Quarterly Review 1/2019

Outlook for the Finnish economy and public finances

The Ministry of Finance forecasts Finnish GDP to grow by 1.5% in 2019. The growth rate is expected to slow down from that of last year, when the volume of Finland’s gross domestic product grew by 2.3%, according to Statistics Finland’s preliminary data. The reasons for lower growth are broad-based, but a decline in housing investment is a key factor contributing to the deceleration. The Ministry of Finance also expects weaker growth prospects in the world economy.

The current account is expected to be balanced this year and show small surpluses thereafter. Inflation will remain subdued and the decline of the unemployment rate will continue in 2019. In February 2019, the trend of the unemployment rate was 6.5% and the trend of the employment rate 72.5%.

Economic growth and the measures to curb public expenditure growth are strengthening general government finances. Finland’s general government finances will be almost balanced in the next few years and the general government debt in relation to GDP will continue to decline. 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 started to decline already a couple of years ago. According to the Ministry of Finance, the debt ratio will shrink to 58.4% in 2019.  In comparison, the central government debt will be clearly smaller: it is forecast to be 44.5% in relation to GDP at the end of this year.*

Finland’s relatively strong public finances and modern economy, among many other things, are reflected in Finland’s 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. S&P and Moody’s have assigned a stable outlook on the rating while Fitch changed the outlook from stable to positive last year, reflecting improved public debt dynamics and better medium-term potential growth prospects. The next pre-announced calendar dates for rating announcements are in July 2019.

Review of Treasury operations by the State Treasury, January to March 2019

According to the first supplementary budget, the gross borrowing requirement for the year 2019 is approximately EUR 15.3 billion. The net borrowing requirement is EUR 1.932 billion. Similar to previous years, approximately 70 per cent of the total borrowing amount will be covered by long-term funding and the rest with short-term Treasury bills.

On 5 February 2019, in its first issue of the year, the Republic of Finland raised EUR 3 billion with a new 10-year benchmark bond, maturing on 15 September 2029. The order book amounted to EUR 14.5 billion, the largest ever for Finland. The issue attracted bids from more than 160 investors. The bond was priced at 23 basis points below the euro swap curve.

Starting in 2019, the State Treasury will issue Treasury bills via auctions. On 26 February 2019, the Republic of Finland conducted its first auction of euro-denominated Treasury bills. The auction consisted of two maturity lines, raising a combined amount of EUR 1 490 million. The total amount of bids was EUR 1 580 million for the line maturing on 13 May 2019, and the accepted amount was EUR 1000 million. The allocated yield rate was -0.53%. The bid amount for the line maturing on 12 August was EUR 1 140 million, and the accepted id amount was EUR 490 million. The cut-off yield was -0.545%.

Near-term outlook for the period of April to June 2019 and beyond

The long-term funding operations in the second quarter of the year are expected to include one to two euro benchmark bond tap auctions. The timing, frequency and size of the auctions can be adjusted subject to the central government’s liquidity position and prevailing secondary market conditions. Details and further information of each auction will be published one week prior to the auction date.

The State Treasury is planning to issue a second new euro benchmark bond in the second half of the year. As in previous years, bonds may be issued under the EMTN programme to complement the funding in euro benchmark bonds during the year, market conditions permitting.

The next auction of euro-denominated Treasury bills will take place on 22 May 2019. The auctions will be arranged in the Bloomberg Auction System and are open to the RFTB dealer group. Further information on Treasury bill auctions and a quarterly updated auction calendar will be published on www.treasuryfinland.fi.

In addition to auctions, a sporadic issuance window for dollar- or euro-denominated Treasury Bills is likely to open during the second quarter of the year. The timing of the Treasury bill issuance is subject to the liquidity position and refinancing needs of the central government.

The next Quarterly Review will be published on 28 June 2019.

Further information: Deputy Director Anu Sammallahti, tel. +358 295 50 2575 and Director of Finance Teppo Koivisto, tel. +358 295 50 2550, firstname.lastname@statetreasury.fi.

* Ministry of Finance (Economic Survey, Winter 2018) and Statistics Finland.

, Updated 26.6.2019 at 10:00