Teppo Koivisto is Head of the Finance Division at the State Treasury of Finland. Mr. Koivisto is in charge of the central government debt management function, which includes funding, liquidity management, investor relations and interest rate risk positioning of the government debt.
The year 2014 turned out to be quite different to what was anticipated at the beginning of the year. Encouraging signs of growth from the euro area did not live up to expectations in the latter part of the year.
Geopolitical tensions added their own complications to the dynamics in economies and financial markets. Interest rates in the euro area slid into extremely low territory in line with weak growth and low inflation. The expectations of a full-scale quantitative easing by the European Central Bank will potentially support this scene of low yields for a long time. This outlook provides new challenges for issuers with respect to both demand and supply of bonds.
The credit rating agency Standard & Poor’s lowered its long-term sovereign credit rating on the Republic of Finland from AAA to AA+ in October 2014. Despite this downgrade, Finland fared well to maintain its competitive position among the best-rated euro sovereigns in 2014. There are beyond doubt uncertainties related to the growth prospects of the Finnish economy, but public finances still shine in international comparison. Finland’s public debt is much lower than in the EU countries on average and Finland is one of the very few euro countries that has so far met the Maastricht criteria on the deficit and debt.
Nevertheless, stabilization of our public finances in the coming years requires support from stronger growth and better performance in our main export industries.
The key themes of future growth prospects are competitiveness and productivity. In this annual review, we want to provide insight on these themes and simultaneously take a closer look at the future of the Finnish economy.
The key themes of future growth prospects are competitiveness and productivity.
The protracted downturn in the Finnish economy suggests that public finances will remain in deficit in the coming years, although the government’s adjustment measures will help to keep the public deficit in check and below the 3% reference value. The public economy’s debt ratio will nevertheless exceed the 60% ceiling, though at the end of 2014 the public debt still stood at 58.9% relative to GDP.
The mission of the State Treasury is to secure the liquidity and funding for the central government. The scale of our financing programme for 2015 resembles that of last year. The central government net borrowing requirement is estimated to be some EUR 4.7 billion. The overall gross borrowing requirement, including short-term funding, will be around EUR 16 billion.
The Republic of Finland will continue the funding strategy of issuing two new euro-denominated benchmark bonds in 2015. However, as communicated before, a new longer benchmark bond issue will be introduced every three years. A 15-year bond was issued in 2012, and following the same pattern, a new 15- or even 20-year benchmark is planned for 2015.
Our key goal of keeping our bonds attractive to our investors has not changed. We are convinced that Finland’s firm credit outlook will continue to support our bonds and serve our investors in the best way today and in the future.
Nomura starts as new primary dealer
Moody's confirms best possible credit rating for Finland
Finland Issues new benchmark bond
The Republic of Finland issued a new 10-year euro benchmark bond due 15 April 2024. The bond was EUR 4 billion in size, with approximately 130 investors participating in the deal. The order book grew to EUR 8.5 billion, and the majority of investors were banks, fund managers and pension funds.
Government’s credit agency tasks are transferred from the Ministry of Finance to the State Treasury
Fitch Ratings affirms best possible credit rating for Finland
Standard & Poor’s affirms best possible credit rating for Finland – outlook revised to negative
Finland taps Treasury bills in daily tapping
Finland arranges tap auction of two government bonds
The first auction of 2014, conducted in May, was a double line auction of bonds maturing on 15 April 2024 and on 4 July 2042. The auctioned amounts were EUR 1 000 million and EUR 500 million, respectively, which brought the total auctioned amount to EUR 1500 million. The outstanding amounts of the bonds after the auction are EUR 5 billion for the 10-year benchmark, and EUR 3.501 billion for the 2042 bond.
Finland issues new 6-year benchmark bond
The second euro benchmark bond of the year was a 6-year bond maturing on 15 September 2020. The issue size of the bond was EUR 4 billion, and the order book grew to EUR 8.8 billion. There were over 100 investors participating in the issue. The number of Asian investors was higher than in the previous 5-year issue, and also many central banks participated in the deal.
Finland issues new USD-denominated bond
Finland launched a new 5-year USD benchmark due 10 September 2019. The issue size was USD 1.5 billion, with bids from more than 60 investors. Central banks took 53% of the issue. The issue was swapped into euros to mitigate currency risk.
