If you ask a debt manager to describe the market conditions in 2016, I think the answer would be ‘eventful’ or ‘unexpected’. The United Kingdom’s decision to withdraw from the European Union in June was not particularly on the cards of the financial markets. Neither was the outcome of the US presidential elections clear-cut until the election day in November. A common denominator for these events is their far-reaching impact on the political and economic scene in Europe. And in 2017, Europe is preparing for an eventful election period where surely nobody is expecting anything unexpected – or are they?
Events will not make our foresight on the market behaviour any easier. An issuer’s role, however, is to anticipate and utilize the prevailing economic and market conditions in order to fulfil central government issuance plans and markets’ expectations. In 2016, the Republic of Finland successfully fulfilled its EUR 17 billion issuance programme in an event-driven market environment.
The scale of our financing programme for 2017 is slightly greater due to two large redemptions. The overall gross borrowing requirement, including short-term funding, will be EUR 23 billion. The central government net borrowing requirement is estimated to be some EUR 5.6 billion.
Growth surprise in sight
The Finnish economy grew faster in 2016 than earlier expected. Furthermore, an agreement to improve price competitiveness of Finnish business and industry was reached among social partners. The so-called Competitiveness Pact will definitely support Finnish exports and employment in the coming years.
Positive developments improve the likelihood of the government attaining one of its key goals of stabilizing our public finances after a prolonged period of negligible growth and sizeable budget deficits. Achieving this goal, however, requires government commitment to follow through on structural reforms with support from stronger growth and better performance in main export industries.
In the first half of 2016, the credit rating agencies Moody’s Investors Service and Fitch Ratings downgraded the long-term sovereign ratings for the Republic of Finland, mainly referring to moderate economic growth prospects. On balance, in the second half of the year S&P Global Ratings revised the outlook on its rating to stable from negative due to a gradually recovering economy and improving public finances. The central government of Finland has solicited credit ratings from S&P, Moody’s and Fitch. For long-term debt, they are AA+, Aa1 and AA+, with a stable outlook.
Follow up on liquidity
The Eurosystem continued its extraordinary monetary policy measures throughout 2016 by purchasing euro-denominated euro-area government securities as part of its expanded asset purchase programme. The Bank of Finland as part of the Eurosystem has steadily been acquiring Finnish government bonds from the secondary markets. By the end of 2016, the Bank of Finland held approximately EUR 21 billion worth of Finnish government bonds in its balance sheet. The figure is equivalent to 25 per cent of our marketable government debt. The purchasing programme (PSPP) will continue at least until the end of 2017.
So far, the impact on Finnish government benchmark bonds’ secondary market liquidity has been modest, but to safeguard liquidity conditions during the extended period of central bank purchases, the State Treasury will maintain the overnight securities lending facility for its primary dealers.
Long bond issuance revisited
The mission of the State Treasury is to safeguard the liquidity and funding for the central government. During 2017 the State Treasury will be looking into opportunities to re-extend the euro benchmark curve to 30 years. The maturities for the likely two syndicated euro benchmarks in 2017 will also include a regular 10-year maturity.
Our long-term goal of keeping our bonds attractive to investors has not changed. We are convinced that Finland’s strong credit outlook will continue to support our bonds with these margins and serve our investors in the best possible manner in 2017 and in the long run.