Fitch Affirms Finland at 'AAA'; Outlook Stable

Fri Mar 28, 2014 1:06am EDT

(The following statement was released by the rating agency) LONDON, March 28 (Fitch) Fitch Ratings has affirmed Finland's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'AAA'. The Outlooks are Stable. The issue ratings on Finland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'. KEY RATING DRIVERS Finland's ratings reflect very high governance indicators, strong political and social institutions and an excellent track record of prudent fiscal and macroeconomic policy management. Finland's score on governance indicators outperforms even 'AAA' rated peers. Finland does not currently suffer from major imbalances in the household and external sectors. Finland recorded a current account deficit - albeit small at around 1% of GDP - for the third year in a row. After declining for a decade, the terms of trade stabilised in 2013. Finland's economy contracted by 1.4% in 2013, leaving real GDP more than 6.5% lower than its peak in 4Q07, before the global financial crisis. The Finnish economy is still adjusting to the structural decline of electronics and paper sectors. Finland is also already experiencing the effects of an ageing population, as the working-age population has declined for the past three years. At the same time, the strong asset position (around 54% of GDP) of Finland's statutory pension schemes is a mitigating factor against the rising costs of an ageing population. The public debt to GDP ratio was estimated to be 57.0% at end-2013. Whilst this is higher than the median of 'AAA' rated peers, it provides Finland with a degree of fiscal space until the economy's medium-term growth potential recovers. On 25 March, the Finnish government announced a series of fiscal adjustment measures totalling EUR2.3bn (around 1.1% of 2015 GDP) over four years, front-loaded in 2015. Fitch expects the economy to recover this year, albeit at a modest rate of 0.6%, with net exports accounting for the improvement in economic growth, as prospects in Finland's key export markets improve further. Real GDP growth is expected to accelerate in 2015. One area of uncertainty is the extent to which recent geo-political tensions will affect economic prospects in Russia, a key trading partner. The Finnish government introduced a series of measures last year to address the structural problems of the economy, and the impact of demographic changes on public finances. The reforms aim to increase the economy's growth potential and address the long-term fiscal sustainability challenge. Fitch estimates that the general government deficit was 2.7% in 2013. We expect the deficit to remain unchanged this year, before falling back in 2015. These deficits are expected to translate into a rise of around 5pp in the government debt to GDP ratio by 2015. RATING SENSITIVITIES The Outlook is Stable. Consequently, Fitch does not currently anticipate developments with a high likelihood of leading to a rating change. However, future developments that could, individually or collectively, result in downward pressure on the ratings include: -Failure to improve the economy's potential medium-term growth rate. Positive developments in sectors outside electronics and paper, along with policy measures addressing labour market rigidities and structural unemployment, would improve growth prospects, thereby supporting the rating. -Failure to address the impact on public finances from demographic changes and lower growth. Measures to address the fiscal sustainability gap would help achieve a stabilisation of the government debt to GDP ratio, supporting the rating. KEY ASSUMPTIONS In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.5% of GDP, trend real GDP growth of around 1.25%, an average effective interest rate of 2.2%, and GDP deflator inflation of 2.0%. On the basis of these assumptions, the public debt to GDP ratio would peak at 66.4% in 2020, before edging back to 65.6% over the following three years. Fitch assumes the gradual progress in deepening fiscal and financial integration at the eurozone level will continue; key macroeconomic imbalances within the currency union will be slowly unwound; and eurozone governments will tighten fiscal policy over the medium term. It also assumes that the risk of fragmentation of the eurozone remains low. Fitch assumes that economic or financial sanctions against Russia do not substantially affect Finland's economic performance. Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Enam Ahmed Director +44 20 3530 1624 Committee Chairperson James McCormack Managing Director +44 20 3530 1286 Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria and Related Research: Sovereign Rating Criteria here Country Ceilings here Additional Disclosure Solicitation Status here ALL 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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