Fitch affirms best possible credit rating for Finland
Standard & Poor’s lowers Finland’s sovereign credit rating to AA+
Finland arranges tap auction of government bond
The second auction of the year was conducted in October for the bond maturing on 4 July 2028. The amount auctioned was EUR 1 000 million. The outstanding amount of the bond after the auction is EUR 5 billion.
Finland taps Treasury bills in daily tapping
During the year, Treasury bill issuance was focused on two time periods, May and October-November. The bulk of the amount issued was USD-denominated. The average maturity of the T-bills was 4.4 months. The gross volume of the Treasury bill issuance was in EUR terms 7.9 billion. The outstanding stock at year end was equivalent to EUR 4.2 billion.
Finland issues new GBP-denominated bond
Finland launched a new GBP-denominated 5-year bond with 250 million nominal amount.
At the time, we thought that we had survived the financial crisis of 2008 with little or no damage in Finland. Companies' strong balance sheets and the level of public debt, which was reasonable by international standards, gave us some room for manoeuvre that was expected to carry us over the difficult period. This belief was backed up by international comparisons of competitiveness, in which Finland still ranked close to the top.
Six years later, we are still waiting for a turning point in the global economy, and more particularly in the European economy, to pull our heavily export-driven country back on track for growth. Many are unable to see or admit that our assessment of the situation was wrong. Rather than international economic cycles, our core problems lie in our national structures. Gazing hopefully at the rest of the world and waiting for a crucial change is pointless. We should recall Winston Churchill’s famous instructions: ”Gentlemen, we have run out of money, now we must think.”
Esko Aho has enjoyed a distinguished career in Finnish politics, including the post of Prime Minister from 1991 to 1995. In 2000 he joined Harvard University as a lecturing professor. In July 2004 Mr. Aho was appointed President of the Finnish Innovation Fund, SITRA. From 2009 to 2012, he worked as the Executive Vice President of Corporate Relations and Responsibility at Nokia. Since 2013 Mr. Aho has served as Executive Chairman of the Board at East Office of Finnish Industries.
While the current crisis cannot directly be equated with the recession of the early 1990s, these two have one important feature in common: at both times, the old recipe for growth ceased to work. Two decades ago, we were forced to find a new recipe on a rapid schedule to stop foreign lenders from turning their backs on us. This time around, we are not faced with a similar immediate threat, and no other sufficiently compelling reason for taking a completely new tack has been found. Our industrial production has declined dramatically and labour productivity has collapsed, whereas the ageing of the population and flexibility of public sector debt have curbed the increase in unemployment. While the sustainability gap is something that everybody accepts, it is deemed a distant threat.
We now possess the ingredients for a new recipe for growth, of which digitalisation is overwhelmingly the most important one.
In the early 1990s, new technologies emerged as a driver of growth. Systematic inputs had already been made in it for a decade, but thanks to efforts to counteract recession and integration policy solutions, we managed to create a functional operating environment for the sector. All this spurred Nokia’s tremendous growth, but also improved the competitiveness of other industries on a broad horizon. The productivity of labour grew rapidly, and the whole national economy followed suit. A tight reign on public expenditure over an extended period brought down debt-to-equity ratios. Ultimately, the secret to this success story was relatively simple.
We now possess the ingredients for a new recipe for growth, of which digitalisation is overwhelmingly the most important one. It will revolutionise manufacturing, logistics and transport as well as the provision of private and public services. It will also open up immense possibilities for increasing productivity by creating new concepts and improving old ones.
Small economies have many weaknesses compared to larger ones. In the implementation of digital solutions, however, they have a comparative advantage. In particular, a country like Finland with a highly educated population, good infrastructures, a well-functioning society and clear ground rules for the economy could easily become one of the major winners of digitalisation.
So far, we have not succeeded in this. The reason does not lie in technology or a lack of it, but in the operating environment. Faced with the challenges of a new millennium, we are looking for solutions in attitudes and approaches dating back to a bygone century. Finland thus urgently needs to draw up a strategy, and make decisions consistent with this strategy, on how our education system, research and its funding, private-public sector cooperation, state aid for business and public leadership can be brought to a level that will allow us to emerge as one of the world's leading countries in digital solutions.
