Government of Finland – Aa1 stable · Associate Analyst [email protected] Dietmar Hornung...

SOVEREIGN AND SUPRANATIONAL

ISSUER IN-DEPTH30 July 2020

RATINGS

FinlandForeign

CurrencyLocal

Currency

Gov. Bond Rating Aa1/stable Aa1/stable

Country Ceiling Aaa Aaa

Bank Deposit Ceiling Aaa Aaa

TABLE OF CONTENTSOVERVIEW AND OUTLOOK 1CREDIT PROFILE 2Economic strength score: a2 2Institutions and governance strengthscore: aaa 8Fiscal strength score: aa3 12Susceptibility to event risk score: a 18ESG considerations 23Scorecard-indicated outcome 24Comparatives 25DATA, CHARTS AND REFERENCES 26

Contacts

Steffen Dyck +49.69.70730.942VP-Sr Credit [email protected]

Ellen Kockum +49.69.70730.922Associate [email protected]

Dietmar Hornung +49.69.70730.790Associate Managing [email protected]

Yves Lemay +44.20.7772.5512MD-Sovereign/Sub [email protected]

Government of Finland – Aa1 stableAnnual credit analysis

OVERVIEW AND OUTLOOKThe credit profile of Finland reflects the country's knowledge-based economy and stronginnovation capabilities; improved competitiveness since 2015, reflected in a recovery inexport market share; a strong commitment to fiscal discipline and structural reforms; a stableand consensus-based political system; and a very strong institutional framework.

The expected sharp economic contraction and significant deterioration in Finland's fiscal andgovernment debt metrics in 2020 as a result of the coronavirus pandemic pose an additionalcredit challenge, on top of long-term fiscal sustainability pressures and weak potentialgrowth stemming from an ageing population. The coronavirus pandemic's implications forhigh household debt and financial stability are a further credit challenge.

The stable outlook reflects our view that the rating remains well supported by thegovernment’s strong commitment to post-crisis fiscal consolidation and structural reforms,despite the negative impact of the coronavirus pandemic on the economy and governmentfinances. Our view is supported by Finland’s strong institutional and governance framework,which has contributed to the successful implementation of structural reforms in areas likepensions and the labour market in recent years, including the 2016 competitiveness pact.

Finland's credit profile is unlikely to come under upward pressure in the near term giventhe severe effects of the coronavirus pandemic on the economy and government finances.However, we would consider upgrading the rating if the debt trajectory beyond 2021 wereto become more favourable as a result of faster and more ambitious structural reforms and asustained increase in medium-term trend growth, which we currently forecast to be very low.

Downward rating pressure would develop if the impact of the coronavirus pandemic wereto last longer than we currently expect. Similarly, we would consider a negative ratingaction if fiscal consolidation measures were reversed and planned structural economicreforms significantly delayed or diminished in scope, leading to a severe deterioration inthe government's debt burden. A material worsening of the medium-term growth outlook,combined with an unwillingness or inability to address the impact of lower growth on publicfinances would also be credit negative.

This credit analysis elaborates on Finland’s credit profile in terms of economic strength,institutions and governance strength, fiscal strength and susceptibility to event risk, the fourmain analytic factors in our Sovereign Ratings Methodology.

http://www.surveygizmo.com/s3/1133212/Rate-this-research?pubid=PBC_1236365

https://www.moodys.com/credit-ratings/Finland-Government-of-credit-rating-278070

https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631

MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL

CREDIT PROFILEOur determination of a sovereign’s government bond rating is based on consideration of four rating factors: economic strength,institutions and governance strength, fiscal strength and susceptibility to event risk. When a direct and imminent threat becomes aconstraint, that can only lower the scorecard-indicated outcome. For more information, please see our Sovereign Ratings Methodology.

Economic strength score: a2

Scale

aaa

aa1

aa2

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a1

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baa1

baa2

baa3

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b1

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+ Final Initial -

Factor 1: Sub-scores

weight 35%

Economic strength evaluates the economic structure, primarily reflected in economic growth, the scale of the economy and wealth, as well as in

structural factors that point to a country’s long-term economic robustness and shock-absorption capacity. Adjustments to the economic strength

factor score most often reflect our judgement regarding the economy's flexibility, diversity, productivity and labour supply challenges.

Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score will

appear in the table above.

Factor 1: Overall score

Score for Finland Median of countries with Aa1 ratingFinland a2

weight 30%weight 25% weight 10%

SCALE OF THE ECONOMY NATIONAL INCOME

Average real GDP (% change) Volatility in real GDP growth (ppts) Nominal GDP ($ bn) GDP per capita (PPP, Intl$)

GROWTH DYNAMICS

aaa

aa

a

caa

ca

baa

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b

Finland's high wealth levels, highly skilled labour force and strong institutional support for innovation underpin our “a2” assessment ofeconomic strength. The country's knowledge-based economic model results in high rankings on global competitiveness indexes thatfurther support our assessment, as they reflect its capacity to absorb shocks. These strengths are balanced against the economy's smallsize compared with the peer group median and its high level of openness, which make it vulnerable to external shocks and underlieits elevated growth volatility over the past decade. Sovereigns sharing an “a2” assessment of economic strength include Austria (Aa1stable), Belgium (Aa3 stable) and Japan (A1 stable).

Exhibit 1

Finland a2 Median Belgium Austria Japan Kuwait DenmarkCzech

Republic

Aa1/STA Aa3/STA Aa1/STA A1/STA Aa2/RUR Aaa/STA Aa3/STA

Final score a2 a2 a2 a2 a2 a1 a3

Initial score a3 a2 a2 a2 baa2 a2 a2

Nominal GDP ($ billion) 269.3 610.7 529.6 446.3 5,079.8 150.5 347.0 250.7

GDP per capita (PPP, Intl$) 47,974.7 47,974.7 49,528.9 53,558.4 45,546.2 66,386.7 53,881.9 38,833.8

Average real GDP (% change) 1.1 1.3 1.0 1.3 0.4 1.1 1.6 2.5

Volatility in real GDP growth (ppts) 1.7 1.7 0.7 0.9 1.3 4.0 0.9 1.9

Peer comparison table factor 1: Economic strength

Sources: National authorities, IMF and Moody's Investors Service

2 30 July 2020 Government of Finland – Aa1 stable: Annual credit analysis


https://www.moodys.com/credit-ratings/Austria-Government-of-credit-rating-76100

https://www.moodys.com/credit-ratings/Belgium-Government-of-credit-rating-100220

https://www.moodys.com/credit-ratings/Japan-Government-of-credit-rating-423746


A wealthy and diversified economy

Finland is the 12th largest economy in the European Union (EU, Aaa stable), with nominal GDP of $269 billion (€241 billion) in 2019.Its small population of just 5.5 million and comprehensive social welfare system contribute to high standards of living and low incomedisparity. GDP per capita in purchasing power parity (PPP) terms of around $48,000 in 2019 is the ninth highest in the EU after peerssuch as Austria and Sweden (Aaa stable).

As Exhibit 2 shows, Finland's economy is relatively well-diversified. Services accounted for 69% of gross value-added (GVA) in 2019,followed by manufacturing (17%), construction (7%) and primary sectors (3%). The manufacturing industry's share of GVA fell frommore than 25% before the 2008-09 global financial crisis, reflecting a profound structural change in Finland’s key export industries.Rapid technological change in the mobile (cellular) phone industry affected the electronics sector, while the wood and paper productssector suffered a demand shock from increased digitalisation.

As a result, Finland's economic structure has reoriented toward services, and the traditional electronics and forest industries haverestructured. In addition, new sectors, such as health technology, are gaining ground. This relative diversification is also evident in thecomposition of exports. Forty-two percent of Finland's total goods exports consist of high and medium-high technology products,underscoring its strong competitiveness.

Exhibit 2

Industry's share of gross value-added has fallen, offset bycommercial and public services

Exhibit 3

Finland spends more on education and research and developmentthan the EU average% GDP, 2018

0%

20%

40%

60%

80%

100%

2000 2019

Industry (excl. construction) Agriculture, Forestry & Fishing

Construction Trade, Travel, Accomodation & Food

Information & Communication Financial Insurance

Real Estate Public Administration, Education & Social Work

Professional, Science & Tech Arts, Entertainment & Recreation

Sources: Eurostat and Moody's Investors Service

0

1

2

3

4

5

6

7

8

Total expenditure on R&D General government expenditure on education


Strong focus on innovation and future skills education supports non-cost competitiveness

Finland scores highly in competitiveness surveys, which identify a supportive institutional framework that fosters innovation andthe high quality of the education system, resulting in a well-educated work force. The World Economic Forum's (WEF) GlobalCompetitiveness Index 4.0 for 2019 ranked Finland 11th out of 141 countries. It also ranked Finland first in terms of institutions andmacroeconomic stability and among the top five countries globally in the categories of skills and quality of the education system, aswell as sophistication and risk profile of the financial system.

Finland also performed strongly in the WEF's Readiness for the Future of Production Report 2018, both in terms of production structure(14th out of 100 countries) and drivers of production (11th). This assessment is echoed by the European Commission's (EC) EuropeanInnovation Scoreboard 2020, which classifies Finland as an innovation leader based on 2019 data, along with Denmark (Aaa stable),Luxembourg (Aaa stable), the Netherlands (Aaa stable) and Sweden. Finland's scores have improved significantly since 2012 but alsocompared with 2018, reflecting the government's focus on innovation and implementation of supporting policies. Finland is also well-prepared for digitalisation and again ranked first in the EC's Digital Economy and Society Index for 2020.

Although direct government-related research and development (R&D) spending is low relative to GDP, spending in the highereducation sector, which includes private funding, is substantial (see Exhibit 3). Finland's overall R&D spending of 2.8% of GDP in


https://www.moodys.com/credit-ratings/European-Union-credit-rating-600049532

https://www.moodys.com/credit-ratings/Sweden-Government-of-credit-rating-730900

http://reports.weforum.org/global-competitiveness-report-2019/

http://reports.weforum.org/global-competitiveness-report-2019/

http://reports.weforum.org/country-readiness-for-future-of-production/

https://ec.europa.eu/docsroom/documents/41941/attachments/1/translations/en/renditions/native

https://ec.europa.eu/docsroom/documents/41941/attachments/1/translations/en/renditions/native

https://www.moodys.com/credit-ratings/Denmark-Government-of-credit-rating-230700

https://www.moodys.com/credit-ratings/Luxembourg-Government-of-credit-rating-455785

https://www.moodys.com/credit-ratings/Netherlands-Government-of-credit-rating-543005

https://ec.europa.eu/digital-single-market/en/desi


2018 was above the EU average of 2.2% but one percentage point lower than its highest level in 2009, reflecting a gradual decline inbusiness spending on R&D.

The government will allocate a total of €2 billion to R&D activities in 2020, resulting in a 3.4% increase in government budgetappropriations for R&D compared with 2019, the second highest increase since 2010. Moreover, supporting education is a key priority,reflected in education's large share of public expenditure of 5.5% of GDP, higher than both the average figure for the euro area (4.5%)and the EU (4.7%).

