Research Update:

Outlook On Finland Revised To Negative On Subpar Growth Prospects; 'AAA/A-1+' Ratings Affirmed
Primary Credit Analyst: Maria J Redondo, London (44) 20-7176-7094; maria.redondo@standardandpoors.com Secondary Contacts: Moritz Kraemer, Frankfurt (49) 69-33-999-249; moritz.kraemer@standardandpoors.com Maxim Rybnikov, London (+44) 207 176 7125; maxim.rybnikov@standardandpoors.com

Table Of Contents
Overview Rating Action Rationale Outlook Key Statistics Related Criteria And Research Ratings List

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Research Update:

Outlook On Finland Revised To Negative On Subpar Growth Prospects; 'AAA/A-1+' Ratings Affirmed
Overview
In our view, Finland's persistent subpar growth rate reflects deep structural demographic and economic imbalances that hamper the government's efforts to achieve fiscal consolidation. We consider that there are downside risks to growth and policy implementation. We are therefore revising the outlook on our long-term sovereign credit ratings on Finland to negative from stable. We are affirming our 'AAA/A-1+' long- and short-term foreign and local currency ratings on the Republic of Finland.

Rating Action
On April 11, 2014, Standard & Poor's Ratings Services revised its outlook on the Republic of Finland to negative from stable. At the same time, we affirmed our 'AAA/A-1+' long- and short-term foreign and local currency sovereign credit ratings on Finland.

Rationale
The outlook revision reflects our view of Finland's protracted economic stagnation, with average GDP per capita growth over the past decade of close to zero. We now view GDP growth in 2013 as markedly more negative than we had previously anticipated at -1.4%, rather than -0.5% (see "Ratings On Finland Affirmed At 'AAA/A-1+'; Outlook Stable," published Oct. 18, 2013, on RatingsDirect). We have also lowered our growth assumptions for 2014-2016 to 1% on average, from an already low 1.4% previously. Furthermore, we believe that the economy remains vulnerable to any slowdown of economic activity in the euro area or among other major trading partners, such as Russia. In our view, weak labor market conditions, an adverse demographic profile, and subdued investment activity will likely continue to hamper domestic demand. We expect that fragile external demand will continue to limit Finland's underperforming export sector. Falling terms of trade and rising unit labor costs have diminished the competitiveness of Finland's tradable sector. We believe that in such an environment the risks to Finland's economic and fiscal performance are increasingly on the downside. The moderate pace of policy implementation addressing structural deficiencies might also hinder the

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delivery of fiscal targets over the medium term. Our ratings on Finland continue to be supported by its innovative and wealthy economy. We estimate its per-capita income at around $47,900 in 2014. Furthermore, net general government debt is low at an estimated 20% of GDP in 2014, supported by large amounts of liquid assets. The ratings also reflect Finland's high degree of institutional and governance effectiveness, and its membership of the European Economic and Monetary Union (EMU or eurozone). This bestows Finnish borrowers, including the government, with enhanced access to international capital markets and permits domestic banks to access liquidity from the European Central Bank (ECB), benefitting from the ECB's monetary flexibility as an issuer of a floating reserve currency. These strengths are somewhat constrained by Finland's weaker external performance, as depressed global demand and decreasing competitiveness have led to current account deficits since 2011 and expected for 2014-2017. Moreover, structurally weaker growth and pressure from increasing social and health costs challenge Finland's track record of a prudent fiscal policy stance. The large share of central government bonds held by nonresidents, estimated at close to 90%, also constitutes a rating weakness in our opinion, as nonresident investors have often shown themselves to be more volatile than domestic investors. Finland's traditional wood and paper industry, accounting for over 2% of GDP in 2013, faces cost pressures, and its electronics industry's output (just over 1% of GDP) has contracted substantially, in part reflecting Nokia's decline. In our opinion, it remains uncertain whether other sectors, such as the broader information and technology sector and the chemical industry, can compensate for the output loss in these sectors. Nevertheless, the collective wage agreement to cap salary increases agreed last year might provide some prospects for recovering cost competitiveness lost in recent years. Weak economic growth, an aging population, and deficiencies at the municipal level have weighed on the general government balance. Accordingly, we expect Finland's gross general government debt to surpass 60% of GDP in 2015, from 34% in 2008. As a result of consolidation measures implemented since 2013, we estimate that the general government deficit will recede to 2% of GDP this year, down from 2.1% in 2013, in spite of the prevailing weak economic conditions. Despite the deterioration in public finances, Finland's government balance sheet is strong, primarily because of its holdings of publicly mandated defined-benefit pension assets, and we have factored this strength into our analysis. We anticipate general government debt, net of pension and liquid assets, will exceed 21% of GDP in 2017. The banking system appears well-capitalized and is dominated by pan-Nordic banks (see "Banking Industry Country Risk Assessment: Finland," published Jan. 3, 2014). In our assessment, the system does not pose a significant contingent liability to the Finnish government. In light of continuing downward pressures to growth and to fiscal targets, the government decided on March 25, 2014, further measures aimed at delivering