The requisite reform of the public economy and service provision must be linked to this strategy. We must shift the emphasis from administrative structures and boundaries to reforming the actual content. Immense productivity benefits and cost savings can be achieved in health care, education and administrative services, while also improving the quality, as long as we can make the most of the new technologies.
The new recipe for growth should also include a new understanding of the roles of the public and private sectors. Far too often, these two are seen as opposites or competitors. A transition into the digital era will require seamless cooperation between the private and public sectors and a new division of labour.
The private sector must accept that over the long term, successful business can only be generated where the surrounding society is highly organised, well functioning, effective and sound. Many industries also rely on the public sector for developing the infrastructures, including the operational architecture, which are vital for developing private enterprising. The electronic patient record system of the health care sector may be the best example of the latter.
Similarly, the public sector must understand that we can only cope with the challenges facing us by also harnessing the best resources of the private sector to producing new solutions. A prerequisite for this, on the other hand, is understanding and accepting that profits can be made and risks must be taken, also in the provision of public services. This will result in effectiveness, productivity and better quality.
The third core ingredient in the recipe for new growth is looking after the industrial foundation of the country. A simultaneous massive structural change in Nokia and in the forest industry is one explanation for the steep decline of our industries, but only one. This is about a larger global change that is threatening to erode Finland's industrial structure.
There is no patent solution for this problem. We need long-term work to secure the infrastructures and skills base needed by the industries, but also their price competitiveness. One of the paradoxes of Finland is that after joining the euro area, our track record in playing by the unavoidable rules of the common currency is worse than Sweden's, a country which has stayed out of the eurozone. The pivotal question for the national economy of a small country crucially dependent on exports is allowing the ceiling of cost trends to be determined by sectors relying on exports. Sweden has lived by this rule, whereas Finland has not. Unfortunately, the consequences are also visible.
Economic growth in Finland remained sluggish in 2014. However, the economy will slowly gather speed with the rebound of the global economy. The economy is expected to grow by around one per cent in 2015.
The year 2014 was a difficult one for the Finnish economy. According to the Ministry of Finance’s forecast, GDP grew by 0.1% in 2014. Net exports had a positive effect on the economy. Private consumption showed zero growth in 2014, and private investment declined. The labour market continued to deteriorate, and the unemployment rate edged up to 8.6%. Once again, international economic conditions overshadowed economic development in Finland.
In 2015, growth is expected to come in at 0.9% and to become more broadly based. Private consumption will edge up by 0.3%, even though household real disposable income will show virtually no growth. The household savings rate will fall slightly in the next couple of years, and the growth of household debt will come to a halt. Exports growth will remain slower than world trade growth, and therefore market shares will continue to decline. Sluggish domestic demand will curb the growth of imports. Private investment will pick up to some extent, mainly on the back of recovering investment in machinery and equipment and R&D investment.
Public finances have continued to remain in deficit due to the persistent weakness of the economy. The general government budgetary position is also burdened by the growth of expenditure resulting from population ageing, which is affecting local government finances in particular. General government finances will improve very slowly in the years ahead. It is forecast that the general government deficit will remain below the 3% reference value, but the debt ratio is set to breach the 60% ceiling.
Central government and local government will remain in deficit, while the earnings-related pensions sector is in surplus and other social security funds more or less in balance. The expenditure rate or the ratio of public expenditure to GDP has climbed to a very high level in recent years above all because of slow GDP growth, but the expenditure rate is also being increased by unemployment-related expenditure. The tax rate, i.e. the ratio of taxes to output, is in turn driven up by tax hikes.
In 2014, central government finances were deeply in deficit for the sixth year in succession, and there is no significant turnaround in sight at least over the next two years ahead. This is due above all to the protracted downturn. Adjustment decisions taken by the government at various stages will take hold on both the revenue and expenditure side and reduce the central government deficit. At the same time, the emerging but still sluggish rebound of the economy will accelerate the growth of tax revenue.
Finnish public finances stand out in a positive light in international comparison. Finland’s public debt is much lower than in the EU countries on average and Finland is one of the very few euro countries that has so far met the Maastricht criteria on the deficit and debt. This favourable position, among many other things, is also reflected in Finland’s high credit ratings.
