The first half of 2023 was marked by continued economic uncertainty. The Russian invasion of Ukraine gave rise to an energy crisis and caused the cost of living to shoot up, complicating the economic situation. MuniFin’s operations remained stable and the company was able to successfully carry out its core mandate of ensuring the availability of affordable financing for its customers.
The Group’s net operating profit excluding unrealised fair value changes amounted to EUR 81 million in January–June, growing from the comparison period and exceeding the previous year’s figure by 9.3%. The increase in net operating profit was affected by significant non-recurring item included in the comparison period’s costs and increase in net interest income of 2%.
New long-term customer financing decreased in January–June and amounted to EUR 1.9 billion. Long-term customer financing excluding unrealised fair value changes totalled EUR 31.5 billion at the end of June and saw an increase of 2.8%.
In January–June, new long-term funding reached to more than EUR 7 billion. MuniFin decided to repay the debt related to the European Central Bank’s targeted longer-term refinancing operations (TLTRO III) in the reporting period. The debt totalled EUR 2.0 billion.
The Group’s total liquidity is very strong. Because of the uncertainty arising from the war and inflation outlook, the Group has maintained larger than normal liquidity buffers as a precaution.
At the end of June, the Group’s CET1 capital ratio was very strong at 101.3%. The Group’s leverage ratio continued to strengthen, and it was 11.9%.
–Market turbulence has not had a direct effect on MuniFin’s operations. Our funding has remained stable and our access to the capital markets strong throughout the first half of the year. Despite the continued uncertainty, we have again successfully carried out our core mandate and ensured affordable financing for our customers, notes Esa Kallio, President and CEO at MuniFin.
The Group will also publish a separate Pillar III Report on risk management and capital adequacy on August 8.
The European Commission approved on 21 December 2022 an extension to the Finnish subsidised loan and guarantee scheme that allows MuniFin and municipalities to finance municipal energy companies. The Commission also extended the arrangement’s scope of application. The recently approved amendments to the scheme are in place until the end of 2023.
The aid scheme is related to the effect Russia’s war against Ukraine has had on European energy markets. Under normal conditions, EU State aid rules prohibit MuniFin from financing energy companies, but this scheme was approved under the Temporary Crisis Framework to ensure the continuity of the energy sector’s operations and strengthen Finland’s security of supply.
The Commission first granted MuniFin and Finnish municipalities license to finance municipal energy companies in October 2022, but this decision was only effective until the end of 2022. Under the arrangement approved in October, financing could be granted only towards liquidity needs related to the collateral requirements on the derivatives exchange, spot market, balancing market and bilateral trading.
When MuniFin, the Municipal Guarantee Board and the Ministry of Economic Affairs and Employment notified to the Commission of the recently approved scheme for 2023, they extended the arrangement’s scope to cover other potential crisis situations in energy companies. These include the elevated liquidity needs arising from the energy crisis that are related to working capital and investments.
Best prepare in advance
“We’ve been getting some inquiries about municipal energy companies’ financing, and we’re currently processing a few loan applications. We encourage both municipalities and their energy companies to prepare for possible financing needs in advance”, says Aku Dunderfelt, Executive Vice President, Customer Solutions at MuniFin.
MuniFin can finance energy companies either directly or through the municipalities that own them. MuniFin can finance municipal energy companies directly only if they have a 100% municipal guarantee. This requirement applies to all of MuniFin’s finance to companies under municipal control. MuniFin can process loan applications only after the loan has been guaranteed by the city or municipal council, and the funds cannot be transferred until after the guarantee decision has become legally valid.
Municipalities and their energy companies should prepare for potential financing needs in advance. The municipal council’s guarantee decision does not oblige the loan to be withdrawn if it proves unnecessary.
Loans must meet the Commission’s requirements
Loans granted to energy companies by either municipalities or MuniFin must meet the eligibility requirements set out in the Commission’s decision. These include, for example, the energy company’s written account of how it will allocate the funds to needs specifically related to the energy crisis.
Loan contracts under the recently approved scheme must be signed by 31 December 2023 at the latest. The maximum loan amount per beneficiary cannot exceed either a) the liquidity needs derived from the additional collateral requirements for the coming 12 months or b) 15% of the beneficiary’s average total annual turnover over the last three closed accounting periods. In other financing needs arising from the energy crisis than those derived from the collateral requirements on the energy markets, the maximum loan amount cannot exceed the needs for the coming six months. The maximum maturity of the loans is six years, which is three years more than the maximum maturity for loans under the previously approved scheme. The Commission’s decision also sets out minimum requirements for loan pricing and details other technical requirements.
