Fitch cuts Finland's credit rating to Aa+

HELSINKI (Reuters) - Finland lost another of its top-grade credit ratings on Friday when Fitch downgraded it to Aa+ with a stable outlook, citing its weak economic performance and persistent problems in reviving its economy.

Described by its own finance minister Alexander Stubb as “the new sick man of Europe”, Finland’s economy has yet to regain its 2008 size following the global financial crisis and a string of setbacks.

The decline of core businesses such as Nokia mobile phones NOKIA.HE and Finland's paper industries, together with a weak demand from neighboring Russia led the economy to contract for three straight years before it eked out growth of 0.4 percent in 2015.

“Although some demand components saw a modest recovery in 2015, investment continued to contract in annual terms, highlighting still weak prospects for key sectors,” Fitch said in its report.

Standard & Poor’s, which is due to review Finland next Friday, cut its rating to AA+ in 2014 and later gave the rating a negative outlook.

Moody’s still rates the economy AAA, but with a negative outlook.

The European Commision expects Finland’s economy to expand by 0.5 percent this year, less than any other country in the European Union except Greece.

Fitch said it expected economic activity to gather pace in 2016, underpinned by a recovery in private investment in housing and in the pulp and paper industry, and it kept its growth forecast unchanged at 1.0 percent for this year.

The European Commission warned Finland on Wednesday that its 2016 budget may break EU fiscal rules and urged Helsinki to take measures to redress the situation.

Finland’s finance minister Alexander Stubb wrote on a blog post late on Friday, that the rating downgrade and the EU Commission’s warning are serious warning signs for Finland.

“This shows, that external assessors are starting to lose their faith in Finland’s ability to reform”, Stubb wrote.

Prime Minister Juha Sipila’s center-right government aims to rein in public debt by pushing for reforms and 10 billion euros ($11.15 billion) of spending cuts by 2030.

The government secured conditional backing from key trade unions this week for its labor reform plans to lengthen working hours and freeze pay, but a handful of unions remain opposed to a pact aimed at boosting competitiveness in exports.

“Some efforts are under way to improve labor participation and competitiveness, but revamping key manufacturing/export sectors will remain a considerable challenge, particularly given that Finland is at the technological frontier,” Fitch said.

($1 = 0.8968 euros)

Reporting by Tuomas Forsell; Editing by Hugh Lawson