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Rating Action:

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

29 Jul 2022

Paris, July 29, 2022 -- 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 Prime-1, as well as the senior unsecured medium-term note (MTN) programme rating and senior unsecured shelf ratings of (P)Aa1 have been affirmed. The outlook remains stable.

Today's rating action reflects the following key rating factors:

1. Finland's competitive and diversified economy has proven resilient to heightened geopolitical risks;

2. A strong institutional and governance framework supports credit fundamentals; and

3. Strong debt affordability mitigates the risk of elevated debt burden.

The stable outlook reflects Moody's view that the economy and government finances are resilient to the impact of Russia's invasion of Ukraine. The rating remains well supported by the country's track record of fiscal prudence 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 backed senior unsecured debt ratings of Finnvera plc at Aa1, the P-1 ratings assigned to its backed commercial paper programme, and the (P)Aa1 rating assigned to its backed senior unsecured MTN programme. The outlook remains stable, in line with the sovereign's outlook. The senior debt instruments issued by Finnvera are backed by unconditional and irrevocable guarantees from the Finnish government.

Finland's local- and foreign-currency ceilings remain unchanged at Aaa. For euro area countries, a six-notch gap between the local currency ceiling and local currency rating as well as a zero-notch gap between the local currency ceiling and foreign currency ceiling is typical, reflecting benefits from the euro area's strong common institutional, legal and regulatory framework, as well as liquidity support and other crisis management mechanisms. It is also in line with Moody's view of de minimis exit risk from the euro area.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468236 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

RATIONALE FOR AFFIRMING THE Aa1 RATINGS

FIRST DRIVER: FINLAND'S COMPETITIVE AND DIVERSIFIED ECONOMY HAS PROVEN RESILIENT TO HEIGHTENED GEOPOLITICAL RISKS

The direct and indirect economic effects of Russia's invasion of Ukraine have prompted Moody's to revise down its growth forecasts to 1.2% in 2022 and 0.8% in 2023 (from 3% and 1.5%, respectively earlier this year). However, Moody's sees these negative economic consequences as being more cyclical than structural.

In fact, in spite of Finland's geographic proximity to Russia, it is no longer materially exposed to Russia-related energy risks. Finland's energy mix is not reliant on gas, and it now receives all gas supplies from the Balticconnector gas pipeline between Finland and Estonia that connects the two countries' gas grids. Finland used to import electricity from Russia, but it now imports from Sweden instead and a new nuclear reactor is expected to open this autumn, which will make Finland fully self-sufficient in electricity.

Nevertheless, Finland's underlying economic strength is unchanged and supportive of the sovereign's Aa1 ratings. Finland is the 12th largest economy in the EU with a nominal GDP of $269 billion (EUR240 billion) in 2019. Although the population is small, at only 5.5 million people, a very comprehensive social welfare system contributes to high standards of living and low income disparity. GDP per capita in purchasing power parity (PPP) terms of around $53,757 in 2021 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 scores highly in competitiveness rankings. A supportive institutional framework that fosters innovation and the high quality of the education system that results in a well-educated workforce are its strongest innovation dimensions according to the various rankings, such as the WEF GCI 4.0, the European Innovation Scoreboard (innovation leader), and the European Digital Economy and Society Index (2nd). The large share of public expenditure spent on education (5.9% of GDP in 2020) indicates its policy importance in Finland and exceeds the average figure for the euro area (4.9%) and the EU (5%). Although PISA scores have deteriorated over the last decade, they still place Finland among the top nations. Moreover, although direct government-related research and development (R&D) spending is low relative to GDP, spending in the higher education sector, which includes private funding, is high at 0.7% of GDP compared with 0.5%  in the EA and EU.

Finland's overall R&D spending, 2.9% of GDP in 2020, exceeded the EU average of 2.3% but was almost one percentage point lower than its peak in 2009, reflecting a gradual decline in business spending on R&D. That said, the business sector in Finland spent over 2% of GDP on R&D expenditure over the last decade, well above the OECD average. The government has set out measures to offset the gradual decline in research and innovation that was registered over the last decade after the setback of the IT sector. The aim is to raise the share of RDI expenditure in Finland to 4% of GDP by 2030 and to increase the ambition level of RDI activities.