MuniFin encourages municipalities and their energy companies to read the Commission’s decision carefully when preparing their decisions about energy company loans and to take into account the key principles of and references to the Commission’s decision when formulating their own decisions. The Commission’s decision will be available on the Commission’s website soon.
The sanctions imposed on Russia by Western countries and Russia’s countermeasures affected international trade and increased the price of both energy and raw materials. Cost pressures also further accelerated inflation, which had already been increasing in the previous year. Confidence in the economy was badly shaken by the combined effect of the war, the rising cost of living and energy-related concerns.
Further tumult was created by the sharp U-turn in monetary policy. Central banks had been underestimating the risks associated with persistent inflation even before the Russian invasion, so when the monetary policy was finally and belatedly tightened, it had to be done fast and in exceptionally large steps.
Positively surprising economic resilience
Despite the sharp turns in the operating environment, the development of GDP was a positive surprise in 2022. The euro area saw relatively stable growth, and thanks to an unexpectedly strong early first half, Finland’s GDP growth remained positive until the third quarter.
The stronger-than-expected economic development stemmed from several different factors. The bottlenecks in production and supply chains, which severely disrupted goods trade last year, largely cleared during 2022. The service sector also started to revitalise after the COVID restrictions were lifted. Many households accumulated extra savings during the COVID period, which has helped them cope with the rapidly rising cost of living to some extent. The business sector seems to have adapted to the European energy crisis better than expected.
Recession projected to remain mild, but risks are growing
Despite the positive observations above, the growth outlook clearly weakened in all main economic areas this autumn. Finland is likely to have already entered a recession due to the threefold trouble households have with food, energy and housing costs, which are all rising quickly and eroding consumers’ purchasing power and bringing down private consumption. The rapid increase in interest rates is slowing down investments and cooling down the housing market. Residential property prices have already turned to a noticeable decline.
Thanks to Finland’s robust industry and high employment, MuniFin still estimates that this period of economic recession will be relatively mild and short-lived. We maintain our GDP forecast for the next few years unchanged, at -0.5% for 2023 and 1.5% for 2024. We revised our GDP forecast for the current year slightly, raising it to 1.8% due to the unexpectedly strong economic development.
It should be noted, however, that the above-mentioned scenario of mild recession involves considerable risks. Consumers’ savings will shrink and the negative effects of the rising cost of living may begin to accumulate during the next year. Moreover, the simultaneous cooling of the economic cycles in Europe, the United States and China may weaken exports more than expected.
Sharply rising interest rates also pose a significant risk to future economic development, and they have not yet had their full effect on all debtors. Many households have their interest rate review dates in the first half of 2023 and will not face the substantially rising loan servicing costs until next winter and spring.
High employment steadies the outlook
For now, employers seem to be looking beyond the temporary recession, aiming to retain skilled workforce. Layoffs return on the agenda if the economic stagnation becomes worse than expected in the winter, but large-scale unemployment is still a long way from the severe labour shortage currently occurring in Finland.
It is to be expected that the contracting economic cycle will eventually also affect the labour market to some extent: employment growth will halt and the unemployment rate will turn to a moderate rise. MuniFin still expects unemployment to rise moderately to 7.4% next year and to remain at approximately the same level (7.3%) in 2024.
Interest rates will continue to rise in early 2023
The strongest rise in consumer prices is already calming down, but it may take a couple of years for inflation to slow down to the target level of the central banks. Interest rate hikes will presumably continue at least through the first half of 2023, with other ways of tightening monetary policy lasting much longer. Key interest rate is expected to rise to around 5% in the United States and to around 2.5–3% in the euro area.
Inflation peak soon passed
In Finland, inflation reached its highest level in almost 40 years in 2022, but nevertheless remained below the euro area average. Energy prices have affected inflation somewhat less in Finland than in Central Europe, and long contract periods might also factor into this as they react to cost pressures with a delay. The flipside to this is that inflation may also fall more slowly in Finland than in the euro area.
MuniFin revised its inflation forecast for the current year to 7.0%. The inflation peak will probably occur at the end of 2022, but inflation will remain at an exceptionally high level also next year. In 2023, we expect consumer prices to rise at an average rate of 4.5%, and in 2024 we expect inflation to finally decrease to 2%.
