DBRS Confirms the Republic of Finland at AA (high), Stable Trend

DBRS Ratings Limited has today confirmed the Republic of Finland’s Long-Term Foreign and Local Currency Issuer Ratings at AA (high) and the Short-Term Foreign and Local Currency Issuer Ratings at R-1 (high). The trends on all ratings are Stable.

Finland’s AA (high) ratings are underpinned by the government’s solid balance sheet, pragmatic and conservative policymaking, and its well-educated and productive labour force. On the other hand, a number of challenges counterbalance these strengths, including sluggish economic performance, weak cost-competitiveness and the effects of an ageing population.

The Stable trend reflects DBRS’s view that risks to the ratings are balanced. The Finnish economy is showing signs of a firmer recovery, with more upbeat economic and sentiment indicators. Government progress on the consolidation and structural reforms agenda offsets the risks to Finland’s economic and fiscal outlook. Finland retains considerable financial flexibility, and its political commitment to reform is likely to be sustained, notwithstanding its economic challenges.

A solid public sector balance sheet and good debt affordability support Finland’s ratings. The government’s balance sheet benefits from sizeable assets, with the net financial asset position expected to amount to 55% of gross domestic product (GDP) in 2016, one of the highest of any member country of the Organisation for Economic Cooperation and Development (OECD). However, two-thirds of these assets are ring-fenced for pension repayment and are therefore unlikely to be either liquid or appropriable for budgetary purposes. Government borrowing costs were contained at 1.1% of GDP in 2016, supporting government finances and shoring up market confidence in Finland’s repayment capacity.

The government has been committed to implementing a number of deficit reduction and structural reforms in order to prevent public finances from deteriorating further. The government programme includes EUR 4 billion worth of consolidation measures until 2019 in the form of spending cuts and index freezes, among other measures. The government has implemented and planned major structural reforms: (1) the pension reform, expected to reduce the sustainability gap by approximately 1 percentage point; (2) the Competitiveness Pact to improve economic cost-competitiveness came into force in 2017; (3) health care and social services reform (SOTE reform) proposal will be submitted to Parliament in the Spring, to be implemented in 2019 with the aim of generating savings of EUR 3 billion by 2029.

The country’s high level of income per capita reflects a skilled and well-educated labour force. Finland consistently ranks at the top in education and skills rankings, above the OECD and Nordic average, showing one of the highest levels of educational attainment in the OECD. Inequality in the country is low, with a relatively compressed wage distribution. While labour productivity has dropped since 2007, to a great extent because of the structural transformation of the economy, Finnish productivity has evolved positively over the past two decades.

A number of challenges counterbalance these strengths. Finland’s economic recovery has been lagging that of its European peers, and growth is expected to remain well below the pre-2007 pace. The Finnish economy suffered from a major structural change, not only stemming from the collapse of its handset industry and secular decline in paper demand, but also because of its rapidly ageing population denting its labour supply and growth potential. DBRS believes the structural reconfiguration of the economy will be slow and could falter in a weaker economic environment.

Improving the competitiveness of the economy is a key challenge. Finland is one of the European countries that suffered the strongest loss of export market shares, with exports as a percentage of world exports almost halving since the early 2000s. The government has introduced significant measures to improve cost-competitiveness, boosting employment, investment and exports. However, the benefits associated with the reforms are longer term in nature, and their effectiveness will have to be monitored over time.

Adverse demographics represent a third significant challenge for Finland. Over the medium and longer term, the projected decline in the working-age population will constrain Finland’s growth potential and pose risks to the sustainability of its public finances. The government has already started to address long-term financing of the pension system, although more measures may be needed in the future. If fully implemented, the SOTE reform could help reduce the sustainability gap; however, its implementation could prove challenging.

RATING DRIVERS
Continued progress in addressing the sustainability gap amid successful adjustments to restore stronger growth could ultimately put the ratings under upward pressure. On the other hand, Finland’s ratings could face downward pressure if its growth prospects and medium-term debt trajectory were to deteriorate significantly more than already expected.

Notes:
All figures are in Euros (EUR) unless otherwise noted.

The principal applicable methodology is Rating Sovereign Governments, which can be found on the DBRS website under Methodologies. The principal applicable rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website under Rating Scales. These can be found on www.dbrs.com at: http://www.dbrs.com/about/methodologies

The sources of information used for this rating include the Ministry of Finance of the Republic of Finland, Central Bank of Finland, Statistics Finland, European Commission, European Central Bank, Statistical Office of the European Communities, United Nations Development Programme (UNDP), IMF, OECD, BIS, and Haver Analytics. DBRS considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

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

This rating included participation by the rated entity or any related third party. DBRS had no access to relevant internal documents for the rated entity or a related third party.

DBRS does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS’s outlooks and ratings are under regular surveillance.

For further information on DBRS historical default rates published by the European Securities and Markets Authority (“ESMA”) in a central repository, see:
http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml.

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

Lead Analyst: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and
Sovereign Ratings
Initial Rating Date: 14 August 2012
Last Rating Date: 9 September 2016

DBRS Ratings Limited
20 Fenchurch Street
31st Floor
London
EC3M 3BY
United Kingdom
Registered in England and Wales: No. 7139960

Information regarding DBRS ratings, including definitions, policies and methodologies, is available on www.dbrs.com.