As is the case in many advanced economies, demographics are an important challenge for Finland. While the employment rate for people aged 55-64 is 68% in Finland, well above the Euro Area average at 61%, it is much lower than Nordic peers such as Sweden (77%), Denmark (72%), and Norway (75%). To address this, the government abolished the so-called unemployment tunnel last year, which is one of the early retirement pathways in Finland. Previously, individuals older than 59 benefitted from 100 working days longer entitlement to unemployment benefits than other age groups and can have their unemployment benefits extended from age 61 until they start drawing old-age pension. In addition, as part of its pension reforms, Finland started to increase the minimum retirement age by three months per year in 2018.

The phasing out of the additional days is part of a package that intends to promote employment among older people with the aim to increase employment by around 8,300 people by the end of 2029, of which 7,900 people employed due to the abolition of the additional days.

SECOND DRIVER: A STRONG INSTITUTIONAL AND GOVERNANCE FRAMEWORK SUPPORTS CREDIT FUNDAMENTALS

Finland has some of the strongest institutions in Moody's rated universe, which underpins the affirmation of the Aa1 rating; Moody's considers these institutional strengths to be a governance factor under its ESG framework. They have dealt effectively with a succession of economic shocks, from the global financial crisis, though the euro area sovereign debt crisis, through the pandemic, and now the impact of Russia's invasion of Ukraine. The government's commitment to prudent and forward-looking policies and structural reforms is strongly supported by the very high-quality institutional framework – Finland scores within the top-5 globally on a range of relevant international surveys. These strong institutions and effective policymaking and implementation also are an important factor for very limited exposure to event risks. The strength of the institutional framework is also visible from the very successful handling of the pandemic, with Finland having comparatively low numbers of cases and deaths.

Policymaking is generally characterised by a consensus-driven approach. Across the political spectrum there is a consensus in favour of maintaining fiscal prudence and maintaining fiscal reforms. Following the severe structural economic shock in the wake of the global financial crisis, the Finnish authorities implemented the Competitiveness Pact, which aimed to restore economic competitiveness and successive governments have worked to encourage greater participation of older workers in the labour force.

THIRD DRIVER: STRONG DEBT AFFORDABILITY MITIGATES THE RISK OF ELEVATED DEBT BURDEN

Finland's debt burden stood at 65.8% of GDP in 2021. Although Finland's debt burden is considerably lower than that of Aa1 peer Austria, which has a debt load totalling 82.8% of GDP, Moody's expects the two countries' debt burdens to converge in the coming years as Finland's debt burden will be broadly stable while Austria's will fall rather rapidly. Finland's debt burden is also relatively low compared to some Aa-rated Euro Area peers such as Aa2 France (112.5%) and Aa3 Belgium (108.4%) as well as the United Kingdom (also rated Aa3, with debt at 102.8%). Finnish debt is broadly stable; in Moody's current baseline, Moody's expects debt to GDP ratio to increase by one percentage point of GDP by 2025 relative to the 2021 level. The debt trajectory is also relatively resilient to growth, fiscal, and interest rate shocks.

No consolidation efforts are expected in the short term due to next year's election and increased spending pressures stemming from heightened geopolitical risks. So far tax revenues have been surprisingly strong, however, the consequences of Russia's invasion of Ukraine is expected to have a negative impact on revenues through lower activity and the tax deduction for higher gasoline prices. The influx of refugees, increased defence spending and subsidies for firms will also put upward pressure on expenditure. The government is expecting the discretionary spending related to the military conflict in Ukraine to total 7 billion euro (2.8% of GDP). In addition, a EUR 2 billion loan and guarantee scheme to support small and medium enterprises ('SMEs') and large companies in the context of Russia's invasion of Ukraine. Under this measure, the aid will take the form of (i) loans with subsidised interest rates; and (ii) guarantees on loans granted by Finnvera. Moreover, the government has announced would increase its military spending by more than two billion euros (0.8% of GDP) over the next four years.