The year 2023 is an opportunity for municipalities to make their economy more sustainable
Finland’s health and social services reform will change Finnish municipal sector fundamentally. It will halve the volume of municipal operations and shake up the structure of income and expenses. But municipalities will not bear the full force of these changes next year as they will be soothed by a one-time tax benefit of more than one billion euros, stemming from the tax cuts introduced by the reform and implemented fully only in 2024.
Thanks to this temporary tax benefit, municipalities will be in a stronger position in 2023 than ever before in the 2000s, even though the increase in salary and interest expenses and the acceleration of overall inflation will take a toll on municipal sector as well. This will offer municipalities some breathing space next year, which they would be wise to spend on securing their financial sustainability in the long term.
One of the reform’s financial effects is the heightened significance of capital expenditure: the needs for municipal investments will not drop nearly as much as operating expenses. At the same time, depreciation will play a greater role in the municipal cost structure. After the reform, it will be even more important for municipalities to ensure their investment capacity.
Municipalities should not be fooled by the temporarily strong financial figures of 2023. Instead, they should pay even more attention to securing sufficient income now that interest rates have risen considerably and made loan servicing costs a significant cost item again.
The gap between financially strong municipalities and those in deficit will widen
The health and social services reform is widening the financial gap between municipalities, giving financially strong municipalities more room to manoeuvre while putting municipalities that are in deficit in an even more difficult position.
It is especially important for municipalities in structural deficit to try to find solutions to their situation. As a general rule, the reform will not significantly change the municipalities’ financial balance in terms of euros, but imbalances may grow markedly in relation to the size of the operational economy. Municipalities will have a much more limited scope for adjusting their operations in the future.
In some municipalities, the need to improve the cost-effectiveness of core operations can prove so great that it may well speed up cooperation between municipalities and eventually also result in municipal mergers. Severe financial deficit is relatively more common in small municipalities with less than 5,000 inhabitants than in large and medium-sized municipalities.
Finnish municipalities will also have to prepare for the possibility that a severely imbalanced central government finances may reflect on state transfers in the coming years. Even though the rising costs of health and social services will be removed from municipalities, the financing gap of the wellbeing services counties will pose an indirect threat to municipal finances as well.
In Finland, affordable social housing is mainly provided by municipality-owned companies and a few nationwide non-profit organisations. The production is financed through interest subsidy loans granted by a commercial bank or other financial institution like MuniFin. The loans are guaranteed by the Finnish state through The Housing Finance and Development Centre of Finland (ARA), which is administered by the Ministry of the Environment.
ARA has a major responsibility in the implementation of Finnish housing policy. The main objectives of the government’s housing policy development programme, updated in 2021, are building a carbon neutral society and improving the quality of construction, supporting sustainable urban development, increasing housing construction in growing urban areas and eradicating homelessness within two government terms.
Among other tasks addressed to the organisation, ARA grants guarantees for housing and construction as well as controls and supervises the use of the ARA housing stock. ARA also designates and maintains a list of non-profit organisations entitled to get interest subsidy loans.
MuniFin is the main financier of affordable social housing production in Finland. The loan periods are long, up to 41 years.
“This model ensures that the financing is long-lasting and predictable. At the moment, only MuniFin grants loans this long. The state guarantee affects the price of the loans making them cheaper” says Juha Kaakinen, a recently retired long-time CEO of Y-Foundation, one of the nationwide providers of affordable social housing and key developer of the Housing First principle in Finland.
“This is also a very inexpensive way for the state to produce affordable social housing”, Kaakinen continues.
ARA oversees the providers and projects. This ensures the apartments are of high quality.
“The quality of affordable social housing apartments is sometimes even better than the non-subsidised apartments.”
No family homelessness in Finland
Social mixing is a central and much valued pillar of Finnish housing policy. The right to housing is enshrined in the Finnish constitution. The biggest cities in Finland have for a long time had a principle of ensuring that 25% of new homes are affordable social housing apartments. Now the aim is to increase this share up to 35%.
The rent level of affordable housing apartments is significantly lower than in the private sector, especially in the Helsinki metropolitan area. Rising interest rates are increasing the funding expenses of the housing providers, which will also impact rents in the near future. ARA however recommends that the rents in the ARA housing stock should only be raised moderately.1
In clear contrast to other countries, e.g. the Netherlands and Austria, the residents are mainly people of low income, who are most in need of state-subsidised housing. The applicants are evaluated through three criteria: need, wealth and income. When comparing the applicants, homeless people and others in urgent need of an apartment, applicants with most limited needs and of lowest income are given priority.2 The ARA housing stock also includes homes for students, and residential homes for people with special needs, elderly people in poor health, and persons recovering from mental health problems.
