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

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

The government’s solid balance sheet, political commitment to sound economic policies, and a well-educated and productive labour force underpin Finland’s ratings. On the other hand, Finland faces a number of challenges, including raising growth prospects, durably recovering the economy’s loss of competitiveness, and countering the effects of an ageing population.

The Stable trend reflects DBRS’s view that risks to the ratings are balanced. The economic recovery is firming up in Finland. After four years of downturn, Finland returned to growth in 2016. Economic activity is accelerating in 2017 driven by the significant pickup in exports after several years of lacklustre performance. The cyclical recovery is helping reduce the fiscal deficits. However, Finland’s industrial restructuring and population ageing is holding back potential growth and the economy is still below its pre-crisis level. Against this background, the government’s progress on fiscal consolidation and the structural reform agenda offset 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 balance sheet and good debt affordability reinforce the government’s ability to fund its liabilities. Benefiting from sizable assets, Finland has one of the highest net financial asset positions as a share of gross domestic product (GDP) among the Organisation for Economic Cooperation and Development (OECD) members. The general government net financial assets ratio stood at 55% in Q1 2017. However, a significant portion of these assets is ring-fenced for pension payment and not appropriable for budgetary purposes. In addition, borrowing costs have remained contained (1.1% of GDP in 2016) despite the higher indebtedness. Moreover, a healthy debt structure enhances the debt resiliency to interest and currency shocks.

The political commitment to fiscal consolidation and structural reforms also supports the ratings. Evidence of this commitment has been the response of the Finnish government to the marked deterioration in public finances since 2009. The government now plans to generate fiscal savings worth EUR 4 billion in 2016-2020, mostly on the expenditure side. On the structural front, the pension reform and the Competitiveness Pact came into force in 2017. Significant progress has been made in the health care and social services reform (SOTE reform). However, given its complexity and breadth, implementation risks and uncertainties relative to fiscal savings potential remain.

The country’s high level of income per capita reflects a skilled and well-educated labour force. Leveraging its high levels of human capital, the Finnish economy is a high value added economy with exports tilted towards capital goods. 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.

A number of challenges counterbalance these strengths. Despite the stronger cyclical pick-up, Finland’s economic recovery has been lagging that of its European peers since 2007. 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 gradual 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, such as the Competitiveness Pact. Moreover, productivity has started to show positive signals as exports gather pace. The confirmation of these trends (i.e., wage moderation and productivity growth) will help uplift the growth outlook in coming years.

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.

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.

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 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, the International Monetary Fund, the United Nations Development Programme, the Organisation for Economic Co-operation and Development, 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 and US regulations only.

Lead Analyst: Javier Rouillet, Assistant Vice President, Global Sovereign Ratings
Rating Committee Chair: Thomas R. Torgerson, Senior Vice President, Global Sovereign Ratings
Initial Rating Date: 14 August 2012
Last Rating Date: 3 March 2017

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