Coronavirus pandemic will cause a deep recession in 2020

While Finland has been less affected by the coronavirus pandemic than other countries (it had recorded only 134 confirmed casesand six coronavirus-related deaths per 100,000 people as of 29 July, measures to contain the virus' spread have caused domesticconsumption to fall sharly. Combined with a decline in exports and private investment, we estimate that real GDP will contract by6.5% this year before growing by 3.1% in 2021. The economy had already been showing signs of deceleration in 2019, when real GDPgrowth slowed to 1.1% because of the slowdown in the euro area, which grew by 1.2%.

The full impact on private consumption of Finland's measures to contain the coronavirus was not felt until April, when wholesale andretail trade turnover fell by over 7% from the year-earlier period, followed by a 5% decline in May. However, consumption recoveredsomewhat in May and online commerce was higher than normal during the period when the most severe containment measures werein effect.

The services sector, which accounts for almost 70% of Finland's total output, was particularly hard-hit (see Exhibit 4), and willtherefore have the greatest impact on GDP. Accommodation and food services activities fell by almost 70% in April, followed by arts,entertainment and recreation activities, which fell by more than 40% (see Exhibit 5)

Exhibit 4

Economic activity fell sharply in April, driven by a fall in theservices sectorTrend indicator of output, annual % change in volume (working-dayadjusted)

Exhibit 5

Accommodation and food service activities were most affectedAnnual % change in service activities (working-day adjusted) in May

-10

-5

0

5

10

15

20

Services Agriculture, forestry and fishing

Secondary production Total activity

Sources: Statistics FInland and Moody's Investors Service

-67.5

-40.4

-28.1

-14.3

-14.3

-6.8

-0.9

0.0

-17.5

-67.6

-26.2

-11.3

-7.1

1.4

-1.3

-14.7

-75 -65 -55 -45 -35 -25 -15 -5 5

Accommodation and food service activities

Arts, entertainment and recreation

Transportation and storage

Other service activities

Administrative and support services activities

Professional, scientific and technical activities

Information and communication

Real estate activities

Total service activities

Volume Turnover

Sources: Statistics Finland and Moody's Investors Service

At the same time, the collapse in global demand and disruption to supply chains and trade have hit Finland relatively hard, given itsopen economy. Exports fell by an average 12% in the first three months of 2020 from the year-earlier period, followed by drops of 20%and 25% in April and May, respectively, because of a substantial decline in economic activity in key export markets. We expect the fallin exports to stabilise in the second half of this year and exports to decline by around 11% for the full year compared with 2019.

The uncertain outlook for Finland's investment environment has prompted companies to postpone investments, which will alsoweigh on growth this year, though measures by the European Central Bank (ECB), the EC and the European Investment Bank (EIB, Aaastable) are likely to speed up investment throughout Europe. In addition, public investment which accounts for around 20% of totalinvestment in Finland, will grow by 11% this year, in line with rising overall public spending to support the economy.


https://www.moodys.com/credit-ratings/European-Investment-Bank-credit-rating-270400


Government measures will mitigate the negative impact of the coronavirus pandemic

Automatic stabilisers have played an important role in mitigating the negative impacts of the coronavirus pandemic in Finland, and thefurlough system makes the labour market more flexible and resilient in times of crisis. In addition, the Finnish parliament has approvedfour supplementary budgets that include extensive measures to mitigate the pandemic's negative effects.

With the economy now showing signs of recovery, the focus shifted from widespread support to targeted stimulus in the lastsupplementary budget, which includes public investment of around €4.1 billion on infrastructure, education and social spending.Overall, the government has announced direct measures amounting to around 3.5% of GDP, and liquidity measures includingguarantees worth over 6% of GDP for 2020. The measures include:

» Support for enterprises: General cost support and grants for companies; support for entrepreneurs; a reduction in private-sectorpension contributions; an increase in state financing company Finnvera plc's (Aa1 stable) domestic financing authorisations (to€12.0 billion from €4.2 billion); an increase in Business Finland's1 lending authorisation; state guarantees for national carrier FinnairPlc and shipping companies; and capitalisations, including injecting capital into Finnish Industry Investment,2 equity investment inFinnish Minerals Group3 and capitalisation arrangements for Finnair.

» Extension of unemployment security: Eliminating waiting periods; faster layoff procedures; making entrepeneurs and freelancerseligible for unemployment security.

» Other support to citizens: Temporary increase in social assistance; free leisure activities; early childhood education and care; basiceducation and general secondary education; guidance counselling and youth work; student healthcare; additional starting places forhigher education and developing continuous learning; ensuring properly functioning services for the elderly.

» Investment projects: Basic transport infrastructure maintenance, public transportation support; developing the transport network;health and social services resources and equipment purchases.

» Easing of payment terms for taxes due from 1 March 2020 and reducing interest on late payments to 2.5% from 7%.

Other support measures include lowering credit institutions' capital requirements; a €1 billion investment by the Bank of Finland(central bank) in commercial paper; an increase in the State Pension Fund's investment in domestic commercial paper (of up to €1billion); easier re-borrowing of TyEl4 contributions; and authorising the Financial Stability Fund to borrow funds to meet its statutoryobligations in respect of deposit guarantees.

Structural challenges will dampen the economic recovery

The economic recovery will be led by private consumption and supported by Finland's strong competitiveness. However, globaleconomic conditions remain crucial to any recovery given Finland's reliance on external demand. We expect weakness in globalinvestment and the likely deterioration in Finland's cost-competitiveness to weigh on exports over the next two years.

Finnish exports largely consist of capital and intermediate goods (around two thirds of the total), for which global demand has fallendramatically this year (see Exhibit 6). Low international investment related to global trade tensions and subsequent postponementsof investment projects meant that external demand for Finnish investment goods had already begun to fall in 2019. The demandoutlook for the wood and metal industry is likely to remain subdued as construction in the euro area and many other export marketswill remain low.

A prolonged demand recession affecting capital goods is the key risk that Finland's Ministry of Finance identified in its EconomicSurvey – Summer 2020. Finland has suffered more from global economic downturns than other countries because of its large exportdependence on capital goods, for which demand normally recovers more slowly than for consumer goods.

Finland's cost-competitiveness will weaken over the coming years as a result of wage negotiations that were being finalised as thecoronavirus pandemic hit. Increases in negotiated wages are overall slightly above 3% over the next two years. As a result, Finland'sprice competitiveness will decline by 3-4 percentage points cumulatively by 2021 compared with 2019.


https://www.moodys.com/credit-ratings/Finnvera-plc-credit-rating-600070359

http://julkaisut.valtioneuvosto.fi/bitstream/handle/10024/162315/VM_2020_56.pdf?sequence=1&isAllowed=y



Finland had not yet fully recovered the losses in its cost-competitiveness that followed the global financial crisis, though exports havebenefitted from regained cost-competitiveness and an investment-led recovery in Finland's export partners since 2015 (see Exhibit7). However, the 2016 Competitiveness Pact5 has helped it regain its market share in global exports. The legislation also laid thefoundation for future wage negotiations to be based on the benchmark of the export industry sector.

Exhibit 6

Intermediate and capital goods exports have fallen this yearCumulative from 1 January 2020 to April 2020 compared with the sameperiod in 2019, % change

Exhibit 7

Finlands' export market share has improved since 2015Export market share of goods and services, % total, 2010=100

-50% -30% -10% 10%

Transport equipment

Fuels and lubricants

Industrial supplies

Capital goods, excl. transport equipment

Other goods

Food and beverages

Consumer goods

Sources: Finnish Custums- Tulli and Moody's Investors Service

75

80

85

90

95

100

105

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Denmark Netherlands Austria

Finland Sweden Germany


Already low potential growth likely to decline further due to the coronavirus pandemic

Although we expect real GDP growth to rebound in 2021, there is a heightened risk that potential growth will remain permanentlylower than pre-coronavirus estimates because of the pandemic's long-term effects. The capital stock could shrink as a result of fallinginvestment and rising bankruptcies, while lower R&D investment would weaken productivity growth. An increase in the averageduration of unemployment will weaken individuals' future opportunities for work, while human capital erodes as skills are degraded.

In addition, like many advanced economies, Finland faces demographic pressures from an ageing population. The working-agepopulation – people aged 15 to 64 – began to decline in 2010. The EC expects the working-age population's share of Finland's totalpopulation to fall by 2.7 percentage points by the end of 2025 compared with 2016.6 According to the EC's baseline projections, theshare of Finns aged 80 and above will double to around 10% of the total population by 2040, while the share of the working-agepopulation will decline slightly.

Finland has already passed the threshold to be considered a “super-aged” society, in which more than 20% of the population is aged65 or over. According to the EC's projections, unless labour force participation is increased by encouraging people to work longer or byincreasing immigration, Finland's labour supply will decline and constrain potential GDP growth at slightly above 1% until 2070, theseventh-lowest level in the EU.

Labour market reforms have had tangible positive effects and more reforms are in the pipeline

The government's objective of reaching an employment rate of 75% and increasing the number of people in employment by aminimum of 60,000 by the end of 2023 is no longer possible in light of the coronavirus pandemic. The government now expects therate to be close to 72% in 2022. However, Finland was on track to achieve an employment rate of 72.6% in 2019, compared witharound 68% in 2015. The unemployment rate fell to 6.7% in 2019 from close to 10% in 2015, driven by a decline in both long-termand youth unemployment, signalling that some of the structural problems in the labour market had eased.

The government began to reform unemployment benefits in early 2017 with the aim of shortening periods of unemployment andincreasing the rate at which work offers are accepted. Specific measures included increasing incentives to accept work in the earlystages of unemployment by reducing the duration of unemployment benefits, improving employment services resources and increasingthe use of benefit sanctions. Additional measures aim to reduce the number of young people not in education, employment or training



through outreach youth work, guidance counselling and support services, as well as accelerating the integration of immigrants into thework force. As part of its pension reforms, Finland started to increase the minimum retirement age by three months per year in 2018.

The government has shown a strong commitment to raising employment levels and has begun preparations for a comprehensive socialsecurity reform that will allow citizens to combine work and social security. There are also plans to reform the unemployment securitysystem and services for the unemployed, by raising the age of eligibility for additional days of unemployment allowance and developingadjusted unemployment security, which will enhance the incentives for work.



Institutions and governance strength score: aaa

Scale

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weight 20%


Institutions and governance strength evaluates whether the country’s institutional features are conducive to supporting a country’s ability and

willingness to repay its debt. A related aspect is the government's capacity to conduct sound economic policies that foster economic growth and

prosperity. Institutions and governance strength is most often adjusted for the track record of default, which can only lower the final score.



Finland aaa

weight 30% weight 20% weight 30%

Median of countries with Aa1 ratingScore for Finland

POLICY EFFECTIVENESS

Quality of Legislative and ExecutiveInstitutions Strength of Civil Society and the Judiciary Fiscal Policy Effectiveness Monetary Policy Effectiveness

QUALITY OF INSTITUTIONS

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Our “aaa” assessment of Finland’s institutions and governance strength reflects the country's high-quality legislative and executiveinstitutions, very strong civil society and independent judiciary. The score is further underpinned by a general consensus on key fiscaland macroeconomic policy goals and their effective implementation, reflected for example in successful fiscal consolidation and debtreduction between 2015 and 2019, and the implementation of structural reforms in areas such as pensions and the labour market.While ECB decisions largely determine monetary policy, the Bank of Finland and Finland's Financial Services Authority (FIN-FSA)monitor and address potential financial stability risks effectively.

