OREANDA-NEWS. Fitch Ratings has revised the Outlook on Finland's Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at 'AAA'. The issue ratings on Finland's senior unsecured foreign and local currency bonds have also been affirmed at 'AAA'. The Country Ceiling has been affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1+'.

KEY RATING DRIVERS
The revision of the Outlook on Finland's IDRs reflects the following key rating drivers and their relative weights:

HIGH
Prospects for economic growth are weak and have deteriorated. This follows weak growth performance in recent years. Real GDP declined 0.1% in 2014, after falling in both 2013 and 2012. The level of real GDP remains 7% below the pre-financial crisis level of 1Q08. External trade prospects have been adversely affected by a sharp fall in exports to Russia, Finland's third-largest trading partner.

Fitch expects GDP growth to be 0.5% this year, a downward revision of 0.6 percentage points since the last review and that growth will accelerate to 1.3% in 2016.

The Finnish economy is adjusting to sector-specific shocks in the electronics and paper sectors, and is also experiencing the effects of population ageing. The working-age population has been decreasing since 4Q10. The combination of the structural decline in key industrial sectors and a diminishing workforce has led to a sharp decline in productivity growth and in estimates of potential economic growth.

MEDIUM
The combination of cyclical weakness since 2012 and structural shocks has adversely affected the public finances. We estimate that the general government deficit was 2.7% of GDP last year. Consolidation measures will reduce the central government deficit this year, but these will be offset by deteriorating local government and social security balances. Overall, we expect the general government deficit to remain at 2.7% this year before falling back to 2.1% in 2016. Persistent deficits will lead to the public debt to GDP ratio rising to 63.3% by 2016.

In parallel with a decline in competitiveness, net external debt has increased since the global financial crisis from -3.6% of GDP in 2007 to an estimated 34.7% in 2014, almost double the 'AAA' median of 18.2%. Finland's once strong current account surplus position has been lost following the crisis and the country now runs small deficits (1.1% of GDP in 2014).

Finland has a high value added economy, with R&D expenditure/GDP among the highest in the world. However, it is less diversified than peer economies and GDP per capita is 22% lower than the AAA median, at an estimated USD43,500 this year.

Finland's 'AAA' IDRs also reflect the following key rating drivers:

Finland's ratings are underpinned by strong political and social institutions. Finland's scores on governance indicators are higher than the 'AAA' peer median.

Finland has a strong track record of prudent fiscal policy management and economic policy execution. The general government sector had a net asset position of 57% of GDP in 2014 due to the strong financial position of statutory pension plans. Finland is among only six OECD countries to enjoy a government net asset position. Government debt was 59.3% of GDP in 2014, higher than the 'AAA' median of 43.7%.

Parliamentary elections will take place on 19 April this year. The new government will still face a fiscal sustainability gap, over and above the consolidation measures already announced for this and the following years. While there is uncertainty about the detailed policy measures that the new government may introduce, we believe there is a degree of consensus across the political spectrum on the future direction of macroeconomic policy. We therefore expect that the new government will remain committed to ensuring public debt sustainability through a mix of fiscal adjustments and structural reforms

RATING SENSITIVITIES
Future developments that could, individually or collectively, result in a downgrade include:
-A persistently low growth rate of the economy, further affecting the sustainability of the public finances.
-A continued rise in the government debt to GDP ratio in the medium term.
-A continued rise in net external indebtedness.

The main factors that could lead to the Outlook being revised to Stable are:
-Evidence of an improvement in medium-term growth prospects.
-Evidence of a stabilisation of the government debt to GDP ratio and improved projected dynamics.
-An improvement in external balances, ensuring a stabilisation in external indebtedness.

KEY ASSUMPTIONS
In its debt sensitivity analysis, Fitch assumes a primary surplus averaging 0.3% of GDP, trend real GDP growth averaging 1.1%, an average effective interest rate of 1.6% and GDP deflator inflation of 1.5%. On the basis of these assumptions, the debt-to-GDP ratio would peak at 64% in 2018, before edging back to just below 60% by 2024.

The European Central Bank's asset purchase programme should help underpin inflation expectations, and supports our base case that, in the context of a modest economic recovery, the eurozone will avoid prolonged deflation. Fitch also assumes gradual progress in deepening financial integration at the eurozone level and that eurozone governments will tighten fiscal policy over the medium term.