Quarterly Review 2/2020

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 economy will shrink significantly in 2020 as a result of the coronavirus (covid-19) pandemic and the restrictive measures taken to mitigate the spread of the virus. According to the new forecast of the Ministry of Finance, Finland’s economy will contract by 6.0% this year. The sharpest fall in output is expected during the second quarter, a result of domestic restrictions and considerable decline in export demand. The economy will recover towards the end of the year and it is expected to grow in 2021 and 2022. Obviously, the forecasts include great uncertainties related to the pandemic and the sentiment among companies and consumers in Finland and globally.

As of now, the spread of the pandemic in Finland has greatly slowed down and the state of emergency has been lifted. The restrictions on mobility and economic activities have not closed down sectors of the economy and cut private demand to the extent feared earlier. On the other hand, the slowdown in export demand is expected to be more severe than previously anticipated by the Ministry of Finance.

Finnish exports are expected to decrease by 14% this year. However, exports could start picking up already in the latter half of 2020. Private consumption and investment will also contract this year. Employment will decrease and the unemployment rate will climb to 8.5% in 2020. Inflation will remain subdued.

Contraction of the Finnish economy and the government measures to mitigate the impacts of the covid-19 pandemic will greatly weaken general government finances. The Ministry of Finance expects general government deficit to be 8.2% in relation to GDP and the gross debt ratio to increase to 71.3%. In comparison, central government deficit will be slightly smaller and debt-to-GDP ratio is estimated to rise to 54.8%.*

Finland’s relatively strong public finances and modern economy, among many other things, have been 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. All credit rating agencies have assigned a stable outlook on the rating.  Next calendar dates for credit rating announcements are listed on the State Treasury’s central government debt management website on https://www.treasuryfinland.fi/government-borrowing/credit-ratings/.

Review of Treasury operations by the State Treasury, April to June 2020

On 22 April 2020, Finland conducted a tap auction of the latest 10-year euro benchmark bond due 15 September 2029. The amount bid was EUR 2 256 million, and a total auctioned amount of EUR 1 001 million brought the outstanding amount of the bond to EUR 5 173 million. The bonds were allocated at a yield of -0.036%.

The Republic of Finland issued a 10-year USD-denominated benchmark bond on 13 May. The issue attracted an order book of over USD 4 600 million with orders from over 100 investors. A total amount of USD 1 500 million was issued with a re-offer yield of 0.899%. This issue under the EMTN-programme aims to diversify the investor base in addition to providing cost-efficient funding.

On 10 June 2020, in its second euro benchmark issue of the year, the Republic of Finland raised EUR 3 000 million with a new 20-year benchmark bond, maturing on 15 September 2040. This was an inaugural benchmark issue in this maturity. The order book amounted to over EUR 25 000 million. The issue attracted bids from more than 220 investors. The bond was priced at 10 basis points over the euro swap curve.

In addition to auctions and syndications, euro benchmark bonds were issued in private placement transactions during the second quarter of the year. During the pandemic crisis government bond market yields and spread levels increased. This induced demand for Republic of Finland benchmark bonds while at the same time market liquidity deteriorated making it challenging to execute larger orders. To cater for end-investor demand under these circumstances, private placement issues were conducted with primary dealers in ticket sizes larger than secondary market lots. The bulk of euro benchmark bond tapping in this format took place in maturities between 5 and 10 years and provided in total EUR 7 300 million of long-term funding.

In the second quarter, the Republic of Finland conducted monthly auctions of euro-denominated Treasury bills. The auctions on 1 April, 12 May and 9 June 2020 raised a total amount of EUR 4 110 million. The auctioned bills’ maturities ranged from 6 to 11 months and carried yields between -0.51% and -0.35%. Bid-to-cover ratios ranged from 1.6 to 2.9.

The tap window for T-bill issuance in euro-denominated bills was open in April, producing EUR 1 800 million of issuance in maturities ranging from 6 to 7 months.

Near-term outlook for the period of July to September 2020

The government’s latest supplementary budget for 2020, dated 26 June, indicates a net borrowing requirement of EUR 18.9 billion which implies gross borrowing of EUR 39.9 billion. At the end of the second quarter, approximately 75% of foreseen long-term funding has been completed.

The State Treasury is planning to issue a new 10-year euro benchmark bond in the second half of the year. The Republic of Finland will likely conduct a euro benchmark bond tap auction in the third quarter of the year. The timing and size of the auction 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. Unless there is an increase in the funding requirement, further tapping of euro benchmark bonds in the private placement format is not foreseen.

The next auction of euro-denominated Treasury bills will take place on 18 August. 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 https://www.treasuryfinland.fi/funding-instruments/auctions/#treasury-bill-auctions.

In addition to Treasury bill auctions, an issuance window for bills is likely to open during the third 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 or semi-monthly maturity dates.

The next Quarterly Review will be published on 30 September 2020.

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

* Ministry of Finance, Economic Survey, Summer 2020.

, Updated 1.7.2020 at 07:37