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 Finnish GDP is expected to contract by 3.3% in 2020, significantly less than feared earlier. In 2021, the easing of the coronavirus (COVID-19) pandemic will restore the economy closer to normal conditions. The Ministry of Finance forecasts the economy will recover in 2021 when the uncertainty caused by the pandemic is dispelled during the year. GDP is expected to grow by 2.5% in 2021, to be followed by 2.0% growth in 2022. Obviously, the forecasts include great uncertainties related to the pandemic and the sentiment among companies and consumers in Finland and globally.
Consumption of services will decline again as a result of the second wave of the epidemic, but consumption of goods is expected to remain strong. Consumption of services is not expected to recover until consumer confidence gradually returns to normal. The average growth rate of private investment will remain subdued. Gradually recovering global economic development will be reflected in a pick-up in investment. World trade has already turned to growth, which has had a favourable impact on goods exports. Exports are expected to grow by 5.0% in 2021.
Contraction of the Finnish economy and the government measures to mitigate the impacts of the COVID-19 pandemic will greatly weaken general and central government finances in 2020 and in 2021. The general government debt-to-GDP ratio is expected to grow to 69% in 2020. In 2021, the growth in the debt ratio will slow as the epidemic recedes and the economy recovers. However, the imbalance between general government revenue and expenditure will continue to exist, also because of increases in spending due to population ageing.*
Finland’s relatively strong public finances and modern economy, among many other things, have traditionally been reflected in Finland’s high credit ratings. The central government of Finland has solicited credit ratings from two credit rating agencies: S&P Global Ratings and Fitch Ratings. For long-term debt both agencies have assigned AA+ credit rating with stable outlook on the rating. Calendar dates for credit rating announcements in 2021 will be published in the beginning of the year on the State Treasury’s central government debt management website on https://www.treasuryfinland.fi/government-borrowing/credit-ratings/. The State Treasury will also publish rating reports on the same website during the year.
Review of Treasury operations by the State Treasury, October to December 2020
On 4 November 2020, Finland conducted a tap auction of the latest 10-year euro benchmark bond due 15 September 2030. The amount bid was EUR 1 458 million, and a total auctioned amount of EUR 951 million brought the outstanding amount of the bond to EUR 3 951 million. The bonds were allocated at a yield of -0.474%. There was no tapping of euro benchmark bonds in the private placement format during the quarter.
In the fourth quarter, the Republic of Finland conducted two auctions of euro-denominated Treasury bills. The auctions on 13 October and 10 November 2020 raised a total amount of EUR 3 967 million. The auctioned bills’ maturities ranged from 6 to 10 months and carried yields between -0.640% and -0.620%. Bid-to-cover ratios ranged from 1.61 to 1.83.
The tap window for T-bill issuance in USD-denominated bills was open in October, producing USD 3.385 billion of issuance in maturities ranging from 5 to 7 months.
The budgeted gross borrowing in 2020 was EUR 40.7 billion, which included EUR 19.7 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 2020 the gross borrowing of EUR 39.3 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 2021 and beyond
The government’s budget proposal for 2021 includes a net borrowing requirement of EUR 11.8 billion. The redemptions next year amount to EUR 24.2 billion. The gross borrowing requirement in 2021 is EUR 35.9 billion.
Given the size of the funding programme, the funding strategy of the Republic of Finland remains in line with 2020. Three new euro benchmarks can be expected to be issued during the year. However, private taps of existing euro benchmark bonds are not foreseen in the plan. Approximately 50% of the gross funding 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 long euro benchmark bond will be issued during the year, to be complemented by both a 10-year and a 5-year benchmark bonds, depending on market conditions. The maturity of the long bond will be determined by market conditions with the aim of maintaining liquid and current benchmarks on the curve at 15-, 20- and 30-year maturities.
In addition to the new issues, tap auctions of existing euro benchmark bonds will be conducted. The State Treasury will introduce a quarterly bond auction calendar for 2021. Auction dates together with target volumes are published quarterly in advance on https://www.treasuryfinland.fi/funding-instruments/auctions/#serial-bond-auctions. The first auction will take place on 19 January. Full details of each auction are published a few days prior to the auction date post market consultation. As in previous years, issues under the EMTN programme are likely to complement the euro-denominated benchmark funding during the year market conditions permitting.
The next auction of euro-denominated Treasury bills will take place on 12 January. 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 http://www.treasuryfinland.fi/auctions/#treasury-bill-auctions.
In addition to Treasury bill auctions, a sporadic issuance window may 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 2021.
*Ministry of Finance, Economic Survey, Winter 2020.