Invest in Finland

Fitch Affirms Finland's Sovereign Ratings at 'AAA' with a Stable Outlook

Fitch Ratings has affirmed Finland's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'AAA' respectively with a Stable Outlook. The agency has also affirmed Finland's Country Ceiling at 'AAA', and the Short-term IDR at 'F1+'.

"The most severe post World War II global financial crisis and recession are placing heavy strains on high-grade sovereigns. Finland has not been immune from this turn of events. Nonetheless, as a small, cautiously managed 'AAA'-rated sovereign, Finland enters recession from a position of strength. Finland's sovereign creditworthiness is robust relative to peers, the financial sector has made no demands on public finances to date, and leverage in the non-bank private sector is low," says Paul Rawkins, Senior Director in Fitch's London-based sovereign rating team.

Finland's 'AAA' status is underpinned by sound public finances, a solid external position, high income per capita (USD51,000 at market exchange rates, on a par with the 'AAA' median), demonstrable political and social stability and an impeccable debt service record. A track record of superior growth and inflation relative to the euro area and 'AAA' medians testifies to a robust macroeconomic policy framework and a high value-added, export-oriented economy.

The country's public finances are a key rating strength. A decade of fiscal consolidation has delivered some of the strongest public finance metrics in the 'AAA' universe and the second lowest public debt in the euro area. General government debt has contracted from a peak of 60% of GDP in the early 1990s to 34% in 2008, assuaging much of the cost of the 1990-93 domestic financial crisis. Gross public debt reduction would have been greater were it not for the fact that social security surpluses (which have accounted for the greater part of general government surpluses) have been channelled into a build up of assets in public sector pension funds. As a result, Finland is one of only two 'AAA'-rated sovereigns to enjoy net general government creditor status, estimated by Fitch at 8.1% of GDP in 2007.

Fitch acknowledges that in some respects Finland has less room for manoeuvre than some of its larger 'AAA' peers, particularly in the current global environment. The relatively specialised structure of its economy, based as it is on capital goods and electronics, renders it more vulnerable to shocks: manufacturing orders were down 38% year-on-year in January and Fitch expects the economy to contract by 3-4% in 2009. The knock-on effect to public finances, Finland is set to incur its first general government deficit in a decade in 2009, is also problematic insofar as it coincides with a sharp decline in the population of working age and a long upturn in age-related public expenditure.

However, Fitch believes that while these factors potentially limit Finland's capacity to adjust, there are some important counterbalances working in its favour. Membership of the euro area gives Finland access to the euro-wide capital market for fiscal funding, shields it from balance of payments/exchange rate pressures and allows Finnish banks access to ECB liquidity facilities. Although its government bond market is small and net public borrowing will rise sharply this year, fiscal funding in a euro area context looks relatively undemanding and should continue to benefit from an established debt issuance pattern of 5- and 11-year liquid benchmark bonds. Moreover, given the sovereign's strong starting position and a relatively trouble-free financial sector, Fitch expects general government debt/GDP to remain below the 10-year 'AAA' median of 51%.

There is a risk that a prolonged global downturn weakens public finances further, while adverse demographic trends and slowing productivity growth could hamper longer term growth and competitiveness. Restoration of general government surpluses of 4-5% of GDP over the medium term will be key to addressing the demographic challenge and an important support for the rating. The maintenance of an open economy to trade and investment, high levels of education and a strong record of innovation should continue to underpin Finland's high value-added economy.

Contacts: Paul Rawkins, London, Tel: +44 (0) 20 7417 4239; Andres Klaar: +44 (0) 20 7417 6284.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, www.fitchratings.com. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.