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.