The central government of Finland has solicited credit ratings from three credit rating agencies: Standard & Poor's, Moody's and Fitch Ratings. For long-term debt, they are AA+, Aaa and AAA, respectively.
The ratings provided by Moody’s and Fitch Ratings did not change in 2014 but Standard & Poor’s (S&P) lowered its long-term sovereign credit rating on the Republic of Finland from AAA to AA+ in October 2014.
S&P cited e.g. Finland’s weak economic growth prospects as a reason for the downgrade. The outlook on the rating is stable. According to S&P, the rating is likely to remain unchanged during the next two years.
The general principles of central government debt management are determined by the Ministry of Finance. The State Treasury is a central administrative agency operating under the Ministry of Finance and implements all debt management operations under the guidelines prepared by the Ministry.
The guidelines set out e.g. the general principles and objectives of debt management, instruments to be employed in debt management and risk limits as well as other restrictions to be observed.
The State Treasury reports regularly on debt management to the Ministry of Finance. The government submits financial statements to Parliament annually, including an overview of the condition of the national economy and the productivity of the Ministry of Finance’s administrative sector.
“The incurrence of state debt shall be based on the consent of the parliament, which indicates the maximum level of new debt or the total level of state debt.”
The objective of Finland’s central government debt management is to fulfil the state’s financial requirements and to keep the long-term costs of servicing the debt as low as possible in relation to risks resulting from the debt, in such a way that the risks are acceptable in terms of national risk-bearing capacity.
Information and communication technology (ICT) has been the most important single factor contributing to Finland's economic growth. The success and collapse of the electronics industry have been the main reasons for the rapid economic growth in Finland and the current economic downturn. However, the other ICT channels have not lost any of their importance. Spurred by advances in digital technology, they can put Finland on the growth path again.
After the introduction of the euro, Finland experienced rapid economic growth, outperforming such countries as Germany. The problem is that, unlike in Germany or Sweden, the growth did not resume after the downturn caused by the financial crisis. Instead, Finland found itself in a new slump in 2012.
Dr. Matti Pohjola is Professor of Economics at the Aalto University School of Business and former Deputy Director of the World Institute for Development Economics Research at the United Nations University (UNU-WIDER). He holds a PhD degree from the University of Cambridge. Mr. Pohjola’s current research focuses on the impacts of information and communication technology on productivity and economic growth.
The large role played by ICT is the main reason for Finland's success and our current problems. During the past 15 years, it has accounted for two thirds of the technological development on which our economic growth is based. It has been responsible for 50 per cent of the productivity growth and 40 per cent of the growth in the Finnish GDP.
ICT is the general purpose technology of our time. It boosts productivity by creating new high value-added products in the ICT sector and by increasing efficiency in all sectors of the economy. The ICT sector consists of the electronics industry, telecommunications, and information and communication services.
The large role played by ICT is the main reason for Finland's success and our current problems.
Until 2008, the electronics industry accounted for half of the productivity impact of ICT in Finland. However, the sector collapsed when Nokia lost its market share in high-margin-smartphones. Because of this and the problems affecting its forestry and metal industries, Finland is yet to recover from the collapse of its industrial base, which began with the withering of Nokia. Our economy is not growing because productivity growth is stagnant and the ideas for accelerating it are in short supply - nobody has presented the 'recipe' for growth.
However, the information and communication technology has not lost any of its importance. Its remaining channels (telecommunications, information and communication services, and investment in ICT) have also helped to maintain economic growth in recent years, accounting for more than a third of all productivity growth in the Finnish economy.
Information and communication services are the most rapidly growing sector in the Finnish economy and they have not been affected by the downturn. Their total output is already more than twice as high as that of the forest industry and two thirds of the output of the metal industry.
ICT and digitalisation are creating new recipes for economic growth. Digital technology is already so inexpensive that it is accessible to everybody. Advances in artificial intelligence and robotics boost productivity within the framework of the new division of labour between humans and computers. The Internet connects the people of the world and the Industrial Internet will soon do the same for objects. The third industrial revolution will have the same impact as the second one, which came about as a result of the use of electricity.
