The economic growth in Finland continued to gather momentum in 2017, supported by world trade and thus improving export performance. This cyclical recovery, together with the continued fiscal consolidation and reform policies by the government, contributed to the stable credit outlook. All three major credit rating agencies currently have a stable credit outlook for Finland with ratings at AA+/Aa1/AA+.
The secondary market trading levels of euro benchmarks remained stable to offer pick-up over the Netherlands and Germany, while remaining tighter with respect to France with its indigenous volatility during the year. The European election cycle in 2017 affected the yield developments for government securities generally and some peer group spreads but not those for Finland.
The Eurosystem’s public sector purchasing programme (PSPP) – which is part of the asset purchase programme – continued in 2017 at an approximate monthly pace of EUR 50 billion. Accommodative monetary policies continued to keep Finnish government euro benchmark bond yields range bound at very low levels and even negative out to maturities of four to seven years. PSPP purchases for some countries, like Finland, have on occasion fallen short of the capital key projected amounts, potentially reflecting the shortage of the securities or the central banks’ unwillingness to stress the market unduly.
Secondary market liquidity for Republic of Finland Government Bonds (RFGB), i.e. the euro benchmarks, was not significantly affected by the cumulative PSPP purchases, which reached a market value of some EUR 28 billion (including agency securities) by the end of November 2017. Some signs of repo specialness were observed particularly at the longer end of the curve, but the market remained well accessible to investors due to a committed Primary Dealer network.
The realised gross borrowing amount in 2017 was EUR 20.2 billion. Long-term issuance amounted to EUR 13.3 billion. The rest of the total was short-term borrowing. The gross borrowing requirement for the coming years is estimated to remain around EUR 20 billion annually.
The budgeted net borrowing amount in 2017 was EUR 4.5 billion. However, the actual net borrowing was around EUR 3.1 billion. The difference is due to the sufficient cash position of the central government. The central government debt stock was EUR 105.8 at year end.
The funding strategy of the Republic of Finland is based on euro benchmark bond issuance. New benchmark bonds are issued in syndicated form. Syndications are complemented with bond tap auctions, which enable increases in the outstanding volumes of the existing bond lines. There is also a foreign currency bond issue programme, called the Euro Medium Term Note programme. The current funding volume requires two new euro benchmark bond syndications per year, 2–4 auctions, and one benchmark-sized USD bond issue. The short-term funding is carried out via Treasury bills.
In terms of maturities, the focus is on issuing current coupon bonds in ten- and five-year tenors annually and 15-year bonds every three years. In 2017, the first issue in spring was a five-year benchmark bond complemented by a new 30-year line in a dual-trance syndication, which re-extended the euro benchmark curve to 30 years. The second syndicated issue was in the traditional ten-year tenor.
The government’s budget proposal for the year 2018 is EUR 3.1 billion in terms of the net borrowing requirement. With redemptions at EUR 15 billion the total borrowing requirement sums up to EUR 18.1 billion for the year. The intention is to continue the current funding strategy by issuing a new ten-year euro benchmark and a new 15-year benchmark as the previous bond issue in the latter maturity took place in 2015.
The State Treasury is motivated to preserve Finland’s place in the global markets as one of the reliable and acknowledged bond issuers and thus maintain attractive debt instruments and bond issuance in the future.