DBRS assigns AAA Ratings to Finland’s long-term foreign and local currency debt with Stable Trend

DBRS Ratings Limited (DBRS) has assigned issuer ratings of AAA to the Republic of Finland’s long-term foreign and local currency debt. The trend on both ratings is Stable. The ratings reflect Finland’s wealthy, competitive and export oriented economy, strong political institutions and prudent macroeconomic and fiscal management. The ratings are also underpinned by Finland’s sound fiscal position with a moderate debt burden and healthy banking sector.

Finland’s fiscal position is healthy by international standards and has proven resilient throughout the 2008-09 financial crisis thanks to a long-standing record of prudent fiscal policy, which has proven effective in ensuring predictable and sustainable government finances. Despite having deteriorated during 2009, Finland's government deficit and debt levels have remained lower than for most 'AAA' rated sovereigns. In 2011, the government deficit at 0.8% of GDP, was the lowest in the Euro area, while government debt accounted to 48.5% of GDP. Moreover, public finances have benefited from a surplus position in the national social security fund estimated at 2.8% in 2011 which has continued to contribute positively to the overall fiscal position.

Despite these strengths, Finland faces challenges stemming from the long-term fiscal pressures arising from an ageing population. These pressures are heightened by an unemployment level of 7.8% in 2011, which is structurally higher compared to some of its Nordic peers. Furthermore given the cyclical structure and openness of its economy, Finland is vulnerable to external weakening.

Finland is also facing challenges with respect to industrial restructuring involving the information technology and manufacturing sectors and an erosion of competitiveness on international markets. Since 2009, export market shares have been contracting and a small current account deficit was recorded in 2011, the first in nearly two decades.

Following the 2008-09 recession, the Finnish economy rebounded robustly in 2010 and 2011. This was primarily driven by strong performance in domestic demand, with GDP expanding by 3.3% and 2.5%, respectively, and unemployment declining to 7.8% in 2011 from its peak of over 8.4%. For 2012, the Finnish Government expects economic growth to slow to 1%, following the sharp deceleration in growth across the Euro area and weaker domestic demand. GDP growth is set to gradually recover in 2013 and 2014, with expected average growth of 1.6% per year.

DBRS believes that Finland is in a relatively strong position to manage the economic slowdown. Public finances are resilient and provide scope for fiscal policy measures should the economic environment deteriorate. The 2012 fiscal stance is set to be relatively expansionary, with the budget deficit projected at -1.6% of GDP, returning to a surplus by 2015. Government debt, estimated at 51.9% of GDP in 2012, is below the European Union average and is expected to reach approximately 53.7% in 2014 (52% excluding the funding of Euro Area support packages). In addition, Finland owns significant liquid assets resulting in a moderate net debt position of 15% of GDP in 2011.

The AAA ratings also reflect Finland’s well-established institutional framework alongside its policy effectiveness with proactive economic policies that allowed for a reduction of government debt substantially before the onset of the crisis. The Finnish government’s use of fiscal policy targets, including multi-annual expenditure ceilings, has helped to moderate real general government expenditure growth and in turn created an important constraint against any relaxation in fiscal discipline. The credibility of the fiscal framework has been underpinned by the political commitment to sound public finances as a widely accepted national objective. In addition, despite the broad spectrum of opinion which characterizes the incumbent six-party coalition that emerged from the 2011 elections, DBRS expects that strong consensus for fiscal consolidation and timely policy response to external shocks is likely to persist.

The Finnish banking system has proven resilient despite market volatility in the Euro area thanks to prudent management and strong regulatory supervision. Finland's three largest financial institutions report profitability and a robust bank capital adequacy ratio of 14.4% in 2011, with low loan losses and minimal direct exposures to peripheral European economies. Despite the recent growth in housing loans, household debt is high at 110% of disposable income in 2011, but well below its Nordic peers. Counterbalancing these strengths, the Finnish banking sector is highly concentrated, with a majority of assets controlled by subsidiaries of foreign Nordic banks with sizeable whole-sale borrowing, leaving the banks vulnerable to potential disruptions in EU funding markets.

The Stable trend reflects DBRS’s expectation that the ratings will be supported by the country’s track record of political stability, fiscal flexibility and competitive economy. DBRS expects that these strengths will allow Finland to respond appropriately to slower economic growth and weather market volatility in the medium to long term.

Notes:
All figures are in Euros unless otherwise noted.

The applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies.

The sources of information used for this rating include the Finnish Ministry of Finance, State Treasury, Bank of Finland, Statistics Finland, Eurostat, IMF and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

Ratings assigned by DBRS Ratings Limited are subject to EU regulations only.

Lead Analyst: Giacomo Barisone
Rating Committee Chair: Roger Lister
Initial Rating Date: 14 August 2012
Most Recent Rating Update: NA

For additional information on this rating, please refer to the linking document under Related Research.