That said, the debt to GDP ratio will benefit from high nominal growth this year. Over the medium to long term Moody's expects the debt burden to continue to marginally increase in the absence of action to deal with ageing-related costs. The fiscal plan for 2023-2026 restated the government's objective to get Finland's general government finances in balance in 2023 given normal global economic circumstances and to achieve a reversal in the upward trend of the public debt ratio in the mid-2020.

Debt affordability remains very strong, as Finland benefits from EA membership, with benchmark bond yields closely tracking those of Germany. Interest payments to GDP in Finland in 2021 were 0.49%, compared with 0.53% and 0.56% for the Aa and Aaa-median respectively. Interest payments to revenues were 0.93%, compared with 1.95% for the Aa-median and 1.17% for the Aaa-median. Moreover, Moody's expects this gap to stay over the forecasting period as it will take a number of years for the rising interest rates to have an impact on the Finnish debt as is the case with other highly rated euro area peers.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook reflects Moody's view that the economy and government finances are resilient to the impact of Russia's invasion of Ukraine. The rating remains well supported by the country's track record of fiscal prudence and structural reforms, which is reflective of the country's very strong institutional and governance framework.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental considerations currently exert limited influence on Finland's credit profile, notwithstanding the country's proactive measures to address climate change; this is reflected in its E-2 issuer profile score. The share of energy from renewable sources in gross final energy consumption was 43.8% in 2020, the second highest in the European Union after Sweden and significantly above the European average of 22.1%.

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. These factors are reflected in its S-2 issuer profile score. Finland benefits from very low income inequality and a high quality education system, which is conducive to social cohesion.

Finland's very strong institutions and governance are reflected in a positive G issuer profile score (G-1). 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.

GDP per capita (PPP basis, US$): 53,757 (2021) (also known as Per Capita Income)

Real GDP growth (% change): 3% (2021) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 3.2% (2021)

Gen. Gov. Financial Balance/GDP: -2.6% (2021) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.9% (2021) (also known as External Balance)

External debt/GDP: 197% (2021)

Economic resiliency: aa2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 26 July 2022, 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 institutions and governance strength, have not materially changed. The issuer's fiscal or financial strength, including its debt profile, has not materially changed.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT COULD CHANGE THE RATING—UP

Finland's Aa1 rating could come under upward pressure if Moody's were to see a sustained improvement in the debt trajectory over the coming decade. This could be accompanied by favourable surprises to the pace and impact of structural reforms—particularly related to labour force participation of older workers and the level of ageing-related spending. These reforms could result in an improvement in the country's medium- to long-term growth potential.

WHAT COULD CHANGE THE RATING—DOWN

Downward rating pressure would develop if fiscal consolidation measures were reversed and planned structural economic reforms significantly delayed or diminished in scope. These actions could lead to a deterioration in growth potential and the government's debt burden. A material worsening of the medium-term growth outlook, combined with an unwillingness of inability to address the impact of lower growth on the public finances would be credit negative.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://ratings.moodys.com/api/rmc-documents/63168. Alternatively, please see the Rating Methodologies page on https://ratings.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

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. For additional information, please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website https://ratings.moodys.com. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings.  Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL468236 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• EU Endorsement Status

• UK Endorsement Status

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Lead Analyst

• Releasing Office

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 on https://ratings.moodys.com/rating-definitions.

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 issuer/deal page for the respective issuer on https://ratings.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.

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://ratings.moodys.com/documents/PBC_1288235.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

Please see https://ratings.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 issuer/deal page on https://ratings.moodys.com for additional regulatory disclosures for each credit rating.

Sarah Carlson, CFA
Senior Vice President
Sovereign Risk Group
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Alejandro Olivo
MD-Sovereign/Sub Sovereign
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's France SAS
96 Boulevard Haussmann
Paris, 75008
France
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
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