Quarterly Review 4/2019

The State Treasury publishes a quarterly review, which includes information on recent developments in debt management and an outlook for the upcoming quarter.

Outlook for the Finnish economy and public finances

The growth of the Finnish economy will slow down in the next few years. According to the new forecast of the Ministry of Finance, Finland’s economy will grow by 1.0% in 2020 and 1.1% in 2021.

Compared to 2019, Finnish exports will grow at a slower pace in 2020. The growth of private and public consumption will continue at a steady rate. The outlook for private investment is weaker; in particular, housing construction investments will decline. In contrast, public investment growth is expected to be strong. The forecast for the unemployment rate for the next year is 6.5%, inflation is expected to remain subdued at 1.3%. The current account will show a rather small deficit next year.

The favourable economic cycle in the Finnish economy in recent years has improved the state of government finances. However, as the economic cycle has started to cool, the improvement of the budgetary position of public finances has come to a halt. In the coming years, 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. In particular, local government finances are weakened by the rising health and social services expenditure.

In 2020 general and central government finances are expected to show deficits, both deficits amounting to 1.4% relative to GDP. According to the forecast of the Ministry of Finance, the general government debt ratio is expected to be 58.8% at the end of 2020. The central government debt ratio will be clearly smaller at 43.6%.*

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. The dates for rating announcements in 2020 will be released at the turn of the year on www.treasuryfinland.fi.

Review of Treasury operations by the State Treasury, October to December 2019

The final bond auction of the year was conducted in early November. It was a twin-line auction offering the benchmark bonds maturing on 15 April 2034 and on 15 April 2047. The issued amount of the 2034 bond was EUR 567 million, while the outstanding amount after the auction is EUR 4 553 million. The total outstanding amount of the 2047 bond increased by EUR 478 million to EUR 3 478 million. The bid-to-cover ratios were 1.3 and 2.1, respectively.

Short-term funding operations in the last quarter of the year included a Treasury bill auction on 20 November and two separate issuance windows on 29 October and on 25 November. The auction consisted of two maturity lines, one line maturing on 12 February 2020 and another with a maturity date on 12 May 2020. The combined accepted amount in the auction was EUR 1 488 million with cut-off yields of -0.57 (12 Feb 2020) and -0.565 (12 May 2020). The outstanding amounts of USD- and euro-denominated Treasury bills at the end of December were USD 4 378 million and EUR 2 028 million.

The budgeted gross borrowing in 2019 was EUR 15.8 billion, which included EUR 2.5 billion of net borrowing. The realized net expenditure has typically deviated somewhat from the budgeted net expenditure. This is due to e.g. adjustments in income, expenditure and cash buffers and transfers of allowances. These differences will be accounted for in the government financial statements. In 2019 the gross borrowing of EUR 14.8 billion was sufficient to cover expenditure on a cash-flow basis and safeguard sufficient liquidity.

Near-term outlook for the period of January to March 2020 and beyond

The government’s budget proposal for 2020 includes a net borrowing requirement of EUR 2.2 billion. The redemptions next year amount to EUR 21 billion. The gross borrowing requirement in 2020 is EUR 23.2 billion.

The funding strategy of the Republic of Finland remains in line with previous years. Approximately 60% of the total required will be funded in long-term maturities, and the rest will be covered with short-term Treasury bills.

The funding operations are expected to start in the first quarter of the year and include a euro benchmark bond syndication. A new 10-year euro benchmark bond will be issued during the year, to be complemented by either a 5-year or a 15-year benchmark bond, depending on market conditions. These operations are in line with the previously communicated strategy of issuing new euro benchmark bonds annually in the 10- and 5-year maturity sectors while replacing the 5-year issues with a new 15-year euro benchmark bond every two to three years.

In addition to the new issues, quarterly tap auctions of existing euro benchmark bonds are expected for the next year. The timing, frequency and size of the auctions can be adjusted subject to the central government’s liquidity position and the prevailing secondary market conditions of the Republic of Finland’s euro benchmark bonds. Details and further information of each auction are published one week prior to the auction date. As in previous years, issues under the EMTN programme are likely to complement the EUR-benchmark funding during the year market conditions permitting.

The timing for the next auction of euro-denominated Treasury bills, which is to take place in the first quarter of next year, will be published in early 2020. The auction will be arranged in the Bloomberg Auction System and is 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/auctions/#treasury-bill-auctions.

In addition to Treasury bill auctions, a sporadic issuance window is likely to open during the first quarter of the year. The timing of the Treasury bill issuance is subject to the liquidity position and refinancing needs of the central government. Treasury bills are issued in euros and US dollars with monthly maturity dates.

The next Quarterly Review will be published on 31 March 2020.

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

* Ministry of Finance (Economic Survey, Winter 2019).

, Updated 20.12.2019 at 10:02