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Research Update: Outlook On Finland Revised To Negative On Subpar Growth Prospects; 'AAA/A-1+' Ratings Affirmed

central government revenue increases and expenditure cuts totaling 2.3 billion over 2015-2018. We understand that the impact of the immediate measures is frontloaded to 2015, when the government expects a 1.6 billion reduction of its fiscal deficit. The government has complemented its consolidation package with a growth package entailing 1.9 billion assets sales, of which 1.3 billion will be used to pay down debt and 0.6 billion will be invested in growth-enhancing projects. We understand that over the current parliamentary term (2011-2015), the government would have provided a structural consolidation package totaling 6.8 billion. We expect that some of the key reforms to bring public finances onto a sustainable path, such as the labor and the social and health care services reforms, will only take effect toward the end of our forecast period. For instance, we understand that the government has planned the latter reform taking effect from January 2017. Meanwhile, protracted subdued growth, low employment rates, and higher costs related to an aging population will continue to weigh on government expenditure over the medium term. Moreover, the success of the structural package hinges on continuing efforts by the next government following parliamentary elections in early April 2015. We believe that Finnish policymakers will remain committed to pursuing fiscal and structural reforms, and that policymaking will remain prudent, transparent, and consensus-based. On this basis, we do not anticipate any substantial deviation to current policies as a result of prime minister Jyrki Katainen's resignation next June, although we cannot rule out some measures may stall in the run-up to next parliamentary elections. Finland's external debt is growing. Net of official reserves and financial sector external assets, we project will reach 193% of current account receipts (CARs) this year, before trending downward. This contrasts with its favorable net external asset position following nearly two decades of current account surpluses (a trend which ended in 2010) and substantial net foreign direct investment and portfolio equity outflows. We have factored this into our analysis, according to our criteria, because net external liabilities estimated at 28% of current account receipts (CARs) in 2014 are much lower than the narrow external debt position, at 193% of CARs. We expect that the current account will remain in deficit over the next few years, gradually trending toward balance as external demand improves. We have factored in short-term external debt by remaining maturity, which will exceed 300% of CARs this year. We view this level, stemming primarily from external liabilities of the financial sector, as high, according to our criteria.

Outlook
The negative outlook reflects our view that there is at least a one-in-three chance that we will lower the ratings within the next 24 months should no clear signs emerge that Finland's negative economic and fiscal debt trends are being reversed. Should we lower the long-term ratings, it would most likely be by one notch.

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Research Update: Outlook On Finland Revised To Negative On Subpar Growth Prospects; 'AAA/A-1+' Ratings Affirmed

We could revise the outlook to stable if we observed compelling evidence of competitiveness and broad-based economic growth returning to Finland. An outlook revision to stable would also depend on swift progress in comprehensive reform that we considered effectively addressed Finland's structural impediments and rising government debt burden.

