Frankfurt am Main, July 24, 2020 -- Moody's Investors Service, ("Moody's") 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 reflects the following key rating factors:
- Despite the sharp real GDP contraction due to the coronavirus
pandemic, Finland's economic strength remains supported by
high and comparatively evenly distributed wealth levels, as well
as the economy's highly educated workforce and strong innovation
capability
- While the coronavirus pandemic will lead to a sharp deterioration
in the government's fiscal balance and debt burden this year,
the deterioration will be broadly similar to that of its peers and the
historically low cost of borrowing mitigates the impact of higher debt
on the government's fiscal strength.
The stable outlook reflects Moody's view that despite the negative
impact from the coronavirus pandemic on the economy and government finances,
the rating remains well supported by the government's strong commitment
to post-crisis fiscal consolidation and structural reforms,
which is reflective of the country's very strong institutional and
governance framework.
In a related rating action, Moody's has today also affirmed the
senior unsecured debt rating of Finnvera plc at Aa1 and the (P)Aa1 rating
assigned to its backed senior unsecured MTN programme. The outlook
remains stable, in line with the sovereign's rating outlook.
The senior debt instruments issued by Finnvera are backed by unconditional
and irrevocable guarantees from the Finnish government.
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.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Aa1 RATINGS
DESPITE A SHARP CONTRACTION THIS YEAR, ECONOMIC STRENGTH SUPPORTED
BY HIGH WEALTH LEVELS AND STRONG INNOVATION CAPABILITY
Despite government measures to soften the impact of the pandemic shock
on the economy, Moody's expects real growth to contract by
6.5% in 2020, followed by a rebound to around 3%
growth in 2021. The recovery in 2021 will be somewhat weaker than
for some Western European peers, and the authorities expect a lasting
negative effect on potential growth which would be only around 1%.
As a result of the sharp contraction, the government's target
of reaching a 75% employment rate (up from the 72% target
achieved by the previous administration at the end of 2018) and increasing
the number of people in employment by a minimum of 60,000 by the
end of 2023 will be harder to achieve.
Nonetheless, Finland's underlying economic strength remains
solid and supportive of the sovereign's Aa1 ratings. Finland
is the 11th largest economy in the EU with a nominal GDP of $269
billion (€241 billion) in 2019. The small population of only
5.5 million people and a very comprehensive social welfare system
contribute to high standards of living and low income disparity.
GDP per capita in purchasing power parity (PPP) terms of around $48,000
in 2019 is the ninth highest in the EU, after peers such as Austria
and Sweden. The comparatively high and evenly distributed per capita
income is supportive of the economy's shock absorption capacity.
Finland also scores highly in global competitiveness rankings and surveys
gauging the economy's innovation capability. A supportive
institutional framework that fosters innovation and the high quality of
the education system that results in a well-educated workforce
are Finland's strongest innovation dimensions according to the various
rankings. The country spends close to 3% of GDP on research
and development, well-above the EU average of 2.2%.
Finland ranks 11th out of 141 countries in the World Economic Forum's
Global Competitiveness Index 4.0, has the highest global
ranking in terms of institutions and macroeconomic stability, and
is among the global top five for skills and quality of the education system,
as well as sophistication and risk profile of the financial system.
The European Commission's European Innovation Scoreboard 2020 classifies
Finland as an innovation leader -- together with Denmark, Luxembourg,
the Netherlands and Sweden. Notably, Finland's scorings have
improved significantly since 2012, reflecting the government's strong
focus on innovation and implementation of supporting policies.
Furthermore, Finland is well-prepared for digitalisation,
and scored number one in the EC's Digital Economy and Society Index for
2020.
DESPITE SIGNIFICANT DETERIORATION, FISCAL STRENGTH IN LINE WITH
PEERS, DEBT AFFORDABILITY REMAINS STRONG
General government debt will rise over the coming years. Moody's
projects it to increase to about 70% of GDP this year and peak
at around 73% of GDP in 2022, up from about 59% in
2019. Despite this increase, Finland's general government
debt burden will continue to compare favorably to close peers such as
Austria. Furthermore, the government debt burden will remain
much lower than for several Aa2- and Aa3-rated Western European
peers such as Belgium, the United Kingdom, or France.
