Moody's: Finland's credit profile supported by effective institutions, growth and fiscal consolidation commitment

Finland's Aa1 rating with a stable outlook is supported by its effective institutions, a broad political commitment to fiscal consolidation and signs of more robust economic growth, Moody's Investors Service said in a new report. The country's main credit challenges are a relatively low economic growth potential and the government's still rising debt load.

The annual update, "Government of Finland - Aa1 Stable Annual Credit Analysis", is now available on www.moodys.com. Moody's subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

"The Finnish government's progress on an ambitious structural reform agenda, which curtailed labour costs and restored cost competitiveness, supports the country's growth recovery," said Rita Babihuga-Nsanze, a Moody's Vice President -- Senior Analyst and co-author of the report.

First quarter data point to a surge in exports, which coupled with rising investment activity, contribute to Moody's real GDP growth forecasts of 1.5 to 2% in 2017-18.

Despite the improvement in 2016, Finland's real economy remains around 4% smaller than it was in 2007, and is the only country among its regional peers yet to return to pre-financial crisis levels.

Finland faces the challenge of steering the economy towards new growth drivers following the structural decline in its key export industries. Additionally, the country's growth potential is constrained by rapid demographic pressures from a declining working age population, which already started to decline in 2010 and is expected to fall by 3.3 percentage points by the end of 2020.

Finland has a track record of maintaining prudent fiscal policies that resulted in relatively low debt levels pre-crisis. Although the deterioration in fiscal metrics since 2007 has been notable, there is still a broad political consensus in favour of fiscal consolidation and debt reduction.

While Moody's expects that consolidation measures will lead to a decline in the deficit, the rating agency's baseline scenario points to a continued but slow rise in the government's debt burden for the next several years to around 66.1% by 2018.

Downward pressure on the rating could develop if the economic growth outlook were to worsen materially, if the planned reforms were to be significantly delayed or scaled back, and if the government's fiscal metrics were to deteriorate beyond Moody's expectations.

Conversely, there could be upward pressure on the rating should the pace and impact of reforms exceed expectations, with sustainably higher economic growth and rapid debt-to-GDP reduction.