Global economic growth still below potential
In 2016, global economic growth slowed down to three per cent. The growth in world trade by volume was clearly slower than global economic growth. The trend in the value of trade was sluggish owing to the low prices of the key commodities, such as oil and gas.
Following the U.S. presidential election in November, new optimism arose on the market about greater economic growth in the United States. As a result of simultaneous uncertainties relating to the new administration, there were greater concerns about the breakdown of agreements facilitating international trade and about the future fate of the recently negotiated international environmental agreement.
The economic development of many countries depends especially on the growth of exports; thus, a potential slowdown in the liberalisation of international trade gives cause for concern. Following poor economic growth and higher unemployment, many countries have taken new protectionist measures to shield their domestic production even though it has been concluded that protectionist measures do not foster economic growth.
The emerging economies of Asia continued their strong growth. It is believed that China’s economic development has stabilised on a growth path that is slower but still about six per cent, whereas India, with its growth rate of over seven per cent, strengthened its role as a regional growth engine. Not only has China’s slower growth affected the economic situation of Asian countries; among other things, it has also had an impact on the world market prices of commodities.
Economic development in Europe continued to be weak. The GDP growth in the European Union is likely to remain under two per cent. Concern over the Union’s future increased when the majority of British voters in the referendum held in June supported Britain’s exit from the EU. Brexit negotiations between the EU and the UK have not been started yet.
The crisis in the Middle East continued. Refugees aroused mixed feelings in Europe, which led to increased support for populist parties and groups and to differences in views within the EU as to how the refugee issue should be managed. Instability in the Mediterranean region increased further when some members of the Turkish army staged a failed coup attempt in July. Turkey participates in efforts to resolve the Syrian crisis, and domestic policy tensions and unrest have increased in Turkey during the past few years. Terrorist acts in many countries around the world, including Europe, fuelled uncertainty associated with social stability. This in turn increased expenditure on security.
The prices of oil, gas and minerals have remained low for an extended period of time and, together with falling income, have caused economic difficulties and social tensions of varying degrees in producer countries. The economic trends of South Africa and Nigeria, the two largest economies in Sub-Saharan Africa and regionally important actors, continued to weaken during 2016. Besides low commodity prices, there are also other economic and political factors underlying the negative development.
The most significant event on the commodity markets was the cut in production levels agreed by the major oil producing countries late in the year. It is hoped that this will raise the world market prices of oil.
Negative interest rates and new international financial institutions on the financial markets
The negative interest rates on bonds issued by the governments of Switzerland, Japan and many euro countries peaked in 2016. Interest rate trends complicate the monetary and interest policies of several central banks. Despite the low interest level, investments in the euro area have not picked up as had been hoped. Within the EU, attention was paid to the banking sector problems, which still continued and came to a head in Italy towards the end of the year. The potential impacts of Brexit on the financial markets within the EU, and more widely internationally, are still unclear.
Owing to a positive economic trend, the U.S. Federal Reserve raised its key interest rates in December. Interest rate trends in the United States may affect the availability of capital, financing costs and the external value of the currency especially in many developing countries that need foreign capital.
Capital has become increasingly swift in moving from country to country. Relatively strong and quickly developing economies, such as China, have also experienced substantial capital drain. Some countries have even considered restrictions on capital movements. In many countries, the alarmingly indebted actor is not the government but companies; fluctuations on the capital market may pose great difficulties for them in securing sufficient financing for their operations. Increasing bank regulation further reduced Western banks’ willingness to grant loans, especially to foreign borrowers.
Two new financial institutions launched operations on the international financial markets. The Asian Infrastructure Investment Bank (AIIB), established at the initiative of China, granted its first credits, and the New Development Bank (NDB) founded by the BRICS countries began operations. Both financial institutions plan to concentrate on the financing of infrastructure projects, AIIB in Asia and NDB in developing countries.
New markets and old challenges
The situation in Brazil and Russia, two countries important to Finnvera’s exposure for export credit guarantees, continued to be challenging. However, the economies of both countries showed some cautious signs of development in a more stable direction. For Brazil, the decisive factor was the resolution of the domestic policy problems. Steadily rising oil prices would improve the growth potential of both economies. As large economies, Brazil and Russia also influence the economic development of their neighbouring countries.
Despite the rather weak development of Finnish exports, demand for export credit guarantees has been increasing. At the end of 2016, Finnvera’s exposure for export credit guarantees or guarantee applications encompassed over 100 countries. During the year, Finnvera began to grant export credit guarantees for exports to Argentina, Iran and Cuba. All three countries have been outside normal international trade and financing for many years – for different reasons. Normalisation of the situation in Argentina, the third largest economy in Latin America, and the country’s return into the scope of international trade and financing have positively compensated for the dip in trade with Brazil. Iran and the international community reached an agreement on Iran’s nuclear programme in summer 2015. Once the agreement entered into force, the EU, as of January 2016, suspended the application of the economic and financial sanctions imposed on Iran because of its nuclear programme. The change in the EU sanctions made it possible to start granting export credit guarantees.
Financial markets still unstable
According to the SME barometer survey conducted last autumn, financing is still perceived as one of the biggest obstacles to business development. The situation has become slightly worse since autumn 2015. The biggest problems are the general availability of financing and the lack of collateral. On the other hand, about 80 per cent of SMEs report that financing has not been perceived as a problem for implementing projects. Increasingly many enterprises strive to manage on cash flow financing.
About half of enterprises have a loan. A little less than one in three have felt the need to acquire external financing, and roughly one in four enterprises plan to apply for external financing. Only four per cent of applicants for financing had received a negative decision. The reasons for a negative decision were generally the applicant’s poor profitability or financial status and insufficient self-financing. The situation for obtaining financing is the most difficult for early-stage companies and small growth companies.
These problems have given rise to new actors on the market, whose financing volumes are rising at huge speed. Although, for instance, the crowdfunding market is still small in size, at the present growth rate it can reach a few hundreds of millions euros within a couple of years.
Investments and company acquisitions showed a marked upswing during 2016. It is especially for these purposes that external financing is sought more often than before. Expectations concerning the demand for credits appear to remain high in 2017 as well.