran Nuclear Treaty, which creates uncertainty. The Treaty is multinational and the EU, for instance, believes Iran is in compliance with it. Banks are still exercising caution with regard to trade with Iran and each trade transaction requires a great deal of effort from all parties. The situation in the entire Persian Gulf region became more unstable in 2017 as the relations between Saudi Arabia and Iran are poor and the situation in Qatar has created more tension. The region seems high-risk at the moment, which may decrease Finland’s exports to the countries there.

The growth of China’s economy strengthened further and economic growth is expected to continue at the 6 per cent level as the country moves from a growth model that is driven by investments and exports towards growth that is more services and consumption driven. China has adopted a new role internationally, advocating free trade and environmental values that are beneficial to it. China and Finland strengthened their economic relations in 2017 when President of China Xi Jinping visited Helsinki in April. Demand for Finnvera’s financing for China has been low in proportion to the size of the market and has mainly been focused on short-term bank risk-taking, but especially demand related to corporate risk-taking in the wood processing sector took an upward turn in 2017. Finnvera’s China-related demand is not expected to change significantly in 2018 but demand related to individual projects may increase somewhat.

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Três Lagoas, Brazil

The forestry sector is the third largest sector in Finnvera’s export financing, and typically forestry financing is related to the construction of pulp mills or to deliveries of forestry machines or cardboard manufacturing machines, for instance. More than 70 per cent of Finnvera’s forestry-related exposure is in Latin America, and Brazil has the highest number of financing and guarantee projects. The second largest country exposure is Uruguay.

In 2017, a pulp mill was started up in Três Lagoas, Brazil, with Finnvera providing an export credit guarantee and financing for its equipment deliveries. The principal supplier of equipment is the Finnish company Andritz Oy. The value of the total investment exceeded USD 2 billion, of which the credit guaranteed by Finnvera amounts to little less than USD 400 million. The investment strengthens Fibria’s position as the largest producer of eucalyptus pulp in the world.

From an environmental point of view, pulp mills are always Category A projects, for which the borrower must provide a report of the assessment of environmental and social impacts, information about hearing the local population and other parties involved as well as an environmental and social management plan, for instance. The basic and environmental information was published on Finnvera’s website in March 2016, that is, before the guarantee agreement was signed.

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Middlesbrough, United Kingdom

The world’s largest power plant fuelled solely by biomass will be built near the town of Middlesbrough in the United Kingdom. Finnvera provided buyer credit financing https://www.finnvera.fi/eng/finnvera/newsroom/articles/flexible-financing-solutions-increasingly-important-in-export-trade for the design and delivery of a boiler plant by the Finnish company Amec Foster Wheeler Energia Oy for the power plant.

The construction of the power plant is estimated to cost approximately GBP 650 million (about EUR 750 million). Finnvera’s share of the financing is roughly GBP 100 million (about EUR 115 million). Finnvera’s participation in the project enabled long-term financing of 15 years. The project is a good example of a flexible financing solution tailored to local conditions and brought Finnvera the Deal of the Year award at the international Trade Finance Awards event in 2017.

The construction of the power plant is in progress, and the plant is scheduled to begin commercial operation at the start of 2020. The 299 MW power plant will be fuelled by wood pellets and chips.

From an environmental point of view, the power plant is a Category A project, for which the borrower must provide a report of the assessment of environmental and social impacts, information about hearing the local population and other parties involved as well as an environmental and social management plan, for instance. The basic and environmental information was published on Finnvera’s website in 2015

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Lombok, Indonesia

A 135 MW gas-fired Flexicycle engine power plant is under construction in West Nusa Tenggara in Lombok, Indonesia, with Wärtsilä supplying the generator machinery, auxiliary equipment and related service deliveries and installation. Finnvera contributed EUR 74.3 million towards financing the power plant.

Environmental and social information about the project: Finnvera’s project review was related to the new gas-fired engine power plant. In Finnvera’s project review of environmental and social impacts, the most significant aspects were land acquisition for the power plant, employees’ rights and working conditions as well as impacts on the marine ecosystem: the power plant is located by the sea and, for instance, the fuel for the gas-fired plant is transported by ships.

The basic information about the project was published on Finnvera’s website in June 2017.