There are good grounds for claiming that the biggest productivity impact of ICT is yet to come. It will not necessarily be based on radical innovations because great ideas are often created accidentally when efforts are made to solve smaller problems. We only need to identify how small and, occasionally, big innovations arise. The success of the Finnish mobile games on the global market shows what opportunities digitalisation can offer.
There are good grounds for claiming that the biggest productivity impact of ICT is yet to come.
Finland can also be equally successful in other areas. Our digital capabilities are among the best in the world and the economic downturn has not destroyed our ICT expertise. In addition to traditional manufacturing industries, Finland is also doing well as an exporter of data processing services. This is a promising sign because the Industrial Internet combines manufacturing and digital service production. Remote control and remote maintenance systems for lifts, cranes, ship engines and power plants are practical examples of this. Analysing the big data that they generate is a new form of high value-added service production. We can also influence the rate of productivity growth.
Industrial Internet or the Internet of Things in general can boost the rate of productivity growth as much as electronics did in the 1990s and early 2000s. All other sectors making wide use of smart devices, such as energy, transport and health care will also benefit from this trend.
These productivity benefits can only be achieved if companies facing strategic choices and economic policy decision-makers understand the importance of digitalisation. Companies and corporations that are able to combine human resources, information technology and efficient operating practices will be the top performers of the future. In the business world, the challenge is that there are still few top executives that understand the importance and potential of digitalisation. Every company aiming for growth needs a digital strategy.
The public sector can boost productivity indirectly by supporting education, research and development and in a direct manner, by taking action itself. This is because the public sector is one of the biggest users of ICT. Fortunately, political decision-makers have understood this and taken action. The National Data Exchange Layer will become operational in spring 2015. The aim is to include at least 80 per cent of the public administration in the National Data Exchange Layer, generate new business and opportunities for SMEs and make Finland the top ranking country in international comparisons of information technology use.
In 2014, the operating environment for debt issuance was characterized by relatively stable market conditions throughout the year, with only a few instances of market turmoil observed. In hindsight, this stability was somewhat surprising given the international economic and political developments.
The central government net borrowing was around EUR 5.4 billion. This contributed to a central government debt stock of EUR 95.1 billion at year-end.
The gross borrowing for 2014 reached over EUR 16 billion, of which EUR 12 billion was long-term issuance and the rest short-term borrowing (under one year of maturity).
In 2014, two new euro benchmark bonds with maturities of 10 and 6 years were launched via syndication. In two bond auctions, the emphasis was on the longer end of the benchmark curve. The longest bond on the curve, RFGB 2042, was tapped with the new 10-year benchmark, and later the 2028 loan was tapped in the second auction of the year.
The State Treasury is working closely with the Primary Dealers to maintain and further enhance the liquidity of the Finnish benchmark bonds.
The secondary market volumes have been increasing in recent years after the low liquidity in the crisis years. In 2014, the bid-offer spreads of the Finnish benchmark bonds remained stable and in line with the peer countries in the interbank and also in the bank-to-customer markets.
The liquidity position of the central government was strong throughout the year. The State Treasury continued to keep its cash reserve investments mainly in the short-term maturities and minimized its credit risk by investing mainly in triparty repo agreements. The average monthly cash reserves were EUR 5.9 billion.
According to the December 2014 forecast of the Ministry of Finance, Finland will return to a growth path, but the rate of expansion will remain subdued in the next few years. Investment activity has been low for several years, an ageing population limits labour supply and large inputs in R&D do not seem to turn into new innovative products as quickly as assumed.
Dr. Markus Sovala is Director General, Head of the Economics Department in the Ministry of Finance. He holds a PhD in Economics from the University of Helsinki and has studied also in the University of Cambridge, UK. Previously he has worked in the World Bank and the European Commission. In the Finnish administration he has served Prime Minister Lipponen as an Economic Advisor and worked as Deputy Budget Head of the Finnish Government. Mr. Sovala joined the Ministry of Finance in 1995.
In Finland, there are concerns that economic growth will stagnate for many years to come. Ageing of the Finnish population will decrease the working age population and increase the number of people in need of public long-term care and health care services, which will put pressure on public finances. Investments will remain modest due to low business confidence and weak international demand. Also, unemployment is rather high, affecting both domestic demand and labour supply in the long-run, due to the hysteresis effects.