In addition, Finland's debt affordability metrics will remain
very strong, as the sovereign benefits from very low funding costs,
partly due to its euro area membership, and with its benchmark bond
yields closely tracking those of Aaa-rated Germany. The
coupons on government serial bond issuances during 2020 have averaged
less than 0.2%, compared to an average coupon rate
of 0.375% for maturing debt this year. As a result,
Moody's expects the interest-to-budgetary revenue
ratio to remain at historic lows of 1.8% on average for
2020 and 2021, compared to the long-term average of 3.6%
since 1995. Resiliency of its fiscal strength is also supported
by sizable financial assets of close to 8% of GDP as of 2019,
and strong oversight and management of contingent liability risks.
RATIONALE FOR THE STABLE OUTLOOK
Despite the highly negative impact from the coronavirus pandemic on the
economy and government finances, Moody's expects that the
government's strong commitment to fiscal consolidation and structural
reforms will preserve the country's economic and fiscal strength
imbedded in the current rating. This expectation is supported by
Finland's strong institutional and governance framework, which
has contributed to the successful implementation of structural reforms
in areas like pension and labour market in recent years, including
the 2016 competitiveness pact.
The government has early on since the coronavirus shock stressed the need
for fiscal consolidation and debt stabilization and reduction following
2021, with concrete plans to be presented in September, together
with the 2021 budget and revised medium-term fiscal plan.
Moody's is confident that the Finnish government will enact reforms
to strengthen the fiscal and debt dynamics over time.
Finally, the stable outlook also reflects Moody's view that
Finland's susceptibility to event risks arising from its political
landscape, the country's external position and its banking
system is well contained.
ENVIRONMENTAL, SOCIAL, GOVERNANCE CONSIDERATIONS
Environmental considerations currently exert limited influence on Finland's
credit profile, notwithstanding the country's proactive measures
to address climate change. The share of energy from renewable sources
in gross final energy consumption was 41.2% in 2018,
the second highest in the European Union after Sweden and significantly
above the European average of 18%.
Social risks are an important factor that will, however, only
affect Finland's credit profile over the long term, given
that its ageing population poses risks to the country's growth potential,
and therefore also to its fiscal flexibility and the sustainability of
its social security systems. Finland benefits from very low income
inequality and a high quality education system, which is conducive
to social cohesion. Moody's regards the coronavirus outbreak
as a social risk under its ESG framework, given substantial implications
for public health and safety.
Governance considerations are material for Finland's credit profile,
and the country's sound institutions and governance framework is supported
by strong government effectiveness and rule of law, which rank very
high in international surveys, and a demonstrated capacity for fiscal
and monetary policy to effectively manage and absorb shocks.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
WHAT COULD CHANGE THE RATING -- UP
Although unlikely in the near term given the severe impact from the coronavirus
pandemic on Finland's economy and government finances, the Aa1 rating
could come under upward pressure if the pace and impact of structural
reforms -- particularly related to containing ageing-related
spending pressures -- surprised on the upside, leading to a
more favourable debt trajectory beyond 2021, possibly in part due
to a sustained increase in the country's medium-term trend
growth, which is currently expected to be very low.
WHAT COULD CHANGE THE RATING -- DOWN
Conversely, downward rating pressure would develop if the impact
from the coronavirus pandemic were to turn out more lasting than Moody's
currently thinks. Similarly, the rating agency would consider
a negative rating action if fiscal consolidation measures were reversed
and planned structural economic reforms significantly delayed or diminished
in scope, leading to a severe deterioration in the government's
debt burden. A material worsening of the medium-term growth
outlook, combined with an unwillingness or inability to address
the impact of lower growth on public finances would also be credit negative
GDP per capita (PPP basis, US$): 47,975 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 1.1% (2019 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 1.1%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -1.1%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -0.5% (2019 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Economic resiliency: aa2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 21 July 2020, a rating committee was called to discuss the rating
of the Government of Finland. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
institutions and governance strength, 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 Ratings
Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631.
Alternatively, 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 further specification of Moody's key rating assumptions and
sensitivity analysis, see the sections Methodology Assumptions and
Sensitivity to Assumptions in the disclosure form. Moody's
Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security 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.
The ratings have been disclosed to the rated entity or its designated
agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy
for Designating and Assigning Unsolicited Credit Ratings available on
its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Moody's general principles for assessing environmental, social
and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
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/Sub Sovereign
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
