Economic growth in Finland started to show signs of recovery in 2016. An increase in investment spurred domestic growth and bolstered employment. The centre-right government achieved important milestones in its programme with the social welfare and health care reforms and a collective agreement on the labour market, facilitating a decline in unit labour costs.
Growth outlook concerns resulted in ratings downgrades in the first half of the year, but due to an improved economic outlook and coherent economic policies, all three major credit rating agencies currently have a stable credit outlook for Finland with ratings at AA+/Aa1/AA+. The secondary market trading levels of euro benchmarks stabilised to offer a pick-up over the Netherlands and Germany and, depending on the maturity, also Austria, while remaining tighter with respect to France.
The Eurosystem central banks continued their quantitative easing with the asset purchase programmes, most predominantly the public sector purchasing programme (PSPP). This was extended from EUR 60 billion monthly to EUR 80 billion in April and complemented by a corporate sector purchase programme in June. Due to accommodative monetary policies, interest rates remained very low and even negative in many maturities of Finnish government euro benchmark bonds. These exceptional market conditions posed challenges for many investors.
Secondary market liquidity for Republic of Finland Government Bonds (RFGB), i.e. the euro benchmarks, was not significantly affected by the increasing central bank holdings, which reached some EUR 21 billion, i.e. almost 25 per cent of the outstanding RFGB stock by year end. Some signs of repo specialness and patches of increased volatility were observed, but the market remained very accessible to investors due to a committed Primary Dealer network.
The realised gross borrowing amount in 2016 was EUR 16.7 billion. Long-term issuance amounted to EUR 13.4 billion. The rest of the total was short-term borrowing. The gross borrowing requirement for the coming years is estimated to remain around EUR 20 billion annually.
The budgeted net borrowing amount in 2016 was EUR 6.0 billion. However, the actual net borrowing was around EUR 2.2 billion. The difference is due to the strong cash position of the central government, enabling part of the planned funding to be foregone by reducing the amount of cash reserves. According to the statistics published by the State Treasury, the central government debt stock was EUR 102.4 at year end.
The funding strategy of the Republic of Finland is based on euro benchmark bond issuance. New benchmark bonds are issued in syndicated form. Syndications are complemented with bond tap auctions that enable increases in the outstanding volumes of the existing bond lines. There is also a foreign currency bond issue programme, called the Euro Medium Term Note programme. The current funding volume requires two new euro benchmark bond syndications per year, 2–4 auctions, and one benchmark-sized USD bond issue. Short-term funding is carried out via Treasury bills.
In terms of maturities, the focus is on issuing current coupon bonds in 10- and 5-year tenors. However, longer bonds are issued every two to three years. In 2016, the first issue in spring was a 10-year benchmark bond. The second syndicated issue was in the 7-year tenor — expected demand in the negative yield environment contributed to this choice of maturity.
The net borrowing requirement in the government’s budget proposal for the year 2017 is EUR 5.6 billion. With redemptions at EUR 17.1 billion, the total borrowing requirement sums up to EUR 22.7 billion for the year. The intention is to continue the current funding strategy by issuing a new 10-year euro benchmark and potentially re-extending the yield curve to 30 years with a new issue.
The State Treasury is motivated to preserve Finland’s place in the global markets as one of the reliable and acknowledged bond issuers and thus maintain attractive debt instruments and bond issuance in the future.