Finland is one of nine sovereigns we rate that share a “aaa” assessment for institutions and governance strength. These sovereignsinclude Aaa-rated regional peers such as Denmark, Norway (Aaa stable) and Sweden.

Exhibit 9

Finland aaa Median Canada Denmark Netherlands Sweden Norway Germany

Aa1/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA

Final score aaa aaa aaa aaa aaa aaa aa1

Initial score aaa aaa aaa aaa aaa aaa aa1

Quality of legislative & executive institutions aaa aaa aaa aaa aaa aaa aaa aaa

Strength of civil society & judiciary aaa aaa aaa aaa aaa aaa aaa aaa

Fiscal policy effectiveness aaa aaa aaa aaa aaa aaa aaa aaa

Monetary & macro policy effectiveness aaa aaa aaa aaa aaa aaa aaa aa

Fiscal balance/GDP (3-year average) -4.2 -2.6 -7.7 -2.1 -2.5 -1.8 0.3 -2.9

Average inflation (% change) 1.1 1.4 1.7 0.9 1.4 1.4 2.2 1.3

Volatility of inflation (ppts) 1.1 1.0 0.6 1.0 1.1 1.0 0.8 0.7

Peer comparison table factor 2: Institutions and governance strength



https://www.moodys.com/credit-ratings/Norway-Government-of-credit-rating-565700


Very high quality of institutions, strong civil society and judiciary

Finland has a highly professional and well-staffed public administration. This is reflected in strong scores on the Worldwide GovernanceIndicators (WGIs) in the areas of government effectiveness and regulatory quality, for which Finland ranks among the strongest of thesovereigns we rate, in line with Nordic peers such as Sweden and Denmark, and well ahead of Austria (see Exhibit 10).

Finland ranks first globally on the first pillar of the WEF's Global Competitiveness Index 4.0, which measures the overall quality ofinstitutions. The country receives particularly strong scores in the categories of security, checks and balances, and property rights,followed by public sector performance and transparency. However, the survey identifies some shortcomings (at a very high level)relating to the public sector in respect of the burden of government regulation (7th).

Finnish institutions dealt effectively with the severe economic shock that followed the global financial crisis, when traditional exportsectors declined sharply. The authorities reacted relatively quickly and were able to start regaining competitiveness through the 2016Competitiveness Pact.

Finland's law-making framework is transparent and predictable, and despite a sizable right-wing populist party in parliament,general policymaking remains consensus-driven. Data availability is excellent across all sectors and categories (timeliness, depth andbreadth). As a euro area member, Finland reports all data in accordance with Eurostat requirements and has been a subscriber to theInternational Monetary Fund's (IMF) Special Data Dissemination Standard Plus (SDDS+) since June 2018.

Finland also performs very strongly in global surveys measuring the strength of civil society and quality of the judiciary (see Exhibit 11).Compared with all other Aaa- and Aa1-rated sovereigns, Finland ranks first for control of corruption and rule of law on the WGIs, andperforms similarly strongly in other surveys. This supports our view that law enforcement is highly predictable and impartial, that thebalance of power and separation of powers are consistently and dependably maintained, that judicial independence is respected andmaintained, and that civil society can function freely.

Exhibit 10

Finland's legislative and executive institutions are of very highquality …Average ranking of Aaa- and Aa1-rated sovereigns (latest date available)

Exhibit 11

… and the judiciary and civil society are also very strongAverage ranking of Aaa- and Aa1-rated sovereigns (latest date available)

Government

Effectiveness

Regulatory

Quality

Checks and

balances

Future

orientation

of govt

Public

sector

performance

Finland 3 6 1 5 2

Switzerland 2 7 5 4 4

Netherlands 6 2 3 3 3

Norway 4 8 4 8 10

Singapore 1 1 14 7 1

New Zealand 10 3 2 14 7

Denmark 5 11 7 6 8

Sweden 7 5 6 9 11

Luxembourg 8 9 8 1 6

Germany 11 10 12 2 9

Canada 9 12 10 10 12

Australia 12 4 9 13 13

United States 13 13 11 11 5

Austria 14 14 13 12 14

Worldwide Governance

Indicators

World Economic Forum: Global

Competitiveness Index (Pillar 1)

Note: Ordered by average rank across all indicatorsSources: Worldwide Governance Indicators and World Economic Forum

Control of

Corruption

Rule of

Law

Voice and

accountability

World

Justice

Project

Rule of

Law Index

Transparency

International

Corruption

Perceptions

Index

Reporters

without

Borders

Press

Freedom

Index

World

Bank

Doing

Business

judicial

measures

Finland 1 1 4 3 3 2 7

Norway 6 2 1 2 7 1 4

Denmark 4 8 5 1 1 3 3

New Zealand 2 5 2 8 2 8 1

Sweden 5 4 6 4 3 4 6

Switzerland 8 3 3 -- 3 7 13

Singapore 3 7 14 11 3 14 2

Netherlands 9 9 7 5 8 5 12

Germany 10 13 11 6 11 6 10

Canada 11 11 9 9 9 9 9

Luxembourg 7 10 8 -- 9 10 14

Austria 13 6 12 7 13 11 11

Australia 12 12 10 10 12 12 8

United States 14 14 13 12 14 13 5

Worldwide Governance

Indicators

Note: Ordered by average rank across all indicatorsSources: Worldwide Governance Indicators and World Economic Forum



Fiscal policy effectiveness is high

Finland’s fiscal framework is tied to multiannual expenditure ceilings, with the Ministry of Finance setting annual limits on centralgovernment spending (real expenditure ceiling in absolute terms) for the remaining years of its term. In addition, revenue windfallscannot be used to finance spending and government departments generally need to compensate for any overspending themselves.

Two other rules apply to the general and central levels of government: (1) the debt goal stipulates that growth in the generalgovernment debt ratio must level off during an electoral period; and (2) the central government deficit should not exceed 0.5% of GDP.Moreover, the Local Government Act stipulates a budget balance rule for municipalities, while a revenue rule targeting social securityfunds defines the “through-the-cycle” rule for revenue from unemployment security and earnings-related pension contributions.7

There is also broad political consensus in favour of maintaining fiscal prudence and a strong commitment to structural fiscal reforms.This consensus was most recently reflected in the government tasking, early in the coronavirus crisis, an expert commission to outlinemeasures for a return to fiscal consolidation and debt reduction.

Nevertheless, Finland’s spending ceilings failed to prevent the general government's fiscal deficit breaching the 3% Maastrichtthreshold in 2014. The EC deemed the breach exceptional due to the economic contraction in 2014 and the move to the EuropeanSystem of National and Regional Accounts. The deficit narrowed to 2.4% and 1.7% of GDP in 2015 and 2016, respectively, and furtherto 0.9% in 2018. As a result, the EC assessed Finland as fully compliant with the Stability and Growth Pact's preventive arm for 2016, inits Spring 2017 assessment and 2017 country-specific recommendations.

Finland aimed to achieve its structural balance medium-term objective of a deficit of 0.5% of potential GDP by 2019 and the EChas assessed it as compliant with its adjustment since 2015. Finland benefits from a three-year temporary deviation of 0.5% of GDP,related to structural reform efforts. However, the EC estimates that the structural balance reached a deficit of 1.7% of potential GDP in2019 and that it will widen significantly to 4.3% in 2020

Finland's Fiscal Rule Index improved in 2013 and has remained stable since then. While largely in line with the EU-27 average, andcomparable with peers such as Sweden and Austria, it is weaker than those of the Netherlands and Germany (Aaa stable). In responseto the exceptional circumstances stemming from the coronavirus pandemic and its severe economic and fiscal impact, the EC hasactivated a clause that allows member states to deviate from Stability and Growth Pact limits. In addition, because Finland had entereda state of emergency and the Emergency Power Act was in force, central government spending limits do not restrict targeted andtemporary measures this year.8

The government created an independent forecasting unit within the Ministry of Finance in early 2015 to comply with EU rules.Although the EC questioned the “realistic and unbiased nature of the macroeconomic scenario” in the 2017 stability programme,European Semester country reports since 2019 have not raised similar concerns. However, the EC has stressed that Finland is theonly euro area member that has designated a department within the Ministry of Finance as an independent forecasting unit, which“warrants regular surveillance”.9

Rapid ageing is a long-term challenge, and the government recently postponed the implementation of an ambitious healthcare andsocial services reform. Even with such reforms, however, the debt ratio is likely to start increasing again from the early 2020s andwould – according to government estimates from before the coronavirus crisis – approach 70% of GDP toward 2030 in the absence ofadditional reforms.

Finland is very transparent about the size and structure of its contingent liabilities, and manages liabilities stemming from state-ownedenterprises (SOEs) through the Ownership Steering Committee at the Prime Minister’s Office. The biggest contingent liability riskstems from state-owned financing company Finnvera. However, Finnvera's own reserves and recourse to the State Guarantee Fundmitigate the likelihood of these liabilities crystallising.

Macroeconomic and monetary policy effectiveness

Finland's status as a euro area member means that the ECB sets monetary policy. The Bank of Finland oversees financial stability(which the FIN-FSA implements) and there has been no systemic crisis since the banking crisis of the early 1990s. Several rounds ofmacroprudential measures have targeted growth in household credit, mainly mortgages. The banking system is large, particularly after


https://ec.europa.eu/info/sites/info/files/26_fi_sp_assessment.pdf

https://ec.europa.eu/info/sites/info/files/economy-finance/design_of_numerical_fiscal_rules_2018.xlsx

https://www.moodys.com/credit-ratings/Germany-Government-of-credit-rating-333700


Nordea Bank moved its headquarters to Helsinki from Stockholm in 2018, and highly interconnected regionally. Regional regulatorscooperate closely.

Following the severe structural economic shock in the wake of the global financial crisis, the Finnish authorities implemented theCompetitiveness Pact, which aimed to restore export competitiveness, limit wage increases and reduce employers’ social securitycontributions, and was agreed through consultations between government, employer organisations and labour unions. Further reformstargeting labour market rigidities and the unemployment benefit system are underway.

Economic policymaking is generally characterised by a consensus-driven approach, though parties may disagree on how policiesshould be implemented. Most recently, for example, disagreements over how to implement social and healthcare reforms led tothe resignation of Prime Minister Juha Sipilä in March 2019 ahead of parliamentary elections in April 2019. Although the reformshave cross-party support, each party has its own proposal as to how they should be structured. Three successive governments haveattempted to negotiate the reforms, highlighting their complexity, as well as the significant challenges the next government is likely toface.



Fiscal strength score: aa3

Scale

+ Final -


ca

b2

b3

caa1

caa2

caa3

weight 25%

baa3

ba1

ba2

ba3

b1

baa1

baa2

weight 25% weight 25%

aa2

aa3

a1

a2

a3

Fiscal strength captures the overall health of government finances, incorporating the assessment of relative debt burdens and debt affordability as

well as the structure of government debt. Some governments have a greater ability to carry a higher debt burden at affordable rates than others.

Fiscal strength is adjusted for the debt trend, the share of foreign currency debt in government debt, other public sector debt and for cases in which

public sector financial assets or sovereign wealth funds are present. Depending on the adjustment factor, the overall score of fiscal strength can be

lowered or increased.




Finland

weight 25%

aa3 Score for Finland Median of countries with Aa1 rating

aaa

aa1

General government debt (% of GDP) General government debt (% of revenue)General government interest payments (%

of revenue)General government interest payments (%

of GDP)

DEBT AFFORDABILITYDEBT BURDEN

aaa

aa

a

caa

ca

baa

ba

b

Finland’s “aa3” fiscal strength score reflects a comparatively moderate general government debt burden and very strong debtaffordability indicators, which are the outcome of prudent and forward-looking fiscal policies whose goal is to reduce the debt burdenand ensure long-term sustainability. After Finland reached the Maastricht deficit threshold of 3% of GDP and the general governmentdebt threshold of 60% of GDP in 2014, fiscal consolidation and economic recovery reduced the government debt burden to below60% of GDP in 2018. The economic crisis caused by the coronavirus pandemic and the fiscal response to it will lead to a sharpwidening of fiscal deficits and an increase in the debt burden over the coming two to three years.

Other sovereigns that share the same fiscal strength assessment include Australia (Aaa stable), the Netherlands and Slovakia (A2stable), while Germany and Sweden have higher scores.

Exhibit 12

Finland aa3 Median Netherlands Australia Slovakia Germany Sweden Taiwan

Aa1/STA Aaa/STA Aaa/STA A2/STA Aaa/STA Aaa/STA Aa3/STA

Final score aa3 aa3 aa3 aa3 aa2 aa2 a1

Initial score aa3 aa3 aa3 aa3 aa1 aa1 aa3

Gen. gov. debt (% of GDP) 59.2 41.8 48.7 41.8 48.0 59.8 35.2 33.8

Gen. gov. debt (% of revenue) 113.8 111.4 111.4 117.3 115.7 127.6 70.6 227.3

Gen. gov. interest payments (% of GDP) 0.9 0.9 0.8 1.3 1.2 0.8 0.4 0.5

Gen. gov. int. payments (% of revenue) 1.6 2.3 1.8 3.6 3.0 1.7 0.8 3.5

Peer comparison table factor 3: Fiscal strength



https://www.moodys.com/credit-ratings/Australia-Government-of-credit-rating-75300

https://www.moodys.com/credit-ratings/Slovakia-Government-of-credit-rating-600011880


Fiscal consolidation since 2016 has helped Finland comply with EU deficit targets

Following large fiscal surpluses of 3.6% of GDP on average between 1998 and 2008, the Finnish government has recorded fiscal deficitssince 2009, driven by deficits at both the central and local government levels, as well as by falling surpluses in the social securitysystem. However, the general government deficit breached the Maastricht threshold of 3% of GDP only in 2014. Fiscal consolidation aswell as gradual economic recovery helped to significantly reduce the fiscal deficit to only 0.7% of GDP in 2017. The general governmentdeficit widened slightly in 2018 and 2019, mainly because of higher spending by local governments.

A record deficit in 2020

Given the fiscal support and stimulus measures set out in four supplementary budgets so far this year, as well as a decrease in revenueand an increase in social security spending, we expect a fiscal deficit of 7.3% of GDP in 2020, which will narrow to a still sizable deficitof 4.2% in 2021 (see Exhibits 13 and 14). The Finnish government's fiscal support and stimulus measures allocated for 2020 havebeen substantial but lower than those of its Nordic peers, amounting to around 3.6% of GDP in budget measures and 6.4% of GDPin liquidity measures and guarantees so far (see Exhibit 15). The central government deficit will start to decrease in 2021 because thesupport measures that were limited to the end of this year will have been phased out and the economic recovery will gradually increasetax revenue again.

Exhibit 13

The fiscal deficit will be substantial in 2020 following thecoronavirus pandemic …(Balances, % of GDP)

Exhibit 14

… driven mainly by a spike in spending(General government, % of GDP)

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Central GovernmentLocal GovernmentSocial Security FundsGeneral Government

-8%

-6%

-4%

-2%

0%

2%

4%

6%

Social Security Funds Local Government

Central Government General Government

Maastricht fiscal deficit threshold

Sources: Eurostat, Statistics Finland and Moody's Investors Service

45

47

49

51

53

55

57

59

61

Revenue Expenditure

Sources: Eurostat, Statistics Finland and Moody’s Investors Service

Local governments' finances have been deteriorating for some years and the coronavirus-induced economic downturn has meanthigher spending and lower tax revenue for them. However, the central government has provided municipalities with substantialfinancial support this year. The local government budgetary position is also burdened by the growing need for higher healthcare andsocial services spending as the population ages.

The employment pension institutions, which are part of the social security funds, had posted substantial surpluses until now. In 2020,however, the surplus will disappear because contributions have been temporarily lowered and the weakened employment situationwill reduce contribution revenue further. Moreover, rapid growth in pension expenditure continues, while low interest rates are slowinggrowth in employment pension institutions’ investment income. Other social security funds will also post deficits as extensive layoffs,higher unemployment and a temporary extension of unemployment security will boost benefit expenditure.

The risks affecting general government finances are closely connected with overall economic developments. The duration of thedownturn and the way the economy recovers from it are highly uncertain.

Finland could potentially also receive financial assistance from the EU. The EC has introduced a temporary instrument called Supportto mitigate Unemployment Risks in an Emergency (SURE). This instrument will allow financial assistance of up to €100 billion in theform of loans from the EU to member states to address sudden increases in public expenditure to preserve employment. EU leaders



also agreed to raise an unprecedented €750 billion of debt to provide loans and grants to member states to help them with their post-coronavirus recovery, on top of the bloc's 2021-27 budget of nearly €1.1 trillion.

Exhibit 15

Finland's fiscal support and stimulus measures have been substantial but less so than its Nordic peers% of GDP

0%

2%

4%

6%

8%

10%

12%

14%

Norway Denmark Sweden Finland

0%

2%

4%

6%

8%

10%

12%

14%

16%

Norway Denmark Sweden Finland

Budget measures Liquidity measures and guarantees (max)

Note: Moody's GDP forecast for 2020; all fiscal measures are for 2020; budget measures include job-retention schemes, compensations schemes, support for corporates, investmentprogrammes and other measures prompted by the coronavirus situation that will directly affect the fiscal balance for 2020; liquidity measures include temporary tax relief.Sources: National authorities and Moody's Investors Service

Government debt will rise in line with peers to above 70% in 2020

Finland's debt-to-GDP ratio peaked at 63.6% in 2015, compared with 32.6% in 2008, because of persistently large primary deficits andstock-flow adjustments in earnings-related pension funds. The increase was one of the largest in Europe, but it was less pronouncedthan in France (Aa2 stable) and the UK (Aa2 negative). The debt ratio fell to 59.2% of GDP in 2019 from 59.6% in 2018. Finland hasalso been building up its financial assets. The earnings-related pension system, which is partially pre-funded, was in surplus (0.9% ofGDP in 2019), although this surplus will disappear as the downturn has led to a decrease in employment pension contributions.

We estimate debt will climb to 70.1% of GDP in 2020 and 72.8% in 2021, up sharply from 59.2% in 2019. However, we expect the 11percentage point increase in general government debt in 2020 to be the fourth lowest in the euro area, with only Luxembourg, Ireland(A2 stable) and Estonia (A1 stable) expected to experience smaller rises (see Exhibits 16 and 17). In contrast, those European countriesthat were much more affected by the coronavirus pandemic in early 2020, such as Italy (Baa3 stable), Spain (Baa1 stable) and France,will have a much more significant increase in their government debt burdens this year and from much higher levels.

Exhibit 16

Finland's government debt burden will rise sharply in 2020 but inline with European peers …General government debt, cumulative change since 2015 (percentagepoints of GDP)

Exhibit 17

… and from a relatively low levelGeneral government debt, % of GDP

-20

-15

-10

-5

0

5

10

15

20

25

30

2015 2016 2017 2018 2019 2020F 2021F

Austria Belgium Finland

France Denmark United Kingdom

Sources: National sources, Eurostat and Moody’s Investors Service

0

20

40

60

80

100

120

140

160

180

200

2019 2020

Sources: Eurostat and Moody’s Investors Service


https://www.moodys.com/credit-ratings/France-Government-of-credit-rating-639500

https://www.moodys.com/credit-ratings/United-Kingdom-Government-of-credit-rating-788250

https://www.moodys.com/credit-ratings/Ireland-Government-of-credit-rating-423933

https://www.moodys.com/credit-ratings/Estonia-Government-of-credit-rating-600046984

https://www.moodys.com/credit-ratings/Italy-Government-of-credit-rating-423690

https://www.moodys.com/credit-ratings/Spain-Government-of-credit-rating-704550


The government had aimed for general government finances to be in balance by 2023 and the general government debt-to-GDP ratioto decline, assuming normal economic circumstances. According to the Ministry of Finance, however, general government finances willbe in deficit until 2023 and the debt ratio will increase because of the exceptional circumstances caused by the coronavirus pandemic.

The government aims to stop the general government debt-to-GDP ratio from rising by the end of the decade. Decisions on howto strengthen government finances to achieve this goal will be made at the government budget session in autumn 2020. Accordingto Ministry of Finance estimates, the target can only be met if the general government budgetary position is strengthened byapproximately €5 billion over the next decade. The ministry also stresses the difficulty of the task and the need not just for structuralmeasures but also measures that boost general government revenue or reduce spending more effectively and quickly. However, it saysthe priority should be on overhauling economic structures in ways that allow Finland to make more efficient and extensive use of itseconomic resources.

Debt affordability continues to compare favourably with similarly rated and euro area peers

Finland's very strong debt affordability is reflected in very low interest expenditure of 0.9% of GDP and only about 1.6% of revenuein 2019. The latter compares very favourably with the Aa-rated median of 1.9% and, especially, the euro area median of almost 3%(see Exhibit 18). Finland benefits from very low funding costs in the context of the ECB's quantitative easing, reflected in governmentbond yields being close to those of German bunds throughout the coronavirus crisis (see Exhibit 19). We expect interest expenditureto increase slightly to 1% of GDP and 1.9% of revenue in 2020, a very modest increase compared with the estimated 0.7 percentagepoint increase in the median interest expenditure to revenue ratio in the euro area and the 0.8 percentage point increase in the Aa-rated median.