The role of social housing has been remarkable in tackling homelessness.
“We have had a stable level of affordable housing production. Some years have been quieter than others, but 7000–9000 apartments have been built every year. The high and stable level of production differentiates Finland from other countries. And thanks to this, there’s no family homelessness in Finland”, Kaakinen says.
Social housing has also been instrumental in preventing segregation and facilitating work-related migration. Social housing influences rent levels in the private sector and lowers the costs of housing allowance granted by the state. The lower rent levels also makes it possible for people of low income to live closer to their workplaces and to manage on their salary.
“Living in a reasonably priced apartment may be the only possibility for many people to save enough money to buy an apartment of their own at some point, which is still something many Finns strive to”, Kaakinen continues.
Forerunners in fighting climate change
Many of the social housing providers have climate change high on their agenda. More and more wooden residential buildings are being constructed, and many of the providers have pilot projects for developing more sustainable buildings and construction methods. The energy efficiency of social housing buildings is generally higher than buildings of the private sector. According to Juha Kaakinen, the big question is how to transform social housing toward carbon neutrality in a way that maintains affordable rents.
“The social housing sector has shown its will and power to fight climate change. Still, new ideas are needed for example to transform existing buildings into affordable apartments”, Kaakinen says.
FACTS
There are 3.2 million apartments in Finland. Around 62% of all apartments are owned and 34% rented. 3 Around one third of all apartments have been constructed using state subsidies.4
MuniFin is the only credit institution in Finland that specialises solely in financing the municipal sector and non-profit housing production. At the end of 2021, 48% of MuniFin’s long-term customer finance portfolio consisted of loans granted for housing.
The price of electricity is soaring to record highs across Europe, putting many consumers in a tight spot. In September, electricity cost an average of 215 euros per megawatt-hour in Finland, while two years earlier the price was less than 40 euros. Prices are rising even faster in Germany, where the monthly average for September was 346 euros.
These steep increases are driven by bottlenecks in production, most importantly the shutdown of the energy trade and gas supply caused by the Russian war in Ukraine. But the war is not the only reason behind the energy crisis, says Samuli Honkapuro, professor in energy markets and energy systems at LUT University. The European energy market has been hit by a perfect storm.
Samu Honkapuro is tenured professor in Energy Markets and Energy Systems in LUT University, School of Energy Systems, Lappeenranta. His key research interests are electricity market design and business models for integration of distributed energy resources, demand side management, and energy communities. Photo: LUT University
“Pretty much every indicator has pointed in the wrong direction. The Nordic countries have experienced a couple of dry years, which has upped the price of hydropower. France’s problems with nuclear power have strained Central Europe, and emissions rights have also had a small impact. And then, of course, the war started”, Honkapuro observes.
The situation in the Nordic countries is better than in most of Europe. Finland has systematically decentralised energy production and steered away from fossil sources such as natural gas, making the availability of energy less dependent on individual forms of production.
“Roughly one quarter of our electricity is nuclear, twenty per cent hydro and ten per cent wind power. One quarter comes from combined electricity and heat production, and the rest is imported”, Honkapuro reports.
Last year, approximately forty per cent of Finland’s imported electricity came from Russia and the rest from Nordic countries. The Russian imports have since then been completely replaced by Nordic or Baltic electricity.
Finland requires 40–45 terawatt-hours of energy for heating residential buildings each year. More than 80 per cent of this is produced by district heating, wood or electricity. In 2021, more than half of district heating was produced with renewable energy or waste heat, and slightly more than a quarter with fossil fuels: natural gas (12%), coal (11%) and oil (3%). Natural gas has been imported almost exclusively from Russia, but its importance in electricity and heat production has been small. The Russian pipeline has now been replaced with Balticconnector, a natural gas pipeline between Finland and Estonia, and by liquefied natural gas transported by sea. Finland is in a markedly different situation compared to Germany, for example, where natural gas is by far the most popular method of house heating.
“Where Finns once decided to build district heating networks, Germans chose natural gas Finland uses gas mainly for industrial purposes, and those amounts are relatively small too.”
