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Debt Management
Annual Review 2016
16
Debt Management
Annual Review 2016
An online version of the Annual
Review with interactive graphs is available at
www.treasuryfinland.fi/annualreview2016.
Page 6
Eventful year
by Teppo Koivisto
Page 12
Central government’s
total balance sheet
boosts transparency
by Sami Yläoutinen
Page 38
Finnish
government net
debt is negative
by Roope Uusitalo
Contents
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1
Eventful
year
2
Central government
debt management
3
Central government’s total
balance sheet boosts transparency
4
Operating
environment
5
Funding
operations
6
Secondary market
developments
7
Risk management
and internal control
8
Finnish government
net debt is negative
9
by Teppo Koivisto
by Sami Yläoutinen
by Roope Uusitalo
Finnish economy and
public finances
Contacts
Eventful
year
by Teppo Koivisto
6
f you ask a debt manager to describe the market
conditions in 2016, I think the answer would be ‘eventful’ or
‘unexpected’. The United Kingdom’s decision to withdraw
from the European Union in June was not particularly on the
cards of the financial markets. Neither was the outcome of
the US presidential elections clear-cut until the election day in
November. A common denominator for these events is their farreaching impact on the political and economic scene in Europe.
And in 2017, Europe is preparing for an eventful election period
where surely nobody is expecting anything unexpected — or
are they?
Events will not make our foresight on the market behaviour
any easier. An issuer’s role, however, is to anticipate and utilize
the prevailing economic and market conditions in order to fulfil
central government issuance plans and markets’ expectations.
In 2016, the Republic of Finland successfully fulfilled its EUR 17
billion issuance programme in an event-driven market
environment.
The scale of our financing programme for 2017 is slightly
greater due to two large redemptions. The overall gross
borrowing requirement, including short-term funding, will
be EUR 23 billion. The central government net borrowing
requirement is estimated to be some EUR 5.6 billion.
Growth surprise in sight
The Finnish economy grew faster in 2016 than earlier expected.
Furthermore, an agreement to improve price competitiveness
of Finnish business and industry was reached among social
partners. The so-called Competitiveness Pact will definitely
support Finnish exports and employment in the coming years.
7
Positive developments improve the likelihood of the
government attaining one of its key goals of stabilizing our
public finances after a prolonged period of negligible growth
So far, the impact on Finnish government benchmark bonds’
and sizeable budget deficits. Achieving this goal, however,
requires government commitment to follow through on
secondary market liquidity has been modest, but to safeguard
structural reforms with support from stronger growth and
liquidity conditions during the extended period of central
better performance in main export industries.
bank purchases, the State Treasury will maintain the overnight
securities lending facility for its primary dealers.
In the first half of 2016, the credit rating agencies Moody’s
Investors Service and Fitch Ratings downgraded the longterm sovereign ratings for the Republic of Finland, mainly
Long bond issuance
revisited
referring to moderate economic growth prospects. On balance,
in the second half of the year S&P Global Ratings revised the
outlook on its rating to stable from negative due to a gradually
recovering economy and improving public finances. The central
government of Finland has solicited credit ratings from S&P,
The mission of the State Treasury is to safeguard the liquidity
Moody’s and Fitch. For long-term debt, they are AA+, Aa1 and
and funding for the central government. During 2017 the State
AA+, with a stable outlook.
Treasury will be looking into opportunities to re-extend the euro
benchmark curve to 30 years. The maturities for the likely two
syndicated euro benchmarks in 2017 will also include a regular
Follow up on liquidity
10-year maturity.
Our long-term goal of keeping our bonds attractive to
The Eurosystem continued its extraordinary monetary policy
investors has not changed. We are convinced that Finland’s
measures throughout 2016 by purchasing euro-denominated
strong credit outlook will continue to support our bonds with
euro-area government securities as part of its expanded
these margins and serve our investors in the best possible
asset purchase programme. The Bank of Finland as part of the
manner in 2017 and in the long run.
Eurosystem has steadily been acquiring Finnish government
bonds from the secondary markets. By the end of 2016, the
Bank of Finland held approximately EUR 21 billion worth of
Finnish government bonds in its balance sheet. The figure is
Teppo Koivisto
equivalent to 25 per cent of our marketable government debt.
Teppo Koivisto is Director of Finance and Head of the
The purchasing programme (PSPP) will continue at least until
Finance Division at the State Treasury of Finland.
the end of 2017.
Mr Koivisto is in charge of the central government debt
management function, which includes funding, liquidity
management, investor relations and interest rate risk
positioning of the government debt.
8
Central
government
debt management
The general principles of central government debt management are determined by
the Ministry of Finance. The State Treasury is a central administrative agