Fitch Affirms Finland at 'AAA'; Outlook Stable

Fri May 3, 2013 12:06pm EDT

LONDON, May 03 (Fitch) Fitch Ratings has affirmed Finland's Long-term foreign and local currency Issuer Default Ratings (IDRs) as well as its senior debt at 'AAA'. Fitch has also simultaneously affirmed Finland's Country Ceiling at 'AAA' and the Short-term foreign currency rating at 'F1+'. The Outlook on the Long-term rating is Stable. KEY RATING DRIVERS Finland's rating is underpinned by a combination of strong governance, high income per capita, a positive net international investment position and an impeccable debt service record. Government borrowing is currently strongly placed in financial markets. The strength of public finances is a key support to the rating despite the more pressing issue of population aging. Public finances remain robust compared to peers. This provides Finland with some scope to absorb unexpected shocks and is reflected in the Stable Outlook. At 53% of GDP in 2012, general government debt is in line with the 'AAA' median and well below eurozone rating peers, including Germany ('AAA'/Stable). While the government has acknowledged that it will fail to meet its objective to reduce the central government deficit to no more than 1% of GDP by 2015, Fitch expects debt to GDP will remain below the EU threshold of 60% of GDP during the remainder of the parliamentary term of the current administration. With pension fund assets over 70% of GDP the government has a net asset position, one of only six countries in the OECD and only second to Norway when measured relative to GDP. This is a mitigating factor towards the rising cost of an ageing population for the government for the short to medium term. The impact of an ageing population on public finances, however, will accelerate from 2020 and the government will need to implement further reforms of pensions to restore long run sustainability. The structural adjustment towards the services sector from highly productive industry, in particular the ICT sector has been well documented. The lower growth potential for Finland increases the long term fiscal challenge from an ageing population. However, Finland does not currently suffer from any major macroeconomic imbalances. The current account slipped into a deficit in 2011 for the first time since 1993 but at below 2% of GDP is not excessive. The rise in private credit and household indebtedness is not yet a material concern from a sovereign credit perspective but is elevated by historical standards. The banking sector is sound, well capitalised and has limited exposures to troubled eurozone economies limiting the macro-financial risks arising from the crisis. RATING SENSITIVITIES The current rating Outlook is Stable. Consequently, Fitch's sensitivity analysis does not currently anticipate developments with a material likelihood, individually or collectively, of leading to a rating downgrade over the next one or two years. However, future developments that may, individually or collectively, lead to pressure on the Outlook include:- - A significant worsening of the eurozone crisis could have a severe adverse impact on Finland's small and open economy putting pressure on the rating. Finnish contingent liabilities arising from other eurozone sovereigns - which the authorities have been at pains to limit - could also increase over time. - Failure to implement structural reforms. Further progress on pension reform is needed to put Finland's long-term age related public finances on a sustainable path. Addressing labour market rigidities and measures to improve the country's competitiveness will lift long term growth prospects lowering the long term fiscal challenge from ageing for the government. KEY ASSUMPTIONS Fitch expects growth to remain sluggish in 2013 after the economy contracted by 0.2%. Activity will expand by around 0.4% in 2013 before picking up to 1.4% in 2014 on the recovery in the eurozone. The output gap is unlikely to close until 2017 which implies growth will significantly underperform the near 4% average for the decade prior to the global economic and financial crisis. Fitch assumes long term growth potential at slightly above 1%, less than half of the 3% average in the decade prior to 2008. Fitch assumes that there is no materialisation of severe tail-risks to eurozone financial stability that could trigger a sudden and material increase in investor risk aversion and financial market stress. Fitch expects the government's consolidation efforts will ease the general government deficit to around 1.5% of GDP in 2015 from 2.3% of GDP in 2012. As a result the debt to GDP ratio will peak at around 58% in 2014 from 53% in 2012. The government will not achieve its objective of reducing the central government deficit to GDP to no more than 1% of GDP in 2015 and the weak growth profile puts at risk its objective of reducing central government debt to GDP from 2015. Contact: Primary Analyst Enam Ahmed Director +44 20 3530 1624 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Spyros Michas Director +44 20 3530 1121 Committee Chairperson David Riley Managing Director +44 20 3530 1175 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available at www.fitchratings.com. Applicable criteria, 'Sovereign Rating Methodology' dated August 2012, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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