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Rating Action:

Moody's downgrades Finland's rating to Aa1 from Aaa; stable outlook

03 Jun 2016

London, 03 June 2016 -- Moody's Investors Service ("Moody's") has today downgraded Finland's long-term issuer and senior unsecured debt ratings to Aa1 from Aaa. Concurrently, the government's short-term rating of P-1 was affirmed. The outlook has been changed to stable from negative.

The key drivers for downgrading the government bond ratings to Aa1 are:

1. The significant economic challenges facing the Finnish economy and the weak growth that Moody's expects the economy to record over the coming years, which reduces Finland's economic resilience to future shocks.

2. The resulting deterioration in Finland's fiscal position with no material reversal in the upward trend in the public sector debt burden likely in the next five years.

The stable outlook reflects Moody's assessment that further downside risks to Finland's credit profile are limited given the government's commitment to structural reforms and fiscal consolidation, which mitigates the risk of further deterioration in the country's economic strength and the government's balance sheet. Despite the structural challenges facing the country, Finland's credit profile continues to benefit from its very strong institutions, a wealthy, innovative and highly educated workforce and the government's substantial holdings of financial assets which still confer very high fiscal strength despite its recent debt build-up.

In a related rating action, Moody's has today also downgraded the ratings of Finnvera plc to Aa1 from Aaa, including for its MTN programme, in line with the sovereign's ratings. The outlook has been changed to stable from negative. The senior debt instruments issued by Finnvera are backed by unconditional and irrevocable guarantees from the Finnish government. Finnvera's short-term rating has been affirmed at (P)P-1.

Moody's adds that 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.

A full list of affected ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR THE DOWNGRADE TO Aa1

FIRST DRIVER: WEAKENED ECONOMIC STRENGTH WHICH REDUCES RESILIENCE TO SHOCKS

The first driver for the downgrade is the ongoing impact on Finland's resilience to shocks of the structural changes that its economy has undergone in recent years. Finland has experienced, and continues to face, a prolonged period of very weak economic growth. The economy is showing some signs of positive momentum with a return to positive growth in 2015 following three years of recession. However, growth over the next five years will remain weak, with planned reforms insufficiently certain and far-reaching to address the economy's significant structural constraints. Indeed, Moody's estimate of Finland's average growth over 2010-2019 at 0.8% is less than half the median of Aaa rated peers (around 2%). That, together with a higher volatility of growth (3.9% over 2005-2014 versus Aaa median of around 2%), illustrates a level of economic strength, and hence shock absorption capacity, that is no longer consistent with the highest rating.

Finland's GDP fell by 8.3% in 2009, following average growth of 3.2% during 2000-08, with the post-crisis recovery impeded by a recession between 2012 and 2014. This growth shock primarily relates to the decline in the electronics and paper production industries, and to a broader reduction in cost competitiveness, which together contributed to a pronounced fall in Finland's export market share. Furthermore, the process of economic restructuring has led to the migration of labour from the high-productivity industrial sector towards services, which, together with a slowdown in capital investment and adverse demographics from the already declining working age population, will keep potential growth low. According to the European Commission (EC), potential output over the next five years will grow at lower rates than regional peers in the euro area.

The authorities have embarked on a comprehensive programme of economic reform to address the competitiveness issues. They are also pursuing measures to tackle poor labour market outcomes, as illustrated by the rise in long-term unemployment over the past few years. However, the timing and hence the effectiveness of these measures, which in part rely on the outcome of challenging negotiations with social partners to lower labour costs and introduce additional flexibility in labour contracts, is highly uncertain. Equally uncertain is their ability to re-orientate the economy towards new growth drivers. These uncertainties drive Moody's muted growth forecasts over the next several years.

The country's medium- and long-term growth prospect is also challenged by a rapidly ageing population, one of the most challenging demographic trends faced by any European country. The expected 3.3 percentage point decline in Finland's working age population (as a share of total population) by 2020 (compared to 2013), the fifth largest reduction in the EU despite already having one of the smallest shares of its population at working age, impacts on labour supply which has negative consequences for potential growth.

SECOND DRIVER: NO PROSPECT OF A MATERIAL REVERSAL IN UPWARD DEBT TREND

The second driver for the downgrade is the negative impact of Finland's weak economic strength on the general government debt ratio, with no prospect of a material reversal in Finland's rising debt burden in the next five years.

Finland's very strong pre-crisis fiscal metrics, when it posted an average budget surplus of 4.4% during 2006-2008, have weakened markedly and Finland's budget performance is expected to remain significantly weaker than the Aaa-median. In 2014, Finland incurred for the first time a fiscal deficit above the Maastricht threshold of 3% of GDP, although its fiscal performance improved marginally to 2.7% of GDP in 2015. Furthermore, the structural balance has, according to the EC, deteriorated to -1.4% in 2015 from a surplus in 2007 and the EC (in its 2016 spring forecasts) expects this figure to weaken slightly to around -1.5% over the next two years, above its medium-term objective (-0.5% of GDP).

The persistence of fiscal deficits since the crisis, coupled with negative GDP growth, have caused the debt-to-GDP ratio to rise markedly from 34% in 2007. The ratio surpassed 60% in 2015 and Moody's baseline scenario points to a continued but slow uptick in the government's debt burden for the next several years, reaching around 67% by 2018.