In the early 2000s, growth in Finland was strongly dependent on the increase in multi-factor productivity (MFP). During the last few years, MFP has not been as strong a source of economic growth as it was previously. This concern about the slowdown of MFP is shared by many countries.
ICT has been seen as a key means to increase productivity in the 2000s, but it seems that the reality has been less convincing. However, the story of ICT is not over yet. While the production of ICT goods has been mainly outsourced to low-labour cost countries, the full benefits of different kinds of ICT applications are yet to be seen through ICT investments and new ways of production.
Research and development expenditure amounted to EUR 6.7 billion in 2013, totalling 3.3% of GDP, a figure which is still among the highest in the world.
Professors Matti Pohjola and Joel Mokyr are convinced that the future productivity gains from technological progress will be significant. According to Mokyr, the most important drivers behind scientific advances are the tools and instruments available to scientists, and the toolkit of science has grown enormously during the last few decades. Artificial intelligence, robotics and the internet of things are currently just promising buzzwords but in time these and other new innovations will change the way we think about production and consumption of goods and services. Also, access costs are lower than ever and there is a good institutional environment for intellectual innovation.
Finland is well-positioned to gain from the technological advances that ICT enables. Research and development expenditure amounted to EUR 6.7 billion in 2013, totalling 3.3% of GDP, a figure which is among the highest in the world.
The number of persons of foreign origin is growing rapidly in Finland. The number of employed immigrants has tripled in the 2000s and has exceeded the 100 000 limit. In addition, there are an estimated 60 000-70 000 foreigners employed who do not appear in any statistics. Also, the number of unemployed foreigners has increased, but more slowly than the number of employed. The unemployment rate for foreigners was 21% in 2011. Furthermore, there is a potential labour supply of 20 000 foreign students in educational institutions. *
* Pekka Myrskylä: Osa maahanmuuttajista työllistyy hyvin, osa opiskelee, Tieto&trendit 1.10.2013 (a digital magazine published by Statistics Finland).
For productivity gains and new business opportunities to materialise, the public sector needs to make sure that unnecessary regulation and the resistance to change do not prevent these developments. Besides regulation, the business environment, taxation and direct support systems need to be reformed to promote new kinds of business ideas and not to support the old production methods if the markets finds these outdated.
More generally, in industrial policies the public sector should maintain its role in providing a supporting environment for all kinds of businesses. Smart regulation and a simple taxation system with broad tax bases and low tax rates are the key means for the public sector to provide support for the emergence of new business opportunities and the reform of the existing businesses. Taxation should not affect the distribution of investments (risky start-ups, listed companies, properties, etc.), and markets should determine which investments are taken. In the case of a market failure, such as some intangible investments with large externalities, there is room for the public sector to operate and ensure that the positive externalities are covered.
Another aspect is that also the public sector needs to update its own operations to make the most of the latest technology. Paper forms and personal visits to public offices are outdated means of providing public services. Digitalisation of the public sector is vital also from the point of view of public finances. Digitalising public services and providing firms easy, highly standardised, reliable way to communicate with Tax Offices, the Business Registry, Employment Offices and other similar public organisations are also ways of boosting change in the private sector. Digitalisation of services and industry can be faster if the public sector does its part.
The objective of risk management is to avoid unexpected losses and safeguard the continuation of operations.
At the strategic level, the objective of interest rate risk management is to select an interest rate risk position that in the long term produces the lowest possible interest costs at the chosen risk level.
Finland’s central government debt is not exposed to exchange rate risk, because funding can be wholly executed in euros or swapped into euros.
Financing risk management covers both long-term refinancing and short-term liquidity risk. In order to manage the long-term refinancing risk, the Finnish government diversifies its funding by instruments, investor type and geographic areas and manages the maturity profile of the debt. Short-term liquidity risk is managed by short-term funding and maintaining an invested liquidity buffer.
Invested liquidity and the use of derivatives expose the central government to credit risk. Credit risk is managed by spreading the risk among counterparties with high credit ratings, investing in collateralised products and by requiring that counterparties pledge collateral to safeguard the market value of derivative positions.