Even though Finland is not a major consumer of natural gas, the upward pressure on gas prices nevertheless has its impact here, too. Natural gas is one of the cornerstones of Central European electricity and heat production, and its price dictates the formation of energy prices throughout the region. This effect is somewhat mitigated by the limited transmission capacity, which causes the greatest price pressure in the Nordic countries to be limited to Southern Norway.
“Southern Norway is tightly integrated into the European energy market, with pipelines going to Germany, Netherlands and the UK. Electricity is now several times more expensive in the south of Norway than in the north”, Honkapuro points out.
Finland relieved by flexible demand
Limited transmission capacity protects Finland from the worst price pressures, and price spikes are also levelled out by flexible demand, which works well in Finland. Energy production and demand are kept in balance through reserve and balancing markets managed by Finland’s transmission system operator Fingrid. In Finland, users also participate in these markets, as opposed to many European countries, where they are only meant for producers.
“Many industrial and production processes are included this system. For example, the lighting of almost all of Finland’s largest greenhouses can be temporarily cut off during the heaviest peak demand. Fingrid will then pay them a compensation for the outage”, Honkapuro explains.
Finland is also gaining an increasing amount of wind power. Last year broke all records with 141 new wind turbines, but this year, this record was broken in less than six months. At the end of 2025, Fingrid estimates Finland’s wind turbines to produce approximately 32 terawatt-hours per year, which is almost half of Finland’s total energy production last year.
As wind power becomes more popular, production becomes more dependent on the weather. Demand should therefore continue to be flexible.
“We have a lot of automation technology that can be used to regulate things like the ventilation of office buildings in step with electricity prices, but this type of automation is not yet used nearly to its full potential. Because electricity has been very cheap, there hasn’t been so much incentive for these types of renovations.”
Finland, a green electricity superpower?
Honkapuro sees a silver lining in the energy crisis. The high prices accelerate the green transition and encourage governments and companies to invest in energy efficiency and flexible demand. According to Honkapuro, the Finnish energy market’s future is bright, which bodes well for the country’s economy as a whole.
“For example, a megawatt-hour of new wind power costs 20–30 euros to produce in Finland, compared to approximately 70 euros in Germany. In a few years, Finland will produce so much inexpensive renewable energy that it may have great potential to attract industry and investments.”
But first, we have a difficult winter ahead of us. Honkapuro remains optimistic about that as well.
“This autumn we’ve noticed that high electricity price cuts consumption by a surprisingly large amount. When the price rises further, consumption may fall even more. I don’t think that we’ll have to deal with power shortages this winter.”
Should the demand of electricity nevertheless exceed supply, Fingrid has the means to regulate electricity consumption. For households, this would mean predetermined rolling blackouts of a couple of hours across Finland. While this is undoubtedly an undesirable scenario, it is reassuring to know a game plan exists for tackling it.
“We’re prepared for it. And at least we’d then get to study how the blackouts work in practice”, Honkapuro chuckles.
The effects of the Russian war on Ukraine have hit the Finnish economy slower than feared, but as the war drags on, it will inevitably affect the everyday lives of people more and more.
MuniFin’s Chief Economist Timo Vesala lists the reasons behind the economic downturn: “The positive developments in employment are grinding to a halt, and real wages are falling faster than ever since the late 1970s. Consumer purchasing power is taking hits from multiple angles at once: electricity bills and food expenses are skyrocketing and many people with a mortgage are facing manifold interest costs. Rising interest rates are weakening the prospects of the housing market and construction sector, and after a very busy period, the volume of construction investments is likely to fall next year.”
At the same time, the entire world economy has become significantly more volatile.
“The US and European central banks have signalled that they will keep raising interest rates for the time being, regardless of how fast growth expectations will fall. Judging by the ECB’s communication, it seems that its deposit rate will rise to approximately 1.25–1.50% by the end of the year. After rapid interest rate hikes, the rate of increase is expected to either slow down or even stop altogether next year if the economy slides into a deep recession. In any case, interest rate cuts remain unlikely until inflation has reliably returned to the target level of 2%”, Vesala explains.
Finland’s economy already in slight recession
Finland is likely to have already entered a period of mild economic recession. MuniFin’s economic forecast is based on a scenario in which Finland’s GDP will contract in the latter half of 2022 and the factors affecting demand will continue to weaken long into 2023.
MuniFin nevertheless maintains its GDP forecast for the ongoing year at 1.5%. The strong initial level of total production and the surprisingly good development in the first half of the year mean that the overall GDP growth in 2022 will be positive despite some negative quarters.
The year 2023 is expected to start with negative growth transferred from 2022, which significantly weakens expectations for GDP growth. MuniFin has therefore lowered its GDP forecast for 2023 to ‑0.5%. MuniFin expects economic recovery to begin in the second half of 2023, which will create a better starting point for the following year. MuniFin forecasts a GDP growth of 1.5% for 2024.
MuniFin’s estimate for the average unemployment rate for 2022 remains at 6.8%. Due to the economic downturn, it is estimated to rise to 7.4% in 2023 and settle at 7.3% in 2024.
Effects of the energy crisis impossible to predict
MuniFin’s forecast for Finland’s average rate of inflation in 2022 stands at 6.7%. The inflation peak will eventually subside as demand fades, but price hikes may not level out until next spring.
In Europe, the massive increase in energy costs combined with the weak euro are creating widespread upward pressure on prices, and the much-awaited decline in inflation is being pushed into the distant future.
“Electricity prices will be extremely uncertain in the coming months, which makes inflation difficult to predict. In the worst-case scenarios, the steep price of electricity can have a dramatic effect on consumer prices”, Vesala notes.
MuniFin prepared to offer financing to municipalities that own energy companies
MuniFin is also prepared for a rapid escalation of the energy crisis. Municipal energy companies are responsible for a significant part of Finland’s energy production, and their collateral requirements are a risk to the continuity of operations.
“We stand ready to offer financing to municipalities that own energy companies in order to ensure their continued operations. We will be able to meet the demand for funding even if it spikes significantly. We have always had a strong liquidity buffer and we increased it even more because of the Russian aggression. It is a precautionary measure for unexpected situations such as this one”, says Esa Kallio, MuniFin’s CEO.
Due to EU rules on state aid, MuniFin cannot, at least for the time being, finance municipal energy companies operating in competitive markets. MuniFin’s funding is therefore directed to the municipal owners of energy companies instead.
MuniFin’s funding is guaranteed by the Municipal Guarantee Board (MGB). On 7 September 2022, the MGB decided to submit a notification to the European Commission seeking for permission to use funding guaranteed by the MGB to grant loans to energy companies controlled by Finnish municipalities. This arrangement will strengthen Finland’s security of supply by ensuring that energy companies are able to keep operating despite the unusual circumstances. If the Commission accepts the arrangement, MuniFin can grant loans directly to the energy companies.
The Municipal Guarantee Board (MGB) will submit its notification to the European Commission in cooperation with MuniFin and the Ministry of Economic Affairs and Employment. The current circumstances in the energy markets have led to a situation where the supply of energy has fallen substantially, leading to sharply increasing collateral requirements on derivatives used by energy companies. This severely endangers the continuity of their operations.
MuniFin has already announced that it stands ready to quickly start providing financing for municipalities that own energy companies to ensure the continuity of energy production. So far, EU rules on state aid have mostly prohibited MuniFin from directly financing energy companies operating in competitive markets. Financing of municipal energy companies will be established based on MuniFin’s standard business model, and thus possible loans to energy companies will still require a 100% municipal guarantee, as is required for any other company loans by MuniFin.
“The spiralling collateral requirements in the electricity market and the reduced energy supply have together created a crisis and given rise to a need to ensure the availability of essential services for citizens. Under the circumstances, we consider the proposed arrangement to be in accordance with competition laws”, says Esa Kallio, MuniFin’s CEO.
Measured by its balance sheet, MuniFin is one of Finland’s largest credit institutions. It has been able to continue its international funding operations also under exceptional circumstances, for example during the start of the Russian war on Ukraine, the COVID pandemic and the financial crisis.
MuniFin has never recognised any final credit losses in its customer financing. The purpose of banks’ international capital regulation is to minimise the risks related to banking operations. MuniFin’s CET1 capital exceeds the ECB’s requirements by more than six times.
“It is difficult to estimate how long the Commission will take to process the notification. The timeline will also depend on whether the MGB or MuniFin will be required to provide further information”, Kallio notes.
MuniFin’s funding is guaranteed by the Municipal Guarantee Board (MGB), a public law institution operating under the Act on the Municipal Guarantee Board (487/1996). The MGB’s members consist of all municipalities in mainland Finland.
MuniFin’s net operating profit excluding unrealised fair value changes amounted to EUR 74 million in the first half of the year. A year before the figure was a record-high EUR 108 million. This year’s drop was expected, as it was influenced by the change in credit terms applied in late 2021.
New lending in January–June amounted to approximately EUR 2 billion and the long-term customer financing excluding fair value changes grew by 2.6% and totalled EUR 29.8 billion.
The amount of green finance aimed at environmentally sustainable investments totalled EUR 2,700 million (EUR 2,328 million) and the amount of social finance aimed at investments promoting equality and communality EUR 1,296 million (EUR 1,161 million) at the end of June.
In January–June, new long-term funding reached EUR 5,962 million (EUR 6,025 million). Group’s consolidated statement of financial position grew to EUR 47.5 billion.
– The pandemic has transformed our lives into something that is predicted to become the new normal, but the outlook has become even murkier than expected after the war broke out in Europe. Amidst all this uncertainty, it is important to note that at MuniFin, we work hard every day to create stability in these uncertain times and to ensure smooth operations for all our customers, notes Esa Kallio, President and CEO at MuniFin.
At the end of June, the MuniFin’s capital ratio was very strong. The Group will also publish a separate Pillar III Report on risk management and capital adequacy on August 8.
The Russian invasion of Ukraine has fundamentally changed the outlook of the Finnish economy. Not only has consumer confidence weakened, but the business expectations have also taken a slight downward turn. Despite the challenging outlook, the Finnish economy is facing the future from a better position than it did when the COVID pandemic hit, and the future NATO membership should help to clarify Finland’s security position.
Rising costs and interest rates are overshadowing the economy and the construction sector in particular. In general, the operating environment is now far from optimal for investments. Finland’s future NATO membership should help to clarify Finland’s security position and strengthen confidence in Finland as a safe target for investments in the long run.
Weakening purchasing power poses the greatest risk
Despite the challenging outlook, the Finnish economy is facing the future from a better position than it did when the COVID pandemic hit.
The service sector has revitalised after restrictions were lifted, and many industries still have strong orderbooks so industrial production is expected to keep growing at least for the rest of the year. The growing trend in employment has continued despite the war in Ukraine, and the employment rate has already risen to around 74%. The seasonally adjusted unemployment rate has fallen close to 6% and is now at its lowest level since 2008.
The biggest uncertainty factor in domestic economy is the accelerating inflation and its effect on domestic consumer demand. In January–March, the real income of full-time employees decreased by 2.7% from the previous year. Such a drop in real income has not been seen in Finland since the late 1970s.
To some extent, consumer price inflation is driven by a change in relative prices, to which households can adjust by changing their consumption habits, but the majority of the cost pressure comes from rising prices of necessities, such as food, fuel and housing. Debtors’ interest expenses are also on a rise. Some households have additional pandemic savings, which may mitigate the effects of their declining purchasing power to some extent.
GDP will grow moderately in 2022, but 2023 is looking highly uncertain
The Finnish economy is relatively strong, but the growth outlook is bound to deteriorate because of the war in Ukraine, the rising inflation and the rapidly tightening monetary policy. The Finnish GDP is expected to grow very little during the rest of the year, and negative quarters are also possible.
Thanks to last year’s strong growth trend, however, the Finnish GDP is expected to reach an overall growth of 1.5% for 2022. The next year, on the other hand, is expected to be more difficult: our current estimate for GDP growth in 2023 stands at 0.5%, and that, too, requires that the economy starts to recover during 2023.
The weakening economic outlook also affects employment growth. The share of hard-to-fill vacancies is higher than during previous cyclical peaks, and talent shortage is so serious a problem that it limits recruitment in itself. Nevertheless, due to the recent sharp decrease in unemployment, we have lowered our estimate of the overall unemployment rate. We now expect it to average around 6.8% for both this year and the next.
It now seems that inflation will not relent until early 2023. We expect Finnish consumer price inflation to stand at 5.5% in 2022 and at 2.5% in 2023.
This summary of MuniFin’s Economic Forecast (only available in Finnish) is written by Timo Vesala, Chief Economist, Doctor of Philosophy (PhD), Economics.
MuniFin’s fourth and final economic forecast for this year comes out at an exceptional time, says MuniFin’s Chief Economist Timo Vesala. The world economy continues to grow, but short-term risks are on the rise. Omicron, the new coronavirus variant discovered in South Africa, is raising uncertainty to a new level. Because very little is yet known about how dangerous the new variant is, how easily it spreads and how effectively vaccines protect against it, it is difficult to estimate what impact it will have on the economy.
“Our forecast accounts for the recent aggravation of the COVID pandemic, but not for the potential effects of the new variant. If vaccine efficacy proves significantly lower for Omicron than for the other variants, tighter restrictions may have to be imposed. This would also mean that economic recovery will be knocked off track”, explains Vesala.
Another current risk involves China, whose overheated property market is cooling down quickly. Construction investments have played an exceptionally large role in China’s economic growth.
“If China’s economic growth slows down considerably, this will affect the world economy as well”, Vesala assesses.
The business environment is also hampered by the increase of costs. Rising inflation weakens the buying power of consumers and thus also takes its toll on economic activity.
Long-term growth path Finland’s greatest problem
By international comparison, Finland has so far survived the pandemic with only a moderate effect on the economy. Finland’s GDP exceeded the pre-pandemic level already in the second quarter of this year. Employment has also recovered briskly, with the total number of people in employment reaching an all-time high this year.
As economic growth has exceeded expectations, MuniFin revised its growth forecast for this year, raising it from 3.2% to 3.5%. Due to increasing COVID uncertainty and rising costs, however, MuniFin lowered next year’s GDP growth forecast from 3.0% to 2.6%. MuniFin’s growth forecast for 2023 remains at 1.8%, which is slightly above Finland’s long-term growth potential.
According to Vesala, the biggest problem in the Finnish economy is that its long-term growth path is not sufficient to sustain the current welfare state. Finland should gradually start shifting the focus back from COVID damage control to bold economic reform.
“We must create an outlook in which companies have ready access to human capital. Otherwise, our economy will struggle to attract growth investments. To succeed, we must invest in education, research and attracting foreign workers. We should also be in the vanguard of the green transition”, summarises Vesala.
Fed expected to raise interests next year, Europe to follow later
Inflation has accelerated significantly in the autumn. The basic trends in monetary policy are the same in the United States and in Europe, but the central banks are moving at a different pace. The risk of the economy overheating is greater in the US.
“Unless the aggravating pandemic situation causes the short-term outlook to take a significant turn for the worse, the Fed is likely to raise its key interest rates as early as next year”, predicts Vesala.
Inflation uncertainty has also increased considerably in the euro area. Vesala nevertheless believes that the underlying factors, such as the spiking energy prices and disrupted supply chains, are mostly temporary.
“As the worst bottlenecks are being released, their price-increasing effects may be replaced by pressure to decrease prices, returning inflation below the ECB’s target level. The ECB’s new inflation target leaves the central bank more leeway to delay interest rate increases, and I think the ECB will use it.”
Vesala believes that the ECB will reduce its non-standard monetary policy measures in 2022. The time to gradually start normalising interest policy could be in late 2023.
Municipalities have enjoyed generous COVID support measures, which are now coming to an end
Almost all of the key indicators of municipal finances are now looking better than pre-pandemic forecasts expected. The central government has shouldered the main responsibility for mitigating the negative economic impact of the pandemic, ensuring that municipalities will not feel the pandemic pinch.
During COVID, the central government has taken on more debt, however going forward this calls for a stabilisation of the central government debt ratio.
“Generous COVID support measures are inevitably coming to an end”, predicts MuniFin’s CEO Esa Kallio.
The predictability of municipal finances is further complicated by Finland’s ongoing health and social services reform, which will transform the financing structure of municipalities. Municipalities with a strong tax base will lose proportionately more tax revenue than municipalities with a weak tax base. Kallio describes the outcome as unfavourable.
“After the reform, municipalities that can now rely on a growing tax income will become increasingly dependent on central government income transfers. And municipalities with a weakening tax base will increase their reliance on their own tax income. In both cases, a secure source of income is replaced by a more unreliable one.”
The health and social services reform also calls for the evaluation of the long-term prerequisites for growth. The level of education among young people is declining, and Finland has fallen below the OECD average in the percentage of tertiary graduates. Even after the social services reform is implemented, the provision of education will largely be the responsibility of municipalities. In many municipalities, a low birth rate is causing a shortage of pupils and pushing up the unit cost in education.
“With the health and social services reform halving municipalities duties and finances, there is a risk that education will take the hit and suffer the adjustments. Municipalities need more resources, but as of yet, it is unclear where these resources will come from”, Kallio says.
