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Finland strengthens investments in companies of the poorest countries

Ministry for Foreign Affairs
26.1.2021 8.54
News item

The coronavirus crisis has hit companies in developing countries hard. Finland has increased its guarantees to development finance institution Finnfund, which will strengthen the targeting of its investments to the companies of the poorest countries as well as promote economic and social development.

In addition to adverse health impacts, the coronavirus pandemic has resulted in major economic losses around the world. In developing countries, the private sector accounts for a large share of jobs, and states cannot afford to revive their economies through billion-dollar packages as in the wealthier countries. As a result, restrictive measures, recession and declining trade hit the companies of developing countries particularly hard.

The situation is further aggravated by the fact that poor countries often have poor social security. If there are no safety nets, the collapse of companies and decreasing incomes often mean that people have to face poverty. The World Bank expects the coronavirus crisis to increase extreme poverty for the first time in more than twenty years.

Preparing for risks

As a response to the distress of companies in developing countries, the Finnish state increased the loss compensation commitment it has issued to Finnfund from EUR 75 million to EUR 150 million. The loss compensation commitment is a guarantee through which Finnfund can make higher risk investments in the poorest countries with exceptionally broad development impacts. The commitment is called special risk financing.

Factors affecting the investment risk level include, for instance, the destination country, the investment volume and the industry. With special risk financing, potential credit or investment losses incurred by Finnfund’s investments could be partly covered with the commitment granted by the state. Thus increasing the loss compensation commitment is a question of preparing for risks, not of direct financing. The annual maximum amount of state compensation is EUR 15 million.

The loss compensation commitment has already been in force since 2012. Only one compensation decision has been made in eight years, at which point compensation was paid for EUR 2.2 million.

In addition, the state recently increased Finnfund’s share capital by EUR 50 million. The increase in share capital secures Finnfund’s preconditions to operate in a challenging environment and maintains its ability to continue making equity investments in the companies of developing countries.

”Aid to export companies and entrepreneurs is needed in Finland, while at the same the private sector in developing countries needs support in order to grow. It is extremely important that Finnfund is also able in this changing economic situation to continue its work to finance companies operating in developing countries, reduce poverty, increase jobs and build critical infrastructure,” says Ville Skinnari, Minister for Development Cooperation and Foreign Trade.

More development and environmental impacts

KPMG’s evaluation of the impacts of special risk financing was published in 2018. In its evaluation, KPMG stated that special risk financing has been successful. More than 80 per cent of the investments covered by special risk financing were targeted at the least developed countries, and projects subject to special risk financing had more development and environmental impacts than in Finnfund’s other projects. According to the final evaluation of the field trips made to Ethiopia and Rwanda, Finnfund’s special risk financing has played a key role in developing entrepreneurship and the investments had resulted in positive employment, environmental and technology impacts.

Even more of these impacts are needed due to the coronavirus crisis. The economic distress caused by the pandemic is especially evident in female-dominated industries in developing countries.

”We have managed to find new, good investment recipients even during the corona pandemic, even though the economy of many developing countries has slowed down dramatically,” says Jaakko Kangasniemi, CEO of Finnfund. ”Among others, we have invested in an online store selling women’s health and hygiene products in East Africa as well as in a financial institution focusing on small-scale farmers in Myanmar. In addition, we have strengthened the financial position of our previous investments. Special risk financing offers us a strong foothold to continue our work in a difficult situation.”

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