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 Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Finland’s long-term local- and foreign-currency issuer and senior unsecured debt ratings at AA+. The agency has also affirmed the short-term issuer ratings at S-1+ in local- and foreign-currency. All Outlooks are Stable.

Summary and Outlook

The affirmation of Finland’s AA+ long-term ratings reflects: i) a wealthy and modern economy, underpinned by a highly educated workforce and a strong infrastructure in the future economic areas of digitalisation and the environmental transition, which is proving resilient to current external shocks related to the Covid-19 pandemic and the Russia-Ukraine war; ii) high government debt affordability, with fiscal resilience anchored to the government’s ample net financial asset position and favourable debt structure reducing the impact of rising interest rates on public finances; and iii) high institutional quality, with Finland ranking among the best countries globally in terms of respect for the rule of law, accompanied by strong commitment to structural reform. On the other hand, the ratings are constrained by challenges related to: i) the country’s moderate growth potential, given weak productivity dynamics and labour market rigidities in the context of a declining working-age population; ii) rising fiscal pressures from Finland’s ageing population that weigh on the medium-term trajectory of public finances; and iii) financial stability risks, including those arising from the size of the Finnish banking sector relative to that of the domestic economy and those related to elevated private sector indebtedness.

The Stable Outlook reflects Scope’s view that risks to Finland’s ratings over the next 12 to 18 months are balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) the country’s economic growth outlook improved significantly; and/or ii) the fiscal outlook improved notably via a sustained debt reduction. Conversely, the ratings/Outlooks could be downgraded if, individually or collectively: i) the medium-term economic growth outlook deteriorated significantly; ii) the fiscal outlook notably weakened, resulting in a material increase in government debt; iii) financial stresses were to crystallise, with damage to the financial and non-financial private sector balance sheets hampering the economic and fiscal outlook; and/or iv) geopolitical risks were to escalate significantly, threatening macroeconomic stability.

Rating rationale

The first driver of Finland’s AA+ ratings is its wealthy and modern economy that is proving resilient to the shocks caused by the Covid-19 pandemic and the war in Ukraine.

Finland’s per capita GDP of about EUR 46,000 or 130% of the euro area average constitutes a source of resilience to economic shocks. Last year, Finland’s output rebounded strongly from the pandemic shock, with real GDP growth of 3.0%, after a contained contraction of 2.2% in 2020. The economy has remained on a solid footing during the first half of 2022, with higher-than-expected growth in the first and second quarters resulting in carry-over annual GDP growth of 2.6% so far. This was achieved despite sanctions on trade with Russia, an important export partner before the escalation of the war, and the first effects of the energy crisis and elevated inflationary pressures. In August, employment counted 100,000 more workers than before Covid-19, resulting in a record high employment rate (trend adjusted) of 73.6%, against 70% pre-shock. The number of unemployed is back at pre-pandemic levels, close to 190,000, meaning participation has significantly increased.

Scope expects the economic outlook to weaken from the second half of this year, however, with growth of 2.3% in 2022 and just 0.2% in 2023, reflecting the worsening of the energy crisis and the global economic slowdown. Growth should rebound to 1.4% in 2024 and then converge towards a medium-term modest growth potential of 1.2%. Finland is less expos