Dagong Maintains Sovereign Credit Rating for Finland at AA+ with Stable Outlook
Dagong Global Credit Rating Co., Ltd.
September 29, 2018
Dagong Global Credit Rating Co., Ltd. (“Dagong”) has decided today to maintain both the local and foreign currency sovereign credit rating for the Republic of Finland (“Finland”) at AA+, each with a stable outlook. Although Finland's short-term economic growth has slowed slightly and further deficit shrinking is facing resistance, the sustained advance of structural reform and the gradual enhancement of government debt management have led to a steady decline in debt. This manageable debt situation, coupled with strong financing capacity and low financing costs, the government's solvency has remained stable.
The principal reasons for maintaining the sovereign credit rating of Finland are detailed below:
1. Although the ruling foundation has been weakened, the majority of seats have ensured the stability of the political situation and the implementation of policies. After the division and combination of the Finnish government, the former right-wing party, the True Finns, was descended to the opposition. The Centre Party of Finland (the middle party), the Blue Reform (the Center right party) and the National Coalition Party (the Center right party) formed a new coalition government. Although the number of parliamentary seats has declined, the maintenance of the ruling majority and a moderate ruling position will help the operation of the multi-party cooperation mechanism and the steady implementation of structural reform. In terms of credit environment, the short-term credit supply will still be moderately abundant due to the euro zone quantitative easing policy. However, the rising proportion of household mortgages and high tax burden made the mismatch between household debt and disposable income as high as 181.2% in 2017, coupled with the high dependence of banks on other Nordic countries' deposit and loan business, Finland's credit system is under great pressure.
2. Although the economic growth slows down, it can still maintain moderate growth under the support of domestic demand. In the short term, Finland's job market will expand, wages will rise and high individual income tax threshold will boost disposable incomes and stimulate private consumption; new investment in start-ups will reduce investment stimulus by a slight slowdown; uncertainties in Russian-European relations, rising trade protectionism and sluggish external demand will drag down export growth. Therefore, it is estimated that Finnish economic growth will drop to 2.6% in 2018 and 2.0% in 2019. In the medium and long term, it is difficult to offset the negative impact of the decline in the international competitiveness of traditional industries due to insufficient driving forces of innovation, coupled with the difficulty in solving the structural problems of high labor costs, Finland's medium and long-term average economic growth is expected to maintain only about 1.2%.
3. Although the deficit is expanding slightly, the security of the debt repayment sources can still be guaranteed. In the short term, high tax burden and the reduction of individual tax is not conducive to the continued growth of fiscal revenue. Although interest expenditure has declined, increasing capital expenditure and pressure on rigid expenditure have hindered the process of narrowing the fiscal deficit. The primary fiscal deficit rate of Finnish general governments is expected to increase to 1.5% in 2018 and 2019, and the demand for government financing is 7.7% and 7.8% of GDP respectively at the same time. By the end of 2017, Finland's net financial assets were about 58.6% of GDP, with ample realizable assets and strong financing capacity, which could provide a guarantee for the sources of government debt repayment.
4. The debt burden ratio has a downward trend and the government's solvency is stable. Driven by moderate economic growth, the general government debt burden ratios are expected to be 60.8% and 60.3% in 2018 and 2019, respectively, with a downward trend in the medium term as the fiscal situation improves. In addition, the maturity structure dominated by short-term debt and the currency structure dominated by euro debt enable a good debt structure of the government debt. In addition, due to its relaxed financing environment, smooth financing channels and low cost, its ample repayment sources can sustain stable government solvency in both local and foreign currencies.
In the short term, although economic growth and financial consolidation face external uncertainties and challenges including social welfare reduction difficulties, the rising trend of debt has been curbed. The abundant financial assets, strong international financing capacity and low financing costs will reinforce stable government solvency in both local and foreign currencies. Therefore, Dagong has decided to maintain a stable outlook for both the local and foreign currency sovereign credit rating of Finland for the next one to two years.