The year 2020 will be remembered as a year of crisis due to the sudden outbreak of the COVID-19 pandemic. It put a deep strain on our societies, inflated public sector spending needs and reduced the revenue base for every government. The pandemic repercussions will still require expansionary fiscal policies in 2021 though the long-awaited introduction of vaccines has raised our individual hopes and led to expectations of an economic recovery.
Finland has not been an exception in the pandemic while our economy appears to survive 2020 with less damage than many other countries. The imbalance between public revenue and expenditure has been heavily widened and in 2020 the public debt is expected to increase from less than 60% to 69% relative to GDP. The pandemic will spill over to 2021, and the government actions taken to support society and the economy will mean a substantial deficit in general government finances in 2021. However, the growth of the debt ratio is expected to slow down in 2021 when the pandemic abates and economic recovery sets in.
Sound governance and sustainable finances
A sharp rise in public sector borrowing caused by COVID-19 requires determined fiscal consolidation in the medium term to avoid excessive debt burdens. Solid economies are usually bolstered by sound governance. Stable institutional settings and effective policies and regulations are the essence of good governance to support governments to achieve their key policy goals and fiscal resilience. Governance is also the most material ESG factor influencing sovereign’s creditworthiness and cost of capital. It seems that in an environment of global debt overhang, a virtue of sound governance will be an even more important factor influencing the choices of sovereign fixed income investors.
Sound governance has traditionally been an institutional stronghold for Finland. Our robust democracy and political stability compare well with our peers. Government effectiveness, rule of law, regulatory quality and control of corruption are among the strongest in the world and certainly key rating drivers for Finland. These factors reflect a high degree of resilience and, further, define our willingness to service and pay debt.
The focus of our two guest authors is also on aspects of good governance. Anna-Maija Karjalainen writes about the importance of digitalisation in the public sector and how it can help strengthen social inclusion and trust in the society. Olli Mäenpää discusses in his article the maintenance of good governance from the points of view of law and administration.
The key function of the State Treasury is to safeguard the liquidity and funding for the central government. In 2020, the Republic of Finland successfully fulfilled its elevated EUR 39.3 billion issuance programme. Our pre-pandemic net borrowing target was EUR 2 billion, but after a rapid increase of cash buffers and seven additional budget rounds net borrowing ultimately amounted to EUR 18.3 billion. For 2021, the scale of our financing programme still reflects the policy response to the pandemic and its aftermath. The overall gross borrowing requirement, including short-term funding, will be EUR 35.9 billion. The net borrowing is expected to be EUR 11.8 billion.
Keeping our bonds attractive and creditworthy to investors remains our long-term goal. We believe that Finland’s strong credit outlook and commitment to sound governance and sustainable development will support our bonds and serve all our investors well in the coming years.
Teppo Koivisto is Director of Finance and Head of the Finance Division at the State Treasury of Finland. He 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.