Quarterly Review 4/2017

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

Outlook for the Finnish economy and public finances

According to the recent forecast of the Ministry of Finance, Finnish GDP is expected to grow by 3.1% in 2017, the fastest rate for many years. As regards 2018, economic growth is forecast to continue at 2.4%. Supported by higher employment, private consumption will continue to grow this and next year. All types of private investment are expected to develop strongly while exports benefit from better price competitiveness and stronger international demand. Both private investment and exports will grow by almost 7% this year, before slowing down moderately in 2018.

The current account is expected to show small deficits in the coming years. Inflation remains subdued: the change in consumer price index this year is expected to be 0.8% before rising to 1.4% in 2018. The unemployment rate will continue to decrease to 8.1% next year. Reflecting a brighter economic outlook the employment rate will increase to over 70% in 2018.

Finland’s general and central government deficits have declined in recent years. However, the deficits will persist in the coming years as well. 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 in 2016. According to the Ministry of Finance, by 2019 the debt ratio will shrink to just under 60%.  At the end of 2017, the public debt is expected to stand at 61.1 per cent in relation to GDP. In comparison, the central government debt will be smaller; it is forecast to be 47.1% in relation to GDP.*

Finland’s relatively strong public finances and modern economy, among many other things, are reflected in Finland’s high credit ratings. Overall 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.

Review of Treasury operations by the State Treasury, October to December 2017

In the final quarter of the year, the Republic of Finland conducted two tap auctions of euro-denominated government benchmark bonds. The first of these was arranged on Tuesday 10 October for the bond maturing on 15 April 2022. The total amount of bids in the auction was EUR 1 502 million, and the accepted amount was EUR 1 000 million. This brought the outstanding amount of the bond to EUR 5 000 million after the auction.

The fourth and final auction of the year was conducted on 21 November. The auctioned bond was the 10-year bond issued in August, maturing on 15 September 2027. The total bid amount was EUR 1 420 million, and the accepted amount was EUR 995 million. The auction raised the  total amount of the bond outstanding to EUR 3 995 million.

In terms of short-term funding operations, the Treasury bill window was reopened in October and November. The Republic of Finland issued Treasury bills denominated in USD for maturity dates 21 February 2018 and 21 March 2018. The outstanding volumes of the two lines are currently USD 3 500 million and USD 2 050 million, respectively. Additionally, there is USD 2 500 million of bills maturing on 17 January, 2018.

The total realized gross borrowing in 2017 is EUR 20.2 billion (estimate as of 20 December). Redemptions this year were EUR 17.1 billion, thus the net realized borrowing amounted to EUR 3.061 billion. This is less than foreseen in the latest supplementary budget proposal for 2017 due to sufficient cash liquidity. Similar to the previous five years, a re-interpretation of the budget balancing law by the parliament enables the borrowing executed by the State Treasury to deviate from the budgeted borrowing estimate, the central government liquidity position permitting.

Near term outlook for the period of January to March 2018 and beyond

In the government’s budget proposal for 2018, the net borrowing requirement is EUR 3.1 billion. The redemptions next year amount to approximately EUR 15.0 billion. This adds up to EUR 18.0 billion of a gross borrowing requirement.

The funding strategy of the Republic of Finland remains in line with previous years. Approximately 70 per cent of the total required will be funded in long-term maturities, and the rest will be covered with short-term Treasury bills.

Funding activity is expected to start in the first quarter of the year. During 2018 the State Treasury will be looking into opportunities to issue a new 15-year euro benchmark in order to maintain that part of the curve smooth with a regular 3-year interval. The maturity for a second syndicated euro benchmark in 2018 is likely to be a 10-year.

In addition to the new issues, quarterly tap auctions of existing euro benchmark bonds are expected for 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.

The timing of the Treasury bill issuance is subject to the liquidity position and refinancing needs of the central government. The daily tapping window is likely to open during the first quarter of the year. Treasury bills are issued in EUR and USD with monthly maturity dates.

The next Quarterly Review will be published on 29 March 2018.

For further information, please contact Teppo Koivisto, Director of Finance, tel. +358 295 50 2550, or Anu Sammallahti, Treasury Front Office, tel. +358 295 50 2575, e-mail firstname.surname@statetreasury.fi.

*Ministry of Finance: Economic Survey, Winter 2017.

, Updated 13.5.2019 at 16:34