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Fitch Rating has affirmed Finland’s Long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘AAA’, both with Stable Outlooks. The agency has also affirmed the Short-term foreign currency IDR at ‘F1+’ and the Country Ceiling at ‘AAA’.
In a statement the ratings agency said that the affirmation reflects the following factors:
– Finland’s rating is underpinned by a combination of strong governance, high income per capita, a positive net international investment position and an impeccable debt service record.
– Finland does not currently suffer from any major macroeconomic imbalances. The current account slipped into a deficit in 2011 for the first time since 1993 but at below 2% of GDP is not excessive. The rise in private credit and household indebtedness is elevated by historical standards but is not yet a material concern from a sovereign credit perspective.
– Finalnd has a solid track record in fiscal management. Finland entered the global financial crisis after recording budgetary surpluses for over a decade – averaging slightly below 4% of GDP from 1998 to 2008. It has also not spent time under the excessive deficit procedure unlike its eurozone peers Germany (‘AAA’/Stable) and the Netherlands (‘AAA’/Negative). The budgetary position has been also supported by a stable and high revenue base and low interest payments as a share of government revenue.
– A gross general government debt (GGGD) to GDP ratio of 53.6% in 2012 is also broadly in line with the ‘AAA’ median and provides Finland with some scope to absorb unexpected shocks, albeit the ratio is forecast to remain on an upward trend. While official projections show that without additional measures the government will not meet its 2015 fiscal goals Fitch expects the debt to GDP ratio to peak below 65% of GDP and remain consistent with a ‘AAA’ rating.
– With pension fund assets of nearly 80% of GDP the government has a net asset position, one of only six countries in the OECD and second only to Norway when measured relative to GDP. This is a mitigating factor against the rising costs of an ageing population over the short to medium term. However, the impact of demographic changes on public finances will accelerate from 2020. The on-going adjustment of the economy to the shocks in the electronics and paper industries has lowered future growth potential, further increasing the challenge of restoring the long run sustainability of public finances.
– The banking sector has not needed any direct financial support from the sovereign during the crisis. Support across the other eurozone ‘AAA’ countries has averaged over 5% of GDP. The Finnish banking industry is seen as stable and exposure to risks in countries undergoing adjustment is limited, as are non-performing loans.
– Risks emanating from contingent liabilities from the eurozone crisis have eased, with the potential impact on Finland’s public finances from regional crisis management mechanisms having reduced. This reflects the recent strengthening of eurozone governance measures, including the implementation of the EU ‘two-pack’ regulation, which has enshrined fiscal consolidation in national economic policies. The ECB’s Outright Monetary Transactions programme – although untested – has significantly eased some of the tail risks for the eurozone outlook. However, Fitch believes the eurozone crisis is not yet over and will require further country-level fiscal and structural adjustment, greater progress towards a banking union and a broad-based economic recovery across the currency union.
