Rationale

Dagong assigns “AAA” to both the local and foreign currency long term sovereign credit ratings of the Republic of Finland (hereinafter referred to as “Finland”) based on a comprehensive analysis of such factors as its lower government debt burden and fiscal deficit, relatively sound financial system but declining economic strength.

After experiencing the serious impact of the financial crisis to the Finnish economy, the government fiscal deficit emerged and the debt burden increased by 20%. However, compared with other European countries, Finland’s debt burden and fiscal deficit ratio are still quite low. By the end of 2009, the general government’s outstanding debt reached 43.8% of GDP, far below the average level of 79.2% in the Euro Zone and the EU’s warning line of 60%. Meanwhile, the government debt structure is relatively reasonable, which is dominated by local currency and long term debt, thus the debt repayment burden in the short term is weak. Under the premise of current economic downturn, the government continues its expansionary fiscal policy in 2010, and the extent of fiscal expansion will be far more than that of other European countries. It is estimated that the fiscal deficit will break through the EU warning line of 3% and reach 4.5% of GDP by the end of 2010. The government’s financing requirement and debt-to-GDP ratio will increase to 15.7% and 50% respectively. With the economic recovery and the implementation of fiscal consolidation, the government’s fiscal deficit ratio and debt ratio will hopefully be controlled within the EU criteria of 3% and 60% respectively.

The Finnish economic development model based on innovative exports has driven its economic prosperity for a decade with current account surplus, fiscal surplus and sound financial system, etc. However, the vulnerability in the exports structure and economic development has been fully exposed under the financial crisis. Furthermore, the existing problems as high welfare policy, aging trends and shortcomings in the financial system have constrained the government’s fiscal and monetary adjustment capacity. Nevertheless, the long-standing cumulative wealth and the government’s strong financial capacity can still ensure the government’s debt repayment. Specifically, it is summarized as follows:

l  That the government actively promotes the independent innovative system is conducive to the development of high-tech industries and to driving economic growth. However, the consequent problems such as heavy dependency on global markets and excess capacity also restrict the future economic potential to some extent.

l  The economic development is in a high level, but the economy was severely affected by the financial crisis due to the vulnerabilities in export destination and product structure. Owing to the insufficient domestic and external demand, the economic growth prospects in the next 3-5 years look quite gloomy.

l  The financial system has less exposure to the toxic assets; it is steady and adaptable to the economic development. The risks such as narrow profit margin, liquidity and credit risks in the financial system are under control compared with other European countries.

l  The government’s high welfare policy and aging trend exacerbate the difficulties for the fiscal situation to return to surplus. However, the government’s large amount of net assets and the strong financing capacity in the European financial market guarantee its capacity of debt repayment.

Outlook

Subject to the economic development model and exports structure, the Finnish economy suffered significantly in the financial crisis. Due to the insufficient domestic and external demand, the economic recovery and growth prospects in the next several years look gloomy, which is unfavorable for the increase of government revenues and ultimate improvement of the existing fiscal deficit situation. At the same time, the high welfare and tax policy and aging trend restrict the government’s capacity to adjust fiscal revenues and expenditure, while the heavy dependency on wholesale funding and increasing default ratio in household and commercial loans in the economic downturn will increase the government’s contingent debt burden. Although the government net assets are quite large and the financing capacity in the European financial market is strong, yet these advantages are gradually eroded by the current sovereign debt crisis happened in the EU and Finland’s slow pace of economic recovery. As a result, Dagong keeps the negative outlook for the Finnish government’s local and foreign currency credit rating in the next 1-2 years.