Exhibit 18

Finland's debt affordability is very high(General government interest payments, % of revenue)

Exhibit 19

Government bond yields closely track Germany's(10-year government bond yield, %)

0

1

2

3

4

5

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F

Finland Aa-rated median Euro-area median

Sources: National sources, Eurostat and Moody’s Investors Service

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Finland Germany

Sources: Haver Analytics and Moody’s Investors Service

Ageing population poses long-term challenges for fiscal sustainability

The EC projects Finland’s total age-related costs will increase by 2.6 percentage points of GDP between 2016 and 2070, from analready high 29.8% of GDP, a faster rise than for the EU-27 and euro area as a whole.10 Public pension spending will peak at 14.8% ofGDP by 2030 and then gradually decline, but will remain high, while healthcare and long-term care spending will rise throughout theprojection period (see Exhibit 20). The projections are broadly in line with the recently updated projections of the Finnish Centre forPensions,11 which forecasts roughly stable statutory pension spending until the 2030s of around 13.5% of GDP, followed by a gradualdecline toward 12.5% until 2045 and an increase to above 14% by the 2070s.



Exhibit 20

Total cost of ageing is likely to rise(% of GDP)

% o

f G

DP

0

5

10

15

20

25

30

35

2016 2020 2030 2040 2050 2060 2070

% o

f G

DP

Pension Healthcare Longterm care Education Unemployment

Source: European Commission

The general government's fiscal plan for 2021-24 highlights that a substantial sustainability gap prevails, meaning government revenuewill not be enough to cover expenditure in the long term. In the medium term, the gap will be driven by the sudden deteriorationof the economy this year and the subsequent increase in public expenditure. In the longer term, the ageing population will stronglyundermine the sustainability of public finances given the projected increase in public spending on pensions, healthcare and long-termcare, while revenue will be reduced by the effect of a shrinking working-age population on the personal income tax base and socialsecurity contributions. As a consequence, failing to strengthen public finances will result in an unsustainable increase in debt, accordingto the Ministry of Finance.

Various Finnish governments have attempted to reform the social security and healthcare system (the SOTE reform). The latestproposal included the creation of a new layer of government (18 counties) and transferring service provision to this new administrativelevel from municipalities. Opposition to the proposal came mainly from municipalities, but also centred on the so-called “freedom ofchoice model”, which would have opened the market to private services providers. The then prime minister, Juha Sipilä, cited the failureto pass the reform as the reason for his resignation on 8 March 2019.12

We expect the current government to restart the SOTE reform, given the political consensus that an overhaul is needed. While detailsof the reform will only become known in autumn, we think any new reform attempt will incorporate the lessons learnt so far andavoid being too ambitious. For instance, the current government has announced its reform proposal would separate administrativechanges (the establishment of counties) from the freedom of choice for healthcare services.13 The draft legislation was circulated forconsultation in mid-June.14

Rising contingent liabilities from the wider non-financial public sector pose a risk

General government contingent liabilities and the rapid rise in government guarantees, in particular, could pose a risk to generalgovernment finances if they crystallise on the government's balance sheet (see Exhibit 21). Outstanding guarantees amounted toover €60 billion in 2019 (24.9% of GDP), up from €57 billion in 2018 (24.4% of GDP), with a majority provided to Finnvera, Finland'sexport credit and small and medium-sized enterprise (SME) financing agency. Contingent liabilities also stem from 11 off-budget funds,the largest being the National Housing Fund with a guarantee that pays interest subsidies on loans for particular housing projectsand renovations. Government guarantees also relate to the European Financial Stability Facility (Aa1 stable). Additionally, Finlandexplicitly takes its guarantee provided to the Bank of Finland for IMF commitments as well as its participation in the European StabilityMechanism's (Aa1 stable) callable capital into account, which underlines its strong fiscal transparency, even within the euro area.


https://vm.fi/documents/10623/1316221/General+Government+Fiscal+Plan+2021-2024.pdf/1ade1f02-5081-71e7-472b-12e07d77080e/General+Government+Fiscal+Plan+2021-2024.pdf?t=1587124663000

https://www.moodys.com/credit-ratings/EFSF-European-Financial-Stability-Facility-credit-rating-822248315

https://www.moodys.com/credit-ratings/European-Stability-Mechanism-ESM-credit-rating-822588884

https://www.moodys.com/credit-ratings/European-Stability-Mechanism-ESM-credit-rating-822588884


Exhibit 21

Government guarantees are rising€ billion

0

10

20

30

40

50

60

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Finnvera Government funds European Financial Stability Facility (EFSF) Student loans Bank of Finland Other

Sources: Ministry of Finance and Moody's Investors Service

Additional guarantees have been made in 2020 in response to the coronavirus pandemic, including: €0.6 billion for shippingcompanies; €0.3 billion for an increase in Business Finland's lending authorisations; €0.5 billion for Finnair; loans granted within theframework of the EU's SURE instrument; and for any losses arising from the pan-European COVID-19 guarantee fund to be establishedunder the EIB.

The largest increase has been to Finnvera, whose domestic authorisations have risen to €12 billion from €4.2 billion in 2020, with a capof €30 million per company. In addition, the government's credit loss compensation has increased to 80% from 50% and is applied toboth new and existing loans and guarantees. Outstanding guarantees to Finnvera are substantial and the agency’s exposure to shippingcompanies, which have been severely affected by the coronavirus pandemic, is large at €25 billion. However, Finnvera’s reserves ofabout €1.2 billion as of December 2019 15 and the €686 million State Guarantee Fund would be the first in line to cover losses.

Finland also reports on its liabilities related to SOEs. Thirty-six of the country's 66 SOEs operate under market terms, of which 17 arelisted on the stock exchange with a total value of about €30 billion, while another 19 fulfil specific societal tasks. The state treasuryhas received about €1.3 billion in dividends per year on average since 200916 and the SOEs pose no significant risks to the sovereign’sbalance sheet.



Susceptibility to event risk score: a

+ -


Overall adjustment to Factor 4 Susceptibility to Event Risk:

Susceptibility to event risk evaluates a country’s vulnerability to the risk that sudden events may severely strain public finances, thus increasing

the country’s probability of default. Such risks include political, government liquidity, banking sector and external vulnerability risks. Susceptibility

of event risk is a constraint which can only lower the scorecard-indicated outcome.

Note: the initial factor score is shown in light blue in the scale above. In case the initial and final factor scores are the same, only the final score

will appear in the table above.


Scale

Median of countries with Aa1 rating

0

Final

Score for

FinlandFinland a

aaa aa a baa ba b caa ca

Political Risk Government Liquidity Risk Banking Sector Risk External Vulnerability Risk

aaa

aa

a

caa

ca

baa

ba

b

MIN. EXTERNAL VULNERABILITY RISK

Finland's main credit challenges relate to its longer-term growth potential rather than the prospect of abrupt shocks, which is capturedin the event risk factor of our methodology. This underpins our “a” assessment of Finland’s susceptibility to event risk, which stemsprimarily from banking sector risk.

Political risk: aa

We assess Finland's exposure to political event risk as “aa”. Domestic political event risk is minimal in our view, reflecting a consensus-based political framework, high income levels and low income inequality, as well as high scores on voice and accountability indicators.All these factors underpin the country's political and social stability. At the same time, Finland faces some exposure to geopoliticalevent risks from its geographic proximity to Russia (Baa3 stable).

Exhibit 23

Finland aa Median Sweden Denmark Germany Australia Luxembourg Austria

Aa1/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aaa/STA Aa1/STA

Final score aa aa aa aa aa aaa a

Voice & accountability, score[1] 1.6 1.2 1.6 1.6 1.4 1.4 1.6 1.4

Political stability, score[1] 0.9 0.9 0.9 1.0 0.6 1.0 1.4 0.9

Peer comparison table factor 4a: Political risk

[1] Composite index with values from about -2.50 to 2.50: higher values correspond to better governance.Sources: National authorities, IMF and Moody's Investors Service

Finland's political framework and policy-making is consensus-based and forward-looking. Examples include the 2017 pension reformand the 2016 Competitiveness Pact. Difficulties passing the SOTE reform led to the resignation of Prime Minister Sipilä's government,


https://www.moodys.com/credit-ratings/Russia-Government-of-credit-rating-600018921


with very limited credit impact in our opinion because further progress on the reform was unlikely ahead of parliamentary elections inApril 2019. Despite disagreements among political parties on how the reform should be structured, there is cross-party consensus thatSOTE is a key reform and should be implemented.

Following the parliamentary elections in April 2019, five political parties reached a coalition agreement that paved the way for theformation of a government. The Social Democratic Party, which gained almost a fifth of the votes, led the negotiations. The CentreParty, Green Party, Left Alliance and Swedish People's Party joined the coalition. Among the key measures outlined in the coalitionagreement were a widely publicised increase in both one-off and recurrent spending measures, which will be financed through the saleof state assets, as well as permanent revenue-enhancing measures.

On 9 December 2019, the Finnish parliament appointed Sanna Marin from the Social Democratic Party of Finland as the new primeminister. She replaced Antti Rinne who resigned six days earlier after losing the support of coalition partner the Centre Party for hishandling of strikes by postal workers. Marin's swift appointment, only a minor reshuffling of ministerial posts and the continuation ofthe same five-party coalition with an unchanged government programme meant no significant shift in policies and the continuation ofthe expansionary 2020 budget.

Finland’s susceptibility to geopolitical event risk relates to the Russia/Ukraine (B3 stable) crisis, which has resulted in the EU imposingfurther sanctions on Russia. We see very low risk of a rapid rating migration for Finland because of this crisis. Partially, the risks havealready crystallised and are captured in the impact on trade with Russia and the resultant effect on overall growth prospects in oureconomic strength assessment. However, Russia's importance to Finland as a trading partner has decreased in recent years, thoughFinland remains exposed to it via trade, foreign direct investment and tourism.

Government liquidity risk: aaa

Our assessment of Finland's government liquidity risk is “aaa”, reflecting the government's very strong access to domestic and externalfunding, supported by the country's euro area membership and shown by its very low financing costs. We expect funding terms toremain favourable despite higher gross borrowing requirements this year. Sovereigns that share the same score include Austria, Canada(Aaa stable), France and Sweden.

Exhibit 24

Finland aaa Median Austria France Sweden Canada Norway Iceland

Aa1/STA Aa1/STA Aa2/STA Aaa/STA Aaa/STA Aaa/STA A2/STA

Final score aaa aaa aaa aaa aaa aaa aa

Initial score aaa aaa aaa aaa aaa aaa aa

Ease of access to funding aaa aaa aaa aaa aaa aaa aaa aa

Gross borrowing requirements (% of GDP) 17.4 7.5 15.4 17.2 12.0 25.6 2.6 13.7

Peer comparison table factor 4b: Government liquidity risk


Gross borrowing requirements will more than double in 2020 to almost €40 billion after averaging around €15 billion for the last fiveyears, roughly half of which reflects redemptions (see Exhibit 25). In relation to GDP, we estimate gross borrowing needs will reach17.4% in 2020 from just 6.4% in 2019. At the end of the second quarter of 2020, approximately 75% of the long-term funding wascompleted.

The government benefits from the very low interest rate environment. Yields on the 10-year government bond fell into negativeterritory for the first time in June 2019 and have remained negative most of the time since then. Finland's government bond yieldstypically closely track those of German bunds. We expect the average cost of debt to continue to fall in 2020 and 2021 becausematuring bonds carry higher coupons than the government has to pay for new issuances.

