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Rating Action:

Moody's affirms Finland's Aa1 ratings; outlook remains stable

27 Apr 2018

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

No Related Data.
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