Page 5 - Seafarers_Pension_Fund_Annual_Report_2022

Financial Operating Environment Annual Report of the Board

In 2022, Finland’s economy was estimated as having increased by Seafarers’ Pension Fund 2022 Annual Report
about 1.5% but it will likely remain slightly negative next year, since
private consumption is anticipated to decrease as a result of weakening 5
purchasing power. In Europe, in particular, there is a strong need for
investments in energy production and the green transition while, at
the same time, the central banks are tightening their monetary policy.
Therefore, the expectation is that the rise in interest rates will continue
next year. A strong deglobalisation trend is occurring within the global
economy as caused by, among other things, difficulties in supply chain
operations throughout the COVID-19 era.

Inflation was clearly accelerating already in 2021, but this acceleration
was further boosted by, for example, the energy and food price increases re-
sulting from the war in Ukraine. Consumer prices increased in Finland by
approximately 7% and they are expected to rise further by more than 4%
next year. Pensions experienced a strong increase of 6.8 per cent at the end
of the year and salaries are also expected to increase by about 4% next year.

The central banks were late in their efforts to control inflation and the
monetary policy is being tightened until economic growth dies down and
inflation, particularly inflation expectations, fall closer to long-term ambi-
tions. This has already had a significant impact on the yield requirements
of different asset categories, thus reducing their value. This was most
strongly seen in government bonds, whose yield within the euro area was
-18.8% last year. This was weaker than the yield in stock markets, which
experienced a decline in Europe of -8.9% and in Finland of -12.7%. The
values of illiquid investments have not yet been updated accordingly, but
this is expected to take place during the next year and will be reflected in,
among other things, real estate prices.

According to the shipowners barometer 2022 focusing on freight traf-
fic, Russia’s attack on Ukraine brought about a new type of situation and
high insecurity about the future. The balance figure reflecting economic
cycles dropped to 27 points from the record high 86 points of the previous
barometer. The balance figure for the trend outlook is minus 59 points,
which is the same level as during the financial crisis and COVID-19. Envi-
ronmental regulations and low-carbon targets are reflected in the planning
of shipping companies, and more than half are considering switching to
more environmentally friendly fuels. This is also affected by charterers’
growing demands for responsibility and environmental sustainability. The
rise in capital costs is, however, viewed as an obstacle to growth. Further-
more, the difficulties in recruiting sea-based personnel is becoming ever
clearer, and 84% of shipping companies state that they will be faced with
a challenge in the future, since the industry is not attracting young people.

Finland is an island. More than 80% of Finland’s foreign trade is
transported by sea. Maritime navigation requires an EU-approved national
scheme to reimburse labour costs. The scheme does not deviate from the
level of similar systems used in other EU countries but differs in terms
of how it is implemented. In many EU countries, such as Sweden and
Denmark, the labour costs of the shipping companies are reduced using a
so-called net pay scheme. Within this scheme, shipping companies report
their employees’ withholding tax to the Tax Administration, but they do
not actually pay these amounts to the tax authorities. Cuts in the labour
cost reimbursement scheme could cause passenger and cargo vessels to