Finland: Macro-Fiscal Flows And Investment Markets

Includes: EFNL
by: Alan Longbon


Finland on track to make its first current account surplus since 2010.

Positive fiscal flows add to the stock of funds in the private sector and negative flows take them away.

The overall macro-fiscal flows are positive but decelerating leaving a small upward bias for investment markets and a general unemployment level of 7.5% and youth unemployment of over 20%.

The purpose of this report is to look at the macro-fiscal flows of Finland and assess the impact of those flows on investment markets to see if there is a bias up or down.

The analysis consists of a sectoral flow assessment of the national accounts.

One can summarize the national accounts in the following formulae:

GDP = Private Sector [P] + Government Sector [G] + External Sector [X]

This is an accounting entity and true by definition.

See the methodology section below for more detail on this formula.

The private sector is where the stock market is and we as investors want the stock market to go up. The stock market can only go up if the flows into it are positive. The private sector derives income from three sources:

  1. Credit creation from banks - Banks lend more than is repaid in loans.

  2. Externally from overseas commerce - Exports bring in more than imports cost.

  3. Government spending - More is spent than taxed.

In an ideal scenario, the private sector would receive large, and growing income flows from all three sources, and at the very least, the overall impact should be a positive flow even if one or two of the three flows are negative.

The stock market in the private sector, as well as all other private financial assets, should rise if the overall income flow into the private sector is positive. Indeed, the stock market would be unlikely to rise if the income flows were negative.

We will look at each inflow in turn and start with the private sector, all the while updating our forecast result based on the latest data.

Private Sector

The chart below shows the level of private credit creation entering the private sector through commercial banks.

The chart shows that over the last year fiscal flows from credit creation have increased the stock of private credit by about $3.2B in 2017 and $3B for 2016 and 2018 will probably be much the same.

Credit growth contributed 1.3% of GDP in 2017, and this is the most likely outcome for 2018.

The chart below shows how the flow of credit money has added to the stock of private debt.

The stock of private debt in Finland is quite high at 179% of GDP. This is very high, and most of it is held by the corporate sector whereas households are at a more sustainable level.

External Sector

The external sector captures trade and commerce with other countries and is best captured by the current account. The current account is exports minus imports, and it also captures capital flows in and out of the country from financial transactions and investments. A positive overall result is best.

The chart shows that Finland is continuing to achieve a small a small surplus

Finland is on track to make a current account surplus this year of 0.1% of GDP if the December 2017 comes in the same as for November 2017. The first surplus since 2010.

Government Sector

The government budget is shown in the chart below.

The chart shows that over the last year the government has been spending into the economy and adding to net financial assets in the private sector. This is a positive trend.

For 2017 the government is on track to have contributed 0.01% of GDP into the economy. This is a big drop from 2016 and all years since 2009 and is a negative trend.

Finland is not a monetary currency sovereign; it is a user of the Euro. It is a matter of simple arithmetic that a country that borrows its currency and runs a net current account deficit will one day run out of money. The problem is that as the debt grows and solvency erodes money becomes too costly to borrow and bond market yields too high to sustain. At this point, the country must declare itself bankrupt and introduce a currency reform. Currency sovereignty holds no such risk.

Finland should prove to be a euro survivor as history shows it can make long-term current account surpluses. Finland has now returned to current account surplus and is a beneficiary of an artificially low currency.

Finland is a signatory to the EU Fiscal Compact which sets the rules that a government deficit may not be more than 3% of GDP and not more than 60% of GDP. One size fits all, whether it fits or not.

This year the deficit as a percentage of GDP is tracking at zero percent and total debt to GDP stands at about 63%. Finland is almost totally compliant with the Fiscal Compact.

Finland has a general unemployment rate of 7.5% and a youth unemployment rate of 20.5%. This is a labor resource that is idle and that the private sector has no use for. For an advanced country, the rate of unemployment is relatively high.

Capacity utilization is 82.6% which means that 17.4% of land and capital is standing idle.

The inflation rate is 0.7%. This is very low by any standard and is being achieved with a stock of unemployed land, labor, and capital following standard neoliberal economic doctrine. On the one hand, the cost of labor is held down by the quantity of unemployed labor, as is aggregate demand by low incomes and zero incomes.

Before the government runs a surplus budget to vent excess aggregate demand that might cause demand-pull inflation it needs to spend enough or tax less to employ the idle resources in the economy.

Sectoral Analysis Methodology

Each nation state is composed of three essential components:

  1. The private sector

  2. The government sector

  3. The external sector

The private sector comprises the people, business and community, and most importantly, the stock market. For the stock market to move upwards, this sector needs to be growing. This sector by itself is an engine for growth and innovation; however, it needs income from one or both of the other two sectors to grow.

The government through its Treasury also sets the prevailing interest rate and provides the medium of exchange. Too much is inflationary and too little is deflationary. It puts the oil in the economic engine and can put in as much as its target inflation rate allows. It is not financially constrained. For a sovereign government with a freely floating exchange rate, any financial constraint such as a matching deficit spending with a bond issue is a self-imposed restriction. A debt ceiling is also a self-imposed restriction as is a fiscal brake.

Finland is not a monetary currency sovereign but a user of the euro. Finland is financially constrained and does not have the luxury of creating its currency and putting it into circulation. The Finnish government borrows its money from the European Central Bank at interest and to obtain that money must implement policies imposed as a condition of those loans.

The external sector is trade and commerce with other countries. This sector can provide income from a positive trade balance, or it can drain funds from a negative trade balance.

For the stock market in the private sector to prosper and keep moving upwards, income is required to be put into the flow. Otherwise, the sector can only circulate existing funds, or is being drained of funds and is in decline.

The ideal situation is that the private sector has a net inflow of funds and is always growing, thus giving the stock market headroom within which to expand in value. For this to happen, one or both of the other sectors have to be adding funds to the circular flow of income.

The following formula can express this relationship:

GDP = Private Sector Spending + Government Sector Spending + External Sector Spending

These are accounting entities and correct by definition.

For the best investing outcome, one looks for countries with stock markets located in private sectors that are receiving positive income flows overall. Top marks come where private credit creation, the government sector, and external sector are all in plus and trending upwards.

Conclusion, Summary, and Recommendation

When we take our inputs and place them in our formula, we can calculate the following sectoral flow result based as a percentage of GDP.

Private Sector Credit Creation


Government Sector


External Sector





1.5% 1.9% -1.1% 2.3%











(Source: Trading Economics and Author calculations based on same)

*Estimate as final figures for 2017 are not all in yet.

#Forecast for 2018 based on incoming data.

The Finnish sectoral flows are positive but weak at 1.4% and look to get weaker as the government draws back from its contribution. It is happy with 7.5% general unemployment and 20% youth unemployment

There is scope for financial assets such as stocks, bonds, and real estate to rise given that the private sector is receiving a positive inflow of funds. The growth rate is not extraordinary though, and there are better alternatives out there. Investors wishing exposure to the Finland stock market can make use of the following ETF:

iShares MSCI Finland Capped Investable Market Index ETF (EFNL)

There is some scope for business to profit over proportionately from the improvement of the current account fiscal flow. This is because most of the additional income flows to the business sector from export earnings. This should add to earnings, profits, dividends and capital value of those companies.

I first reported on Finland in this article, and since then it has traded largely flat though the dividend has risen from 2.1% then to 3.16% now. I did not recommend before and am not recommending it now.

After a good start in 2017, gains in the ETF have flattened in the last half of the year. The flat and falling macro-fiscal flows point to further lackluster performance going forward.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.