June 22 - Fitch Ratings has affirmed Finland’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AAA’. The Outlook is Stable. Fitch has simultaneously affirmed Finland’s Country Ceiling at ‘AAA’ and Short-term foreign currency rating at ‘F1+'.
Finland’s ratings are underpinned by sound macroeconomic and public finance management, a high value-added economy and positive net international investment position. Finland’s credit profile benefits from exceptionally strong governance and political and social stability, which is also reflected in its impeccable debt service record. These fundamental credit strengths, especially the strength of public finances and fiscal credibility, have cushioned Finland’s ‘AAA’ status from the turmoil in the eurozone.
The Stable Outlook reflects Fitch’s assessment that Finland’s ‘AAA’ status remains robust to the eurozone crisis despite the additional government debt incurred by Finland’s contribution to eurozone rescue funds and ‘bail-out’ programmes in 2011. The banking sector is sound and has limited exposures to troubled eurozone economies limiting the macro-financial risks arising from the crisis. Nonetheless, a dramatic worsening of the eurozone crisis could have a severe adverse impact on Finland’s small and open economy and potentially bring downward pressure on the rating.
Over the medium to long term, Finland faces a number of challenges as the economy rebalances from manufacturing towards services and faces intensified competitive pressures. Reforms that would raise participation rates and productivity growth are also needed to prevent a gradual decline in the economy’s growth potential. Finland is well-placed to absorb the fiscal costs of an aging population relative to its peers, though further fiscal consolidation is required to secure public finances over the longer-term. The rise in private credit and household indebtedness is not yet a material concern from a sovereign credit perspective but is elevated by historical standards. Further significant rises in private debt and credit could act as a further drag on the domestic economy if the housing market were to suffer a sharp downturn.
The global financial crisis in 2008 served to accelerate and bring to the fore these long term challenges. With GDP falling by over 8% in 2009, the economy is still recovering from the steep loss in output, registering a robust 3.7% recovery in 2010 and another 2.9% in 2011. Fitch projects growth of 0.7% this year, weighted down by slowing exports in the face of weak demand from Finland’s main trading partners.
Finland’s external position weakened in 2011, with the current account registering a deficit for the first time since 1993. The deterioration resulted from both cyclical and structural factors, with the latter being more predominant as the economy shifts away from manufacturing to service industries.
Specifically, Nokia (‘BB+'/Negative), which contributes to around 1% of Finnish GDP, has experienced significant market share erosion and lower profit margins in recent years. While Fitch does not consider the weakening financial position of Nokia to pose material risks to Finland’s ‘AAA’ sovereign rating, it does underscore the broader structural challenges and adjustment facing the ICT and manufacturing sectors.
Public finances remain robust compared to peers, supported by a strong track record of fiscal prudence. At 48.5% of GDP in 2011, general government debt is in line with the ‘AAA’ median while the social security (primarily pension) funds have a positive consolidated asset position equivalent to around 70% of GDP. The strength of public finances is a key rating strength despite the more pressing issue of population aging relative to its ‘AAA’ peers. The constraints on its financing flexibility that could arise in the advent of a negative external shock are mitigated by its unblemished debt service record and fiscal credibility. Finland’s fiscal credibility is an important rating factor that would be further enhanced by the realisation of a balanced central government budget by 2015 as targeted by the government.