The Finnish government is taking steps to address the deterioration in its balance sheet with planned consolidation measures including expenditure cuts. Furthermore, the recently adopted pension reform will help to address Finland's significant age-related spending (the highest in the EU by 2040 according to the EC's 2015 Ageing Report) by lowering the fiscal sustainability gap by around 1 percentage point of GDP. In addition, an ambitious restructuring of healthcare and social services is expected to help address the rising expenditure by municipalities from 2019, although the precise measures are yet to be specified.

If successful, and in the absence of a further growth shock, these measures should arrest the rise in the debt burden over the coming years. Nevertheless, the rise in Finland's debt load has been material and the measures planned to reverse it are not without challenges, particularly in a low-growth environment. Furthermore, the improvements in the overall budget balance will be limited by higher investment to support growth-enhancing reforms such that Moody's does not expect the government's balance sheet to return to its pre-crisis strength in the near term.

Accordingly, Finland's rising debt burden is expected to remain well above the Aaa median in coming years and not decline before 2020 even under an optimistic reform scenario. Finland's very challenging demographic profile will continue to pose a risk to the trajectory of the debt burden in the medium term.

This erodes a key credit strength, which has, to date, supported the assignment of the Aaa rating. Moreover, the increased debt burden needs to be taken in the context of the economic challenges facing the country. Such debt levels can be consistent with a Aaa rating where the sovereign also possesses very high economic strength. In the case of Finland, however, Moody's judges that fiscal prudence and institutional strength, both of which are among the strongest in Moody's sovereign ratings universe, no longer offset its assessment of economic strength which point to a rating within the Aa1-Aa3 rating range.

RATIONALE FOR THE STABLE OUTLOOK

The stable outlook at the new rating level of Aa1 reflects the limited further downside risks to the credit profile given the government's commitment to structural reforms and fiscal consolidation, which mitigates the risk of further deterioration in the country's economic strength and the government's balance sheet beyond what is captured by today's rating action.

Despite the structural challenges facing the country, Finland's credit profile continues to benefit from its very strong institutions and its wealthy, innovative and highly educated workforce. Finland's very high government effectiveness -- which is scored by the Worldwide Governance Indicators above the median of Aaa rated peers -- supports its ability to address its economic challenges over the long term, limiting further downside risks even during a difficult adjustment in the economy. Increased investment is likely to facilitate the gradual improvement in economic growth, driven by large investment projects in the paper industry and increased confidence in the construction and services sectors, with real GDP growth averaging 1% over the next two years, still far below its pre-crisis average growth.

Finland's budget balance will also benefit gradually from the planned €4 billion in expenditure reduction by 2019 which Moody's expects will help the deficit to remain below the 3% threshold. The improvement in the overall fiscal position will be limited by the weak growth outlook as well as by plans to invest in key areas of the economy. Nonetheless, the government's commitment to fiscal consolidation limits the risk of further material erosion in its balance sheet, also supported by substantial holdings of liquid financial assets which still confer very high fiscal strength despite its recent debt build-up. Finland's high debt affordability also mitigates downside risks, as reflected by both a very low gross interest expenditure to GDP of 1.2%, as well as a low gross interest expenditure to revenue ratio of 2.2% in 2015, benefitting from depressed yields in the context of the ECB's quantitative easing policy.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Finland's government bond rating could develop should the pace and impact of the economic reform and fiscal measures surprise to the upside, leading to sustainably higher economic growth rates and a rapid debt-to-GDP reduction.

Conversely, downward pressure could develop if the 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 or ambition, and if the government's fiscal metrics were to deteriorate beyond Moody's current expectations. A combination of the two -- lower growth, and the government's unwillingness or inability to address the impact of lower growth on the fiscal position and debt burden -- would be particularly significant for the rating.

LIST OF AFFECTED RATINGS

Issuer: Finland, Government of

..Downgrades:

....LT Issuer Rating, Downgraded to Aa1 from Aaa

....Senior Unsecured Regular Bond/Debenture, Downgraded to Aa1 from Aaa

....Senior Unsecured MTN, Downgraded to (P)Aa1 from (P)Aaa

....Senior Unsecured Shelf, Downgraded to (P)Aa1 from (P)Aaa

..Affirmations:

....ST Issuer Rating, Affirmed at P-1

..Outlook Actions:

....Outlook, Changed To Stable From Negative

Issuer: Finnvera plc

..Downgrades:

....BACKED Senior Unsecured Regular Bond/Debenture, Downgraded to Aa1 from Aaa

....BACKED Senior Unsecured MTN, Downgraded to (P)Aa1 from (P)Aaa

..Affirmations:

....BACKED Other Short Term, Affirmed at (P)P-1

..Outlook Actions:

....Outlook, Changed To Stable From Negative

GDP per capita (PPP basis, US$): 41,120 (2015 Actual) (also known as Per Capita Income)

Real GDP growth (% change): 0.5% (2015 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): -0.2% (2015 Actual)

Gen. Gov. Financial Balance/GDP: -2.7% (2015 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: 0.1% (2015 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 31 May 2016, 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 remained weak relative to peers. The issuer's fiscal or financial strength, including its debt profile, has materially decreased. An analysis of this issuer, relative to its peers, indicates that a repositioning of its rating would be appropriate.

The principal methodology used in these ratings was Sovereign Bond Ratings published in December 2015. Please see the Ratings 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.

Evan Wohlmann
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's downgrades Finland's rating to Aa1 from Aaa; stable outlook
No Related Data.
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