Key Statistics
Table 1

Republic of Finland - Selected Indicators

2007 Nominal GDP (US$ bil) GDP per capita (US$) Real GDP growth (%) Real GDP per capita growth (%) Change in general government debt/GDP (%) General government balance/GDP (%) General government debt/GDP (%) Net general government debt/GDP (%) General government interest expenditure/revenues (%) Oth dc claims on resident non-govt. sector/GDP (%) CPI growth (%) Gross external financing needs/CARs +use. res (%) Current account balance/GDP (%) Current account balance/CARs (%) Narrow net external debt/CARs (%) Net external liabilities/CARs (%) 246 46,644 5.3 4.9 (1.4) 5.3 35.2 1.5 2.8 81.5 1.6 207.9 4.3 7.5 92.3 53.1 2008 272 51,309 0.3 (0.2) (0.1) 4.4 33.9 4.9 2.7 86.0 3.9 223.7 2.6 4.6 81.5 4.5 2009 239 44,946 (8.5) (9.0) 7.0 (2.5) 43.6 8.0 2.6 93.7 1.6 352.1 1.8 3.9 146.6 (15.4) 2010 237 44,235 3.4 2.9 6.7 (2.5) 48.8 9.9 2.6 95.4 1.7 358.3 1.5 3.1 138.9 (43.8) 2011 262 48,809 2.8 2.4 3.0 (0.7) 49.3 14.9 2.6 96.8 3.3 376.1 (1.5) (3.0) 134.8 (37.0) 2012 247 45,754 (1.0) (1.5) 4.0 (1.8) 53.6 16.5 2.6 99.1 3.2 502.8 (1.4) (2.9) 179.8 (37.9) 2013e 257 47,339 (1.4) (1.8) 3.3 (2.1) 57.0 18.2 2.8 102.0 2.2 461.8 (1.1) (2.2) 186.9 (33.2) 2014f 261 47,857 0.5 0.0 5.2 (2.0) 59.1 19.9 2.9 104.0 1.8 376.4 (1.7) (3.4) 193.2 (28.5) 2015f 263 47,956 1.2 0.8 4.5 (2.0) 61.9 21.1 3.3 105.6 1.8 359.2 (1.2) (2.3) 195.3 (25.5) 2016f 273 49,617 1.4 0.9 3.7 (2.0) 63.8 21.9 3.4 107.5 1.8 321.4 (0.9) (1.6) 189.5 (22.4) 2017f 282 50,963 1.5 1.0 2.3 (1.5) 64.1 21.3 3.5 109.4 1.8 319.1 (0.9) (1.7) 184.6 (19.6)

Other depository corporations (dc) are financial corporations (other than the central bank) whose liabilities are included in the national definition of broad money. Gross external financing needs are defined as current account payments plus short-term external debt at the end of the prior year plus nonresident deposits at the end of the prior year plus long-term external debt maturing within the year. Narrow net external debt is defined as the stock of foreign and local currency public- and private- sector borrowings from nonresidents minus official reserves minus public-sector liquid assets held by nonresidents minus financial sector loans to, deposits with, or investments in nonresident entities. A negative number indicates net external lending. CARs--Current account receipts. The data and ratios above result from S&Ps own calculations, drawing on national as well as international sources, reflecting S&Ps independent view on the timeliness, coverage, accuracy, credibility, and usability of available information.

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Related Criteria And Research

Related Criteria
Sovereign Government Rating Methodology And Assumptions, June 24, 2013 Methodology For Linking Short-Term And Long-Term Ratings For Corporate, Insurance, And Sovereign Issuers, May 7, 2013 Criteria For Determining Transfer And Convertibility Assessments, May 18, 2009

Related Research
Sovereign Defaults And Rating Transition Data, 2012 Update, March 29, 2013 Sovereign Ratings And Country T&C Assessments, March 28, 2014 Banking Industry Country Risk Assessment: Finland, Jan. 3, 2014 Emerging Markets Sovereign Debt Report 2014: Borrowing To Remain Broadly Unchanged This Year, Feb. 27, 2014 Sovereign Risk Indicators, March 24, 2014, (Interactive version also available at http://www.spratings.com/sri ) Ratings On Finland Affirmed At 'AAA/A-1+'; Outlook Stable, Oct. 18, 2013 In accordance with our relevant policies and procedures, the Rating Committee was composed of analysts that are qualified to vote in the committee, with sufficient experience to convey the appropriate level of knowledge and understanding of the methodology applicable (see 'Related Criteria And Research'). At the onset of the committee, the chair confirmed that the information provided to the Rating Committee by the primary analyst had been distributed in a timely manner and was sufficient for Committee members to make an informed decision. After the primary analyst gave opening remarks and explained the recommendation, the Committee discussed key rating factors and critical issues in accordance with the relevant criteria. Qualitative and quantitative risk factors were considered and discussed, looking at track-record and forecasts. The chair ensured every voting member was given the opportunity to articulate his/her opinion. The chair or designee reviewed the draft report to ensure consistency with the Committee decision. The views and the decision of the rating committee are summarized in the above rationale and outlook.

Ratings List
Ratings Affirmed; CreditWatch/Outlook Action To Finland (Republic of) Sovereign Credit Rating AAA/Negative/A-1+ Transfer & Convertibility Assessment AAA Senior Unsecured AAA Short-Term Debt A-1+ From AAA/Stable/A-1+

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Finnvera PLC Senior Unsecured

AAA

Additional Contact: SovereignEurope; SovereignEurope@standardandpoors.com

Complete ratings information is available to subscribers of RatingsDirect at www.globalcreditportal.com and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.

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