Frankfurt am Main, April 27, 2018 -- Moody's Investors Service has today affirmed the Government of Finland's
long-term issuer and senior unsecured debt ratings at Aa1.
Concurrently, the government's short-term issuer rating of
P-1, as well as the senior unsecured medium-term note
(MTN) programme rating and senior unsecured shelf rating of (P)Aa1 have
been affirmed. The rating outlook remains stable.
Today's rating action balances the following key rating factors:
1. Finland's robust economic growth supports a gradual improvement
in fiscal and debt metrics.
2. Despite remaining structural challenges, the Finnish authorities
show significant commitment to reforms.
The stable outlook reflects Moody's view that risks to Finland's credit
profile are balanced given the government's commitment to structural reforms
and fiscal consolidation, which effectively mitigates the risk of
a potential deterioration in the country's economic strength and the government's
balance sheet from age-related fiscal costs and weak potential
growth. Moody's expects this broad-based political
consensus on macroeconomic policy to also prevail under a new government
following Finland's April 2019 elections.
In a related rating action, Moody's has today also affirmed the
senior unsecured ratings of Finnvera plc at Aa1, including the (P)Aa1
rating for its backed senior unsecured MTN programme, in line with
the sovereign's ratings. The outlook remains stable. The
senior debt instruments issued by Finnvera are backed by unconditional
and irrevocable guarantees from the Finnish government. Finnvera's
backed other short-term rating has been affirmed at (P)P-1.
Finland's long-term and short-term foreign-currency
bond and deposit ceilings remain unchanged at Aaa and P-1,
respectively. Finland's long-term local-currency
bond and deposit ceilings also remain unchanged at Aaa.
RATIONALE FOR THE AFFIRMATION OF FINLAND'S Aa1 RATINGS
FIRST DRIVER: ROBUST ECONOMIC GROWTH SUPPORTS A GRADUAL IMPROVEMENT
IN FISCAL AND DEBT METRICS
Finland's real GDP growth picked up in 2016-2017 after a
four-year recession due to a structural decline in the key export
industries (electronics and forest-related), reaching 2.6%
in 2017. The economy is on a firmer footing with solid exports
supported by the global cycle and more investments in euro area trade
partners, private consumption growth and investment in the construction
sector. The recovery has been broad-based and Moody's
acknowledges structural improvements in industries that were at the core
of the previous period of very weak growth, such as the pulp and
paper industry.
Helped by the improved growth picture, weaker-than-expected
public investment spending, and decreasing deficits at the central
and local government levels, the general government deficit decreased
to only -0.6% of GDP in 2017, which marks a
significant reduction from the -1.8% of GDP deficit
recorded in 2016. The outlook for public finances for 2018 through
2021 has improved due to the better growth outlook and strengthening employment
growth. That said, Moody's projects the deficit to
widen marginally in 2018, to -0.7% of GDP,
as investment spending will likely pick-up, and to average
-0.6% between 2018 and 2021. Due to continued
primary surpluses of around 0.3% of GDP expected over the
coming five years, Moody's expects general government debt
to fall to below 60% of GDP by 2019, compared to 61.4%
in 2017, and will continue to gradually trend down over the following
years.
Moody's expects real GDP growth to remain largely unchanged in 2018,
at 2.7% before declining to 2.0% in 2019.
This would, however, still be above potential growth,
which the Bank of Finland estimates at around 1.5%,
and the output gap will likely be closed by end of 2019. However,
Moody's projects growth rates to decline towards 1.5%
during the 2020s.
SECOND DRIVER: STRUCTURAL CHALLENGES MEET SIGNIFICANT REFORM COMMITMENT
The declining working age population and ageing-related healthcare
costs pose long-term risks to both growth potential and public
finances. Finland's potential growth is constrained by a
shrinking working age population and declining capital accumulation.
For the period spanning the years 2012 to 2021, Moody's expects
average real GDP growth of only 1.0% in Finland, significantly
below the average median of 2.2% for Aaa-to-Aa2-rated
sovereigns. Unless labour force participation is increased for
instance through elevated immigration, labour supply is expected
to decline and to constrain potential GDP growth.
Finland's 2016 Competitiveness Pact has helped to restore the country's
competitive position. Wage restraint has supported export competitiveness,
as reflected in growing growth contribution from net exports and the return
to a current account surplus of 0.7% of GDP in 2017.
However, the improvement in the current account balance was also
influenced by one-off items in the primary income accounts,
and Moody's expects the current account surplus to move back to
zero over the next three years as imports in relation to capital investment
will increase. In addition, Moody's expects that following
the limited increases during the 2018 wage negotiations the next round
of wage negotiations from late 2019 will likely see stronger increases.
The Finnish labour market suffers from a number of structural weaknesses,
and unemployment rates have fallen only gradually, reaching 8.8%
in the first quarter of 2018; while youth and long-term unemployment
remains comparatively high it is also showing an improving trend.
Still high unemployment reflects a number of inter-related factors
including skills mismatches and limited geographical mobility, as
well as increasing labour force participation. Unemployment benefit
reforms have been implemented in early 2017, while another part
of the unemployment reform aims at improving service delivery, also
focused on youth and integration of immigrants into the work force.
While employment has increased, coming close to the government's
target of 72%, the government has indicated that further
measures are required to increase the employment rate, particularly
among younger people and is considering further reforms in this regard.
Reforms are underway to counter the fiscal impact from rapid ageing.
Following implementation of an additional pension reform which took effect
in 2017, the government has also committed to reforming the social
welfare and healthcare system. The reform will introduce a new
layer of public administration, as the healthcare provision is transferred
from 311 municipalities to 18 counties. In addition, healthcare
services will increasingly be provided by a number of private-sector
and non-profit institutions. The reform, which is
still pending parliamentary approval, will -- when implemented
from 2020 -- help address Finland's fiscal sustainability gap
which according to the Ministry of Finance's calculations stands at around
2.5% of GDP.
WHAT COULD CHANGE THE RATING UP/DOWN
Given the stable outlook, any movement in the rating is unlikely
in Moody's view over the next 12 to 18 months.
Having said that, upward pressure on Finland's ratings would
develop should the pace and impact of the structural reform measures surprise
on the upside, leading to sustainable and more rapid debt-to-GDP
reduction, most likely accompanied by primary surpluses.
In addition, if Moody's were to become convinced that economic
resilience has increased and vulnerability to a renewed severe economic
downturn has decreased this could support a positive rating action.
Downward pressure would develop if the medium-term economic growth
outlook were to worsen materially, if the planned fiscal consolidation
measures and structural economic reforms were to be significantly delayed
or diminished in scope, and if the government's fiscal metrics
were to deteriorate beyond Moody's current baseline expectations.
A combination of the two -- lower growth, and the
governments unwillingness or inability to address the impact of lower
growth on the fiscal position and debt burden would be particularly negative
for the rating.
GDP per capita (PPP basis, US$): 42,408 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 2.1% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.1%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: -1.8%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.3% (2016 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Very High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 24 April 2018, a rating committee was called to discuss the rating
of the Finland, Government of. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutional strength/ framework, have not materially changed.
The issuer's fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Steffen Dyck
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
