The State Treasury publishes a quarterly review, which includes information on recent developments in debt management and an outlook for the upcoming quarter. The next Quarterly Review will be published on 31 March 2017.
Quarterly Review 4/2016
Outlook for the Finnish economy and public finances
Finnish GDP is predicted to grow much faster in 2016 than earlier expected. The Ministry of Finance expects the Finnish economy to grow by 1.6% in 2016. Output growth in 2016 has been broad-based, but clearly driven by domestic demand.
As regards next year, the Ministry’s growth forecast is 0.9%. Public consumption will contract in 2017 as the government’s adjustment measures lower operational costs of the central and local government, thereby contributing negatively to GDP growth.
Exports will pick up in 2017. The Competitiveness Pact agreement reached by the labour market organisations will improve the price competitiveness of Finnish business and industry and increase exports and employment in the coming years. The current account will still show small deficits in 2017. The employment outlook has improved and the unemployment rate will decline. The projected unemployment rate for 2017 is 8.5%. Consumer price inflation will pick up to 1.3% next year.*
Finland’s general government deficit will decrease in 2016 and come well within the 3% of GDP reference value. The central government and local authorities are in deficit but the earnings-related pension sector is showing a surplus. The challenge of balancing public finances is compounded by population ageing, which is driving up pension expenditure as well as health care and long-term care costs.
The general government debt-to-GDP ratio will continue to rise in the next few years. At the end of 2016, the public debt stands at 63.7% in relation to GDP. The central government debt is slightly over EUR 100 billion at the end of 2016, i.e. 47.7% in relation to GDP, at the same level as a year ago.
Finland’s relatively strong public finances and modern economy, among many other things, are reflected in Finland’s rather high credit ratings. The central government of Finland has solicited credit ratings from three credit rating agencies: S&P Global Ratings, Moody's Investors Service and Fitch Ratings. For long-term debt, they are AA+, Aa1 and AA+, respectively.
Review of Treasury operations by the State Treasury, October to December
In the final quarter of the year, the Republic of Finland conducted two tap auctions of euro-denominated government benchmark bonds. The first of these was held on Tuesday 25 October for the bond maturing on 15 April 2031. The total amount of bids in the auction was EUR 1 486 million, and the accepted amount was EUR 1 001 million. This brought the outstanding amount of the bond to EUR 4 501 million after the auction.
The fourth and final auction of the year was conducted on 22 November. The auctioned bond was the 7-year bond issued in August, maturing on 15 September 2023. The total bid amount was EUR 1 252 million, and the accepted amount was EUR 1 000 million. The auction raised the outstanding amount of the bond to EUR 4 000 million after the auction.
In terms of short-term funding operations, the Treasury bill window was reopened in November. The Republic of Finland issued Treasury bills denominated in USD in two maturity dates: 18 January 2017 and 15 February 2017. The outstanding volumes of the two lines are currently USD 1 800 million and USD 1 850 million, respectively.
The total realized gross borrowing in 2016 is EUR 16.7 billion (estimate as of 19 December). Redemptions this year were EUR 14.5 billion, thus the net realized borrowing amounted to EUR 2.228 billion. This is less than foreseen in the latest supplementary budget proposal for 2016 due to sufficient cash liquidity. Similar to previous five years, a re-interpretation of the budget balancing law by the parliament enables the conducted borrowing by the State Treasury to deviate from the budgeted borrowing estimate, the central government liquidity position permitting.
Near term outlook for the period of January to March and beyond
In the government’s budget proposal for 2017, the net borrowing requirement is EUR 5.6 billion. The redemptions next year amount to approximately EUR 17.1 billion, as there are two benchmark bonds maturing in 2017. This adds up to EUR 22.7 billion of a gross borrowing requirement.
The funding strategy of the Republic of Finland remains in line with previous years. Approximately 70 per cent of the total required will be funded in long-term maturities, and the rest will be covered with the short-term Treasury bills.
Funding activity is expected to start in the first quarter of the year. During 2017 the State Treasury will be looking into opportunities to re-extend the euro benchmark curve to 30 years, potentially even in benchmark size, market conditions permitting. The maturities for the likely two syndicated euro benchmarks in 2017 will include a regular 10-year maturity.
In addition to the new issues, quarterly tap auctions of existing euro benchmark bonds are expected for next year. The timing, frequency and size of the auctions can be adjusted subject to the central government liquidity position and prevailing secondary market conditions of the Republic of Finland euro benchmark bonds. Details and further information of each auction is published one week prior to the auction date.
The timing of the Treasury bill issuance is subject to the liquidity position and refinancing needs of the central government. The daily tapping window is likely to open during the first quarter of the year. Treasury bills are issued in EUR and USD with monthly maturity dates.
The next Quarterly Review will be published on 31 March 2017.
Further information: Director of Finance Teppo Koivisto, tel. +358 295 50 2550, firstname.lastname(at)statetreasury.fi.
* Ministry of Finance: Economic Survey, Winter 2016.
Quarterly Review 4/2016 (23 December 2016, pdf)