Because of the exceptionally strong demand for Finnish issuance, the treasury increased its cash buffer to €16.3 billion as of the end ofJune from €2.2 billion at the end of 2019 (see Exhibit 26), covering almost all of the planned net borrowingfor 2020 of €19 billion.


https://www.moodys.com/credit-ratings/Ukraine-Government-of-credit-rating-600037040

https://www.moodys.com/credit-ratings/Canada-Government-of-credit-rating-137160


Exhibit 25

Borrowing needs will grow substantially this year€ billion

Exhibit 26

The treasury has increased its cash buffer as a result of strongdemand for Finnish issuance€ billion

-5

0

5

10

15

20

25

30

35

40

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

New issues Redemptions Net borrowing

Sources: State Treasury Republic of Finland and Moody's Investors Service

0

2

4

6

8

10

12

14

16

18

Sources: State Treasury Republic of Finland and Moody's Investors Service

Around 80% of general government debt is held by nonresidents, which could be viewed as a risk given nonresident investors tend tobe less stable than domestic investors in times of crisis. However, the high share is largely driven by Finnish public and private pensionfunds' decision not to invest in Finnish government debt securities because of financial stability concerns and their relatively low yields,and their share could rise in the future.

Banking sector risk: a

We assess the susceptibility to banking sector event risk in Finland as “a”. Strengths include solid capital adequacy, profitability anddiversification of market funding, reflected in a strong average Baseline Credit Assessment (BCA) of a3. The same banking sector riskscore of “a” is shared by Austria, Denmark, France and Sweden.

Exhibit 27

Finland a Median Austria Denmark Sweden France Singapore Iceland

Aa1/STA Aa1/STA Aaa/STA Aaa/STA Aa2/STA Aaa/STA A2/STA

Final score a a a a a aa baa

Initial score a a a a a a baa

BCA[1] a3 baa2 baa2 baa2 a3 baa1 a1 --

BSCE[2] aaa-a3 baa2 baa2 baa1 aaa-a3 baa1 aaa-a3 baa3

Total domestic bank assets (% of GDP) 271.1 138.8 218.8 384.2 193.2 384.3 626.3 168.8

Peer comparison table factor 4c: Banking sector risk

[1] BCA is an average of Baseline Credit Assessments (BCAs) for rated domestic banks, weighted by bank assets.[2] Where we have no or small rating coverage in a system, we estimate the risk of Banking Sector Credit Event (BSCE) based on available data for aggregate banking system.Source: National authorities, IMF and Moody's Investors Service

The economic disruption triggered by the coronavirus pandemic will pose a challenge to Finland's banking sector. Support measurestaken by the Finnish government and the ECB underpin our expectations of a moderate deterioration in banks' credit profiles. Whilerising loan-loss provisions and declining revenues will weigh on profitability metrics, capital as well as funding and liquidity ratios arelikely to remain broadly stable. We expect nonperforming loans to increase moderately as worsening economic conditions undermineborrowers' repayment capacity.

We expect Finnish banks’ problem loans to increase from a relatively low level of 1.4% of gross loans, with the repayment capacityof borrowers in coronavirus-exposed sectors such as leisure, travel, hospitality and transportation worst affected. SMEs in thesesectors and in export-oriented manufacturing industries are particularly vulnerable. The government’s policy response, which will helpmany affected businesses and workers keep up loan repayments initially, will mitigate the deterioration in loan quality. Mortgageimpairments should rise only marginally at first, as banks have allowed for amortisation holidays. Although repayment suspensions will



support asset quality in the short term, they may also mask deterioration in some borrowers' underlying financial positions. A deeperand more prolonged slowdown would have a correspondingly greater adverse effect on Finnish banks’ loan portfolios.

However, we expect Finnish banks to remain strongly capitalised. The FIN-FSA’s decision to lower the structural buffer requirementsby 1% will give banks greater flexibility to apply forbearance to customers facing repayment difficulties and to extend loans tootherwise creditworthy borrowers. We also expect Finnish banks to retain more capital by postponing dividends and share buybacks, asrecommended by the ECB. Finnish banks had an aggregate ratio of tangible common equity to risk weighted assets of 18.5% as of June2019.

Profitability will deteriorate as Finnish banks' earnings face headwinds from rising loan loss provisions, weaker investment income as aresult of falling financial markets, and lower fee revenue because of a decline in assets under management. These additional pressureson profitability will be partly offset by rising net interest margins as volatile wholesale markets push up demand for bank loans. Thiswill allow lenders to reprice their loan portfolios at higher rates and shift toward higher-margin corporate and SME lending, with bankslikely to face increased demand for working capital.

On 29 June, the FIN-FSA announced that it would restore the maximum loan-to-collateral (LTC) ratio for residential mortgages to 90%from 85%, except for loans to first-time home buyers. In the current climate of depressed activity in the housing and lending market,the FIN-FSA aims to support housing market activity, which dropped sharply during the coronavirus lockdown. For instance, nationwidesales of apartments in housing companies decreased by 33.4% in April and 31.5% in May compared with the year-earlier periods.

However, the FIN-FSA decision is credit negative for lending standards affecting Finnish banks and covered bonds. Higher leveragefor new borrowers will reduce collateral value buffers for banks and covered bonds if banks adopt the higher LTC ratio. If the Finnishauthorities’ measures do not stabilise the housing market, a prolonged economic contraction and rising unemployment caused by thecoronavirus pandemic risk triggering house price declines, increasing the risk that loan values for highly indebted borrowers will exceedcollateral values. In such a scenario, the FIN-FSA’s relaxation of lending standards will reduce mortgage asset quality in an environmentwhere overall asset risk is already deteriorating because of rising unemployment and high household indebtedness. At the end of 2019,Finland's total household debt reached a record high of 129% of disposable income, though it is still well below that of other Nordiccountries.

Cover pool loans' relatively low leverage is the main specific mitigant for covered bonds to the potential negative effects of therelaxation of lending practices. On a continuous basis and by law, banks have to assure that their covered bonds are backed to 102%with residential mortgages and other high-quality assets. Only loan amounts up to 70% of the current property value count towardthis calculation, providing a safety net against declining house prices. Loan-to-value (LTV) ratios for loans backing Finnish coveredbonds are relatively low. The 70% LTV threshold is more conservative than the 80% threshold for residential mortgage loans thatapplies in many other European countries.

External vulnerability risk: aa

The “aa” score for external vulnerability risk reflects Finland's relatively stable and small current account deficits since 2011. Finland hasalso shown an improving net asset international investment position since the global financial crisis.

Exhibit 28

[1] Net international investment position (% of GDP).Sources: National authorities, IMF and Moody's Investors Service



The country’s current account exhibited large surpluses in the early 2000s, attributable to a strong positive position in the tradebalance. This surplus declined and the current account balance moved to a slight deficit of 1.7% of GDP on average in 2011-14.

Finland's current account deficit shrank in 2019 to 0.5% of GDP from 1.7% in 2018, with a surplus in the trade balance of 1.2% of GDPin 2019 compared with a deficit of 2.3% in 2018 (see Exhibit 29). We expect Finland's current account surplus to widen again in 2020and 2021 and reach 2.3% and 1.6% of GDP, respectively. Terms of trade weakened during the first quarter as prices of export goods andservices decreased, continuing the decline that started in 2019. In 2020, the value of exports will fall faster than the value of imports,which will widen the current account deficit, a situation that will persist in the coming years although both export and import priceswill pick up again in 2021.

Exhibit 29

Current account balance improved in 2019(% of GDP)

Exhibit 30

Finland's net international investment position has improved(% of GDP)

Secondary income Current account balance

-6

-4

-2

0

2

4

6

8

10

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Goods balance Services balance

Primary income Secondary income

Current account balance

Sources: Statistics Finland and Moody’s Investors Service

-35

-30

-25

-20

-15

-10

-5

0

5

10

15

20

-400

-300

-200

-100

0

100

200

300

400

500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

IIP-Assets IIP-Liabilties Net IIP (RHS)

Sources: Statistics Finland and Moody’s Investors Service



ESG considerationsHow environmental, social and governance risks inform our credit analysis of FinlandWe take account of the impact of environmental (E), social (S) and governance (G) factors when assessing sovereign issuers’ economic,institutions and governance and fiscal strength and their susceptibility to event risk. In the case of Finland, the materiality of ESG to thecredit profile is as follows:

Environmental considerations currently exert limited influence on Finland’s credit profile, notwithstanding the country’s proactivemeasures to address climate change. The share of energy from renewable sources in gross final energy consumption was 41.2% in2018, the second highest in the EU after Sweden, and significantly above the European average of 18%.

Social risks are an important factor that will, however, only affect Finland’s credit profile over the long term, given that its ageingpopulation poses risks to the country’s growth potential, and therefore also to its fiscal flexibility and the sustainability of its socialsecurity systems. Finland benefits from very low income inequality and a high quality education system, which are conducive to socialcohesion.

We regard the coronavirus pandemic as a social risk under our ESG framework, given substantial implications for public health andsafety. The rapid and widening spread of the coronavirus pandemic, deteriorating global economic outlook, falling oil prices and assetprice declines are creating a severe and extensive credit shock across many sectors, regions and markets. We believe that the combinednegative effect of these developments has the potential to amplify Finland’s significant long-term fiscal sustainability pressures from anageing population.

Governance considerations are material for Finland's credit profile and the country's sound institutions and governance frameworkare supported by strong government effectiveness and rule of law, which rank very highly in international surveys, and a demonstratedcapacity for fiscal and monetary policy to effectively manage and absorb shocks.

All of these considerations are further discussed in the “Credit profile” section above. Our approach to ESG is explained in our report onhow ESG risks influence sovereign credit profiles and our cross-sector methodology General Principles for Assessing ESG Risks.





Scorecard-indicated outcomeCombining the scores for individual factors provides the scorecard-indicated outcome. While the information used to determine the grid mapping is mainly historical, our ratingsincorporate expectations around future metrics and risk developments that may differ from the ones implied by the scorecard-indicated outcome. Thus, the rating process isdeliberative and not mechanical, meaning that it depends on peer comparisons and should leave room for exceptional risk factors to be taken into account that may result in anassigned rating outside the scorecard-indicated outcome. For more information please see our Sovereign Ratings Methodology.

Exhibit 31

Sovereign rating metrics: Finland

aaa

aa1

aa2

aa3

a1

a2

a3

baa1

baa2

baa3

ba1

ba2

ba3

b1

b2

b3

caa1

caa2

caa3

ca

+ -

aaa

aa1

aa2

aa3

a1

a2

a3

baa1

baa2

baa3

ba1

ba2

ba3

b1

b2

b3

caa1

caa2

caa3

ca

+ -

aaa

aa1

aa2

aa3

a1

a2

a3

baa1

baa2

baa3

ba1

ba2

ba3

b1

b2

b3

caa1

caa2

caa3

ca

aaa

aa1

aa2

aa3

a1

a2

a3

baa1

baa2

baa3

ba1

ba2

ba3

b1

b2

b3

caa1

caa2

caa3

ca

+ - + -

aaa

aa1

aa2

aa3

a1

a2

a3

baa1

baa2

baa3

ba1

ba2

ba3

b1

b2

b3

caa1

caa2

caa3

ca

+ -

+ -

aaa

aa

a baa

b caa

ca

Aa1 - Aa3

Aa1ba

Economic strength

How strong is the economic structure?

