Fitch stated that current government policies are unlikely to stop the growth of the debt-to-GDP ratio.
It noted that ageing demographics, increased defence costs, and rising social spending continue to place pressure on public finances.
Finland’s sovereign rating was last at AA in 1996. It had held the higher AA+ status from 2016 until the downgrade was issued on Friday.
In its announcement, Fitch cited a legislative proposal by the Orpo government to reduce the debt ratio by one percentage point annually. The agency warned that the proposed law would only take effect in the next decade and expressed doubt over its practical impact.
“The proposal’s effectiveness and political feasibility are uncertain,” the statement read.
The decision comes amid a weakening economic outlook. Finland’s debt burden has been increasing steadily, and government expenditure is expected to continue growing in the coming years.
According to Fitch, the rating cut is driven by the view that the government’s fiscal consolidation plans are not strong enough to address the structural deficit.
Public sector debt, which stood at 74 percent of GDP in 2023, is projected to exceed 80 percent by the end of the decade. Defence expenditure has risen following Russia’s invasion of Ukraine, and healthcare costs are rising due to demographic ageing.
The downgrade is not expected to have an immediate major effect on Finland’s borrowing costs. Nordea’s chief analyst Jan von Gerich said on Friday that the move had been anticipated.
“The direction is of course negative, and it reflects the challenges facing Finland’s economic outlook,” he told Helsingin Sanomat. “But the situation is not dramatic.”
Von Gerich said the downgrade could increase Finland’s borrowing costs slightly but did not foresee a significant selloff of Finnish government bonds.
“We’re talking about a few basis points in yields,” he said.
The state’s interest expenditure this year is projected to exceed three billion euros.
Responding to the downgrade, Prime Minister Petteri Orpo called the news “a serious signal” and said it will be addressed in the upcoming government budget talks.
“The decision was not unexpected,” Orpo wrote on X. “The government has worked hard to improve the situation, but economic growth and cyclical conditions have been weaker than forecast.”
Finance Minister Riikka Purra said the country is on “a concerning path” and that more action will be needed.
“We cannot afford to wait,” she said in a written statement. “Further adjustment measures are needed, and they must continue over several government terms in order to bring the debt ratio down.”
Fitch also noted that the Orpo government has struggled to implement fiscal policy changes swiftly, pointing to political uncertainty and slow legislative timelines.
In its previous assessment, Fitch had already warned that Finland’s rating could be at risk if the public debt ratio continued to rise or if structural reforms failed to take hold.
Finland is now rated at AA by Fitch, two notches below the top AAA rating. The country continues to hold AA+ ratings from S&P and Moody’s.
HT
