Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Finland (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AA+/Stable; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 26 August 2024.

This monitoring note does not constitute a credit-rating action, nor does it indicate the likelihood that Scope will conduct a credit-rating action in the short term. Information about the latest credit-rating action connected with this monitoring note along with the associated ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, click here.

Finland’s AA+ ratings are underpinned by the following credit strengths: i) Finland’s wealthy and modern economy, supported by a highly educated workforce and strong infrastructure in the future economic areas of digitalisation and the environmental transition, which increases resilience to external shocks; ii) high government debt affordability, excellent market access and the government’s ample net financial asset position; and iii) high institutional quality, with Finland ranking among the best countries globally in terms of respect for the rule of law, accompanied by a good record of proactively implementing reforms.

Finland’s credit ratings remain constrained by: i) structural fiscal pressures exerting upward pressure on the country’s debt-to-GDP ratio, which Scope considers to be a key credit challenge; ii) the moderate medium-term growth potential compared with peers; and iii) structural financial stability vulnerabilities including a concentrated banking sector reliant on wholesale funding.

Finland’s challenging public finance outlook poses a key constraint on Finland’s credit ratings. Slow economic growth following the Covid-19 pandemic and energy crisis led to a fall in tax revenues, while inflationary pressures resulted in higher government spending, including higher spending on defence since the escalation of the Russia-Ukraine war. These fiscal pressures come in addition to structural challenges, including an ageing society as captured by the old-age dependency ratio, which stands at the highest level in the euro area, in line with Italy and Portugal. As a result, the debt-to-GDP ratio remained elevated following recent crises, rising from 75% in 2020 to 77% in 2023. Scope expects continued weak economic growth and a high fiscal deficit of 3.4% of GDP to increase the debt-to-GDP ratio to 80.4% in 2024 and further to 82.4% in 2025.

To help stabilise rising public debt levels, the government has announced further tax rises and spending cuts in April 2024 amounting to around 1% of GDP. This includes an increase in the VAT rate as of September 2024 to 25.5% from 24%, being the second highest in the EU after Hungary (27%) but in line with other Nordic economies (25%), as well as further permanent spending cuts of around EUR 1.4bn which will largely take effect from 2025 onwards. In addition, Finland is adopting a set of labour market reforms aimed at reducing the number of people caught in the welfare-trap, seeking to increase employment by 100,000 by 2027 and raise the employment rate to 80% by 2031 from around 72% as of Q1 2024. If implemented successfully, the planned government revenue increases, cost savings and efficiency gains could stabilise the debt-to-GDP ratio at 84% from 2027 onwards. Longer-term, the government’s ample net financial asset position (58.9% of GDP) stemming from its public pension scheme is an important element of resilience for Finland’s government finances. Most of these assets are earmarked to fund pension expenditures, resulting in the Finnish government being the wealthiest among euro area sovereigns.

Economic growth slowed in 2023 with output declining by 1.0% and Scope expects it to decline by a further 0.3% in 2024. The weak outlook reflects slow growth in Finland’s largest trading partners and the impact of higher interest rates on households and companies, particularly in the construction sector. The economy is expected to grow by 1.8% in 2025 as demand in Finland’s export markets continues to grow, inflation falls significantly this year and interest rates continue to decline.

The Stable Outlook represents Scope Ratings’ view that risks to the ratings remain balanced.

The ratings/Outlook could be upgraded if, individually or collectively: i) the fiscal outlook improved notably, resulting in a sustained debt reduction; and/or ii) the country’s medium-term economic growth outlook improved significantly.

Conversely, the ratings/Outlook could be downgraded if, individually or collectively: i) the fiscal outlook weakened, resulting in a sustained increase in government debt; ii) the medium-term economic growth outlook deteriorated significantly; iii) financial stability risks were to crystallise, with damage to the financial and non-financial private sector balance sheets, significantly weakening the economic and fiscal outlooks; and/or iv) geopolitical risks were to escalate significantly, threatening macroeconomic stability.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Eiko Sievert, Senior Director

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