How robust are the institutions and how predictable are the policies?

Sub-factors: quality of the institutions, policy effectiveness, government default history and track record of arrears

How does the debt burden compare with the government's resource mobilization capacity?

Assigned rating:

Institutions and governance strength

Fiscal strength

Susceptibility to event risk

What is the risk of a direct and sudden threat to debt repayment?

Economic resiliency

Government financial strength

Sub-factors: growth dynamics, scale of the economy, wealth

Sub-factors: debt burden, debt affordability, debt trend, share of foreign currency debt, contingent liabilities, fiscal reserves

Sub-factors: political risk, government liquidity risk, banking sector risk, external vulnerability risk

Scorecard-indicated outcome:

Source: Moody's Investors Service




ComparativesThis section compares credit relevant information regarding Finland with other sovereigns that we rate. It focuses on a comparison with sovereigns within the same rating range andshows the relevant credit metrics and factor scores. and exceed in terms of competitiveness

Finland compares favourably with its peers on all factors, except for economic strength because of higher growth volatility, lower GDP per capita and a smaller economy. However,it exceeds its peers on many competitiveness measures and governance indicators, even in comparison with Aaa-rated sovereigns. Finland’s fiscal strength score is slightly above theAa1 median and better than Austria’s, but below the score assigned for countries such as Sweden and Denmark because of its higher debt burden. Finland’s susceptibility to event riskscore is in line with its key rating peers.

Exhibit 32

Finland's key peers

YearFinland Austria Netherlands Denmark France New Zealand Aa1 Median

Western Europe

Median

Rating/outlook Aa1/STA Aa1/STA Aaa/STA Aaa/STA Aa2/STA Aaa/STA Aa1 Aa2

Scorecard-indicated outcome Aa1 - Aa3 Aa2 - A1 Aaa - Aa2 Aaa - Aa2 Aa2 - A1 Aaa - Aa2 Aaa - Aa2 Aa1 - Aa3

Factor 1 a2 a2 aa3 a1 a1 a1 a2 a2

Nominal GDP ($ bn) 2019 269.3 446.3 907.0 347.0 2715.5 205.0 357.8 424.8

GDP per capita (PPP, Intl$) 2019 47,975 53,558 58,341 53,882 47,223 40,943 50,767 53,558

Avg. real GDP (% change) 2015 - 2024F 1.1 1.3 1.3 1.6 1.3 2.7 1.2 1.3

Volatility in real GDP growth (ppts) 2010 - 2019 1.7 0.9 1.2 0.9 0.7 0.9 1.3 1.6

Factor 2 aaa aa2 aaa aaa aa2 aaa aa1 aa2

Quality of legislative & executive institutions Latest available aaa aa aaa aaa aaa aaa aaa aa

Strength of civil society & judiciary Latest available aaa aa aaa aaa aaa aaa aaa aaa

Fiscal policy effectiveness Latest available aaa aa aaa aaa a aaa aaa aa

Monetary & macro policy effectiveness Latest available aaa aa aaa aaa aa aaa aaa aa

Gen. gov. fiscal balance (% of GDP) 2019 - 2021F -4.2 -2.7 -2.5 -2.1 -6.5 -5.3 -3.5 -3.3

Average inflation (% change) 2015 - 2024F 1.1 1.6 1.4 0.9 1.2 1.5 1.3 1.4

Volatility of inflation (ppts) 2010 - 2019 1.1 0.8 1.1 1.0 0.8 1.0 1.0 1.0

Factor 3 aa3 a2 aa3 aa1 a2 aa1 a1 a1

Gen. gov. debt (% of GDP) 2019 59.2 70.3 48.7 33.3 98.1 27.8 64.8 59.0

Gen. gov. debt (% of revenue) 2019 113.8 143.7 111.4 62.3 186.6 90.2 128.8 120.7

Gen. gov. interest payments (% of revenue) 2019 1.6 2.9 1.8 1.4 2.7 3.7 2.3 2.8

Gen. gov. interest payments (% of GDP) 2019 0.9 1.4 0.8 0.7 1.4 1.1 1.1 1.3

Factor 4 a a a a a baa a a

Political risk Latest available aa a aa aa aa aaa aa aa

Government liquidity risk Latest available aaa aaa aaa aaa aaa aaa aaa aaa

Gross borrowing requirements (% of GDP) 2020F 17.4 15.4 -- -- 17.2 9.4 16.4 14.1

Banking sector risk Latest available a a a a a a a a

BSCE[1] Latest available aaa-a3 baa2 baa1 baa1 baa1 aaa-a3 baa1 baa1

Total domestic bank assets (% of GDP) 2019 271.1 218.8 298.0 384.2 384.3 187.5 271.1 221.5

External vulnerability risk Latest available aa aa aaa aaa aaa baa aa aaa

Current account balance (% of GDP) 2019 -0.5 2.6 10.2 7.8 -0.7 -3.0 1.1 3.0

Net international investment position (% of GDP) 2019 1.5 9.6 89.4 79.2 -23.3 -55.2 5.5 21.0

[1] BSCE is our estimate of the risk of a Banking Sector Credit Event (BSCE), which we use for sovereigns where we have no or very limited rating coverage of a system. Otherwise, we use the Baseline Credit Assessment (BCA) for rated domestic banks,weighted by bank assets.Source: National authorities, IMF, Moody's Investors Service



DATA, CHARTS AND REFERENCESChart pack: FinlandExhibit 33

Economic growthExhibit 34

Investment and saving

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-8

-6

-4

-2

0

2

4

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Real GDP volatility, t-9 to t (ppts) (RHS)

Real GDP (% change) (LHS)


20

21

22

23

24

25

26

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Gross investment/GDP Gross domestic saving/GDP


Exhibit 35

National incomeExhibit 36

Population

0

10000

20000

30000

40000

50000

60000

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

GDP per capita ($) GDP per capita (PPP basis, $)


0.0

0.1

0.2

0.3

0.4

0.5

0.6

5.25

5.30

5.35

5.40

5.45

5.50

5.55

5.602

010

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Population (Mil.) (LHS) Population growth (% change) (RHS)


Exhibit 37

Global Competitiveness IndexRank 11 out of 137 countries

Exhibit 38

Inflation and inflation volatility

0 5 10 15 20 25

Austria (Aa1/STA)

New Zealand (Aaa/STA)

France (Aa2/STA)

Finland (Aa1/STA)

Denmark (Aaa/STA)

Netherlands (Aaa/STA)

Source: World Economic Forum

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Inflation rate volatility, t-9 to t (ppts) (RHS)

Inflation rate (CPI, % change Dec/Dec) (LHS)




Exhibit 39

Institutional framework and effectivenessExhibit 40

Debt burden

1.2

1.4

1.6

1.8

2.0

2.2

2.4

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

Government Effectiveness[1] Rule of Law[1]

Control of Corruption[1] Voice & Accountability[1]

Regulatory Quality[1]

Notes: [1] Composite index with values from about -2.50 to 2.50: higher values suggestgreater maturity and responsiveness of government institutions.Source: Worldwide Governance Indicators

0

20

40

60

80

100

120

140

160

0

10

20

30

40

50

60

70

80

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Gen. gov. debt/GDP (%) (LHS)

Gen. gov. debt/gen. gov. revenue (%) (RHS)


Exhibit 41

Debt affordabilityExhibit 42

Financial balance

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Gen. gov. interest payment/GDP (%) (LHS)

Gen. gov. interest payment/gen. gov. revenue (%) (RHS)


-8

-7

-6

-5

-4

-3

-2

-1

0

12

010

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

20

20

F

20

21

F

Gen. gov. financial balance/GDP (%)

Gen. gov. primary balance/GDP (%)


Exhibit 43

Government liquidity riskExhibit 44

External vulnerability risk

0

10

20

30

40

50

60

70

0

10

20

30

40

50

60

70

80

90

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Gen. gov. debt/GDP (%) (RHS)

Gen. gov. external debt/total gen. gov. debt (%) (LHS)


-10

-5

0

5

10

15

20

-3

-2

-1

0

1

2

3

20

08

20

09

20

10

20

11

20

12

20

13

20

14

20

15

20

16

20

17

20

18

20

19

Current account balance/GDP (%) (LHS)

Net international investment position/GDP (%) (RHS)




Rating history

Exhibit 45

Finland [1]

Outlook Action Date

Foreign

Currency

Local

Currency

Foreign

Currency

Local

Currency

Foreign

Currency

Local

Currency

Aa1 Aa1 STA - - - P-1 Jun-16

Aaa Aaa NEG - - - P-1 Jun-15

Aaa Aaa STA - - - P-1 Nov-12

Aaa Aaa STA - - - - Nov-03

Aaa Aaa - - - - - May-98

Aa1 Aaa - Possible Upgrade - - - Mar-98

Aa1 Aaa - - - - - Jan-97

Aa2 - - - - - - Jan-92

Aa1 - - - - - - Oct-90

Aaa - - - - - - Feb-86

Aa - - - - - - Oct-77

Review Action Short Term RatingsLong Term Ratings

Notes: [1] Table excludes rating affirmations and ceilings. Please visit the issuer page for Finland for the full rating history.Source: Moody's Investors Service


https://www.moodys.com/credit-ratings/Finland-Government-of-credit-rating-278070


Annual statistics

Exhibit 46

Finland2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020E 2021F

Economic structure and performance

Nominal GDP (US$ bil.) 249.3 275.4 258.5 271.4 274.5 234.5 240.6 254.7 275.8 269.3 260.5 286.0

Population (Mil.) 5.4 5.4 5.4 5.4 5.5 5.5 5.5 5.5 5.5 5.5 5.5 5.5

GDP per capita (US$) 46,594 51,230 47,853 50,001 50,360 42,860 43,853 46,288 50,029 48,803 47,113 51,634

GDP per capita (PPP basis, US$) 38,732 40,378 40,370 40,576 40,880 41,358 42,822 44,826 46,596 47,975 -- --

Nominal GDP (% change, local currency) 3.5 5.2 1.5 1.6 1.3 2.2 2.9 3.9 3.4 3.0 -4.6 5.2

Real GDP (% change) 3.2 2.5 -1.4 -0.9 -0.4 0.5 2.8 3.3 1.5 1.1 -6.5 3.1

Inflation (CPI, % change Dec/Dec)[1] 2.8 2.6 3.4 1.9 0.6 -0.2 1.1 0.5 1.3 1.1 0.9 1.0

Unemployment rate (%) 8.4 7.8 7.7 8.2 8.7 9.4 8.8 8.6 7.4 6.7 9.3 8.9

Gross investment/GDP 22.1 24.0 23.4 22.3 21.9 21.7 23.3 24.1 25.3 24.2 23.9 23.6

Gross domestic saving/GDP 23.7 23.5 21.9 21.3 21.0 21.1 22.0 23.9 24.2 24.6 22.3 22.8

Nominal exports of G & S (% change, US$ basis) 5.1 11.8 -6.4 2.9 -2.9 -17.1 0.9 14.4 10.9 1.7 -12.0 13.0

Nominal imports of G & S (% change, US$ basis) 7.4 18.3 -4.5 1.6 -2.6 -18.3 2.9 10.2 14.1 -2.5 -6.9 10.6

Real exports of G & S (% change) 6.2 2.0 0.2 0.6 -2.0 0.4 3.9 8.6 1.7 7.5 -7.2 10.9

Real imports of G & S (% change) 6.3 6.2 1.1 0.1 -0.9 2.0 5.7 4.2 5.5 2.4 -14.4 6.3

Net exports of goods & services/GDP 1.4 -0.8 -1.6 -1.1 -1.1 -0.6 -1.3 0.0 -1.1 0.6 -1.6 -0.8

Openness of the economy[2] 75.5 78.6 79.2 77.1 74.1 71.4 70.9 75.2 78.1 79.7 74.5 75.9

Government Effectiveness[3] 2.2 2.2 2.2 2.2 2.0 1.8 1.8 1.9 2.0 -- -- --

Government finance

Gen. gov. revenue/GDP 51.4 52.6 53.3 54.3 54.3 54.1 53.9 53.1 52.5 52.1 52.2 52.5

Gen. gov. expenditures/GDP 53.9 53.7 55.4 56.8 57.3 56.5 55.7 53.7 53.4 53.2 59.5 56.6

Gen. gov. financial balance/GDP -2.5 -1.0 -2.2 -2.5 -3.0 -2.4 -1.7 -0.7 -0.9 -1.1 -7.3 -4.2

Gen. gov. primary balance/GDP -1.2 0.4 -0.7 -1.3 -1.8 -1.3 -0.6 0.3 0.1 -0.3 -6.3 -3.3

Gen. gov. debt (US$ bil.) 118.2 124.0 142.1 158.3 149.8 146.1 145.0 166.4 159.6 160.0 186.7 211.0

Gen. gov. debt/GDP 46.9 48.3 53.6 56.2 59.8 63.6 63.2 61.3 59.6 59.2 70.1 72.8

Gen. gov. debt/gen. gov. revenue 91.3 91.7 100.6 103.6 110.2 117.7 117.1 115.5 113.5 113.8 134.4 138.8

Gen. gov. interest payments/gen. gov. revenue 2.6 2.6 2.7 2.3 2.3 2.1 2.0 1.9 1.7 1.6 1.9 1.7

External payments and debt

Nominal exchange rate (local currency per US$, Dec)[4] 0.7 0.8 0.8 0.7 0.8 0.9 0.9 0.8 0.9 0.9 0.9 0.8

Real eff. exchange rate (% change) -5.2 1.3 0.0 3.2 1.2 -3.0 -2.0 -2.9 2.0 -1.9 -- --

Relative unit labor cost -- -- -- -- -- -- -- -- -- -- -- --

Current account balance (US$ bil.) 3.7 -4.0 -5.3 -4.9 -3.7 -2.2 -4.9 -2.4 -4.8 -1.2 -6.0 -4.5

Current account balance/GDP 1.5 -1.4 -2.1 -1.8 -1.3 -0.9 -2.0 -0.9 -1.7 -0.5 -2.3 -1.6

Net foreign direct investment/GDP -1.1 -0.9 -1.3 0.8 6.1 7.8 -5.5 1.3 -4.9 1.8 1.9 1.8

Net international investment position/GDP 15.5 13.9 10.6 3.0 -3.1 4.8 5.2 0.5 -6.6 1.5 -- --

Official forex reserves (US$ bil.) 4.9 5.3 5.7 6.7 6.4 6.2 6.5 6.4 6.1 6.8 6.4 6.6

[1] Harmonized Index of Consumer Prices (HICP)

[2] Sum of Exports and Imports of Goods and Services/GDP

[3] Composite index with values from about -2.50 to 2.50: higher values suggest greater maturity and responsiveness of government institutions

[4] Euro adopted on January 1, 1999




Moody's related publications

» Rating Action: Moody's affirms Finland's Aa1 ratings; outlook remains stable, 24 July 2020

» Credit Opinion: Government of Finland – Aa1 stable: Update following rating affirmation, outlook unchanged, 24 July 2020

» Sector Comment: Sovereign and Supranational – Europe: Revised Recovery Fund remains broadly credit neutral for the EU andsupportive of recipient countries, 24 July 2020

» Sector In-Depth: Sovereign – Europe: Economic recovery and policy effectiveness key to government credit profiles in the euroarea, 24 July 2020

» Sector In-Depth: Credit Conditions- Europe: Post-Covid Europe: More indebted, more social, more tech-reliant, 22 July 2020

» Sector In-Depth: Sovereign – Europe: Job retention schemes in Europe mitigate economic damage of coronavirus shock, 21 July2020

» Sector In-Depth: Sovereigns – Nordics: Strong public finances mitigate credit negativeimpact of the coronavirus shock, 13 July2020

» Sector In-Depth: Sovereigns & Supranational – Europe: Recovery Fund would have limited credit impact for EU, while supportivefor member states hard hit by pandemic, 23 June 2020

» Sector In-Depth: Sovereigns – Advanced Economies: Coronavirus will raise debt burdens; credit differentiation in capacity toreverse shock, 22 June 2020

» Outlook: Global Macro Outlook 2020-21 (June 2020 Update): Global economy is limping back to life, but the recovery will be longand bumpy, 22 June 2020

» Sector Comment: Sovereigns – Europe: German court’s ruling highlights constraints on ECB asset purchases, 6 May 2020

» Sector Comment: Coronavirus – Europe: Lost and postponed consumption during lockdown has a significant impact on GDP, 5May 2020

» Sector Comment: Sovereigns – Europe: Euro area’s coronavirus financial package supports low funding costs for sovereigns, 14April 2020

» Sector Comment: Sovereigns – Euro Area: Coronavirus' lasting credit impact will depend on crisis duration and fiscal exitstrategies, 8 April 2020

» Sector Comment: Cross-Sector – Europe: Euro area sovereigns are main beneficiaries of ECB's asset purchases, 23 March 2020

» Sector in-Depth: Sovereigns – Global: Coronavirus and oil price shock magnify weaknesses highlighted in negative 2020 outlook,20 March 2020

» Sector In-Depth: Sovereigns - Europe: Income inequality in Europe is associated with weaker institutional strength, 6 November2019

» Rating Methodology: Sovereign Ratings Methodology, 25 November 2019

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this report and that more recent reports may be available. Allresearch may not be available to all clients.

Related websites and information sources

» Sovereign risk group web page


https://www.moodys.com/research/Moodys-affirms-Finlands-Aa1-ratings-outlook-remains-stable--PR_427890
























https://www.moodys.com/researchandratings/market-segment/sovereign-supranational/-/005005/005005/-/-1/0/-/0/-/-/en/global/rr


» Sovereign ratings list

MOODY’S has provided links or references to third party World Wide Websites or URLs (“Links or References”) solely for your convenience in locating related information and services.The websites reached through these Links or References have not necessarily been reviewed by MOODY’S, and are maintained by a third party over which MOODY’S exercises no control.Accordingly, MOODY’S expressly disclaims any responsibility or liability for the content, the accuracy of the information, and/or quality of products or services provided by or advertised onany third party web site accessed via a Link or Reference. Moreover, a Link or Reference does not imply an endorsement of any third party, any website, or the products or services providedby any third party.

Endnotes1 Business Finland is the Finnish government's organisation for innovation funding and trade, travel and investment promotion.

2 Finnish Industry Investment is a company that promotes growth, competitiveness, internationalisation and restructuring Finnish industries throughventure capital investments.

3 Finnish Mineral group is a company that manage the Finnish state's mining industry shareholdings with the mission to responsibly maximise the value ofFinnish minerals.

4 TyEl is the Employees Pensions Act, under which earnings-related pensions are financed by contributions paid by both employers and employees.

5 The pact included (1) an increase of 24 hours per year in working hours without additional compensation; (2) a wage freeze in 2017; (3) a permanent shiftto a larger share of social security contributions by employees; and (4) a 30% reduction in public sector holiday bonuses during 2017-19. See also: Issuer-InDepth: Governmnet of Finland - Aa1 Stable, 15 May 2018.

6 The 2018 Ageing Report: Economic & Budgetary Projections for the 28 EU Member States (2016-2070), May 2018.

7 See: European Commission, Fiscal Rules Database.

8 See for example Assessment of the 2020 Stability Programme for Finland, May 2020.

9 See European Commission: Country Report Finland 2019, page 19, European Commission: Country Report Finland 2018, page 17, and Country ReportFinland 2020, page 24.

10 See European Commission: The 2018 Ageing Report: Economic and Budgetary Projections for the EU Member States (2016-2070), 25 May 2018.

11 Finnish Centre for Pensions, Statutory pensions in Finland – long-term projections 2019 (Executive summary), 19 March 2019.

12 See Cross-Sector – Finland: Government collapse highlights reform challenges ahead, 11 March 2019.

13 See Europe 2020 Strategy: Finland's National Reform Programme, Spring 2020.

14 See Government’s draft legislation on the reform of healthcare, social services and rescue services circulated for consultation, 15 June 2020.

15 See Finnvera, Report of the Board of Directors and Financial Statements 2019.

16 See Ownership Steering Committee at the Prime Minister’s Office.


https://www.moodys.com/research/Sovereign-Supranational-Rating-List--PBC_186519


https://ec.europa.eu/info/sites/info/files/economy-finance/ip079_en.pdf

https://ec.europa.eu/info/publications/fiscal-rules-database_en

https://ec.europa.eu/info/sites/info/files/economy-finance/fi_assessment_of_2020_sp.pdf

https://ec.europa.eu/info/sites/info/files/file_import/2019-european-semester-country-report-finland_en.pdf

https://ec.europa.eu/info/sites/info/files/2018-european-semester-country-report-finland-en.pdf

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0525&from=EN

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:52020SC0525&from=EN

https://ec.europa.eu/info/publications/economy-finance/2018-ageing-report-economic-and-budgetary-projections-eu-member-states-2016-2070_en

https://www.etk.fi/wp-content/uploads/Lakisaateiset-elakkeet-pitkan-aikavalin-laskelmat-2019-summary.pdf

https://www.moodys.com/research/Cross-Sector-Finland-Government-collapse-highlights-reform-challenges-ahead--PBC_1165129


https://vm.fi/en/-/1271139/sosiaali-ja-terveydenhuollon-ja-pelastustoimen-jarjestamisen-uudistusta-koske-vat-hallituksen-lakiluonnokset-lausuntokierrokselle

https://www.finnvera.fi/eng/finnvera/annual-reports-and-financial-reports

https://vnk.fi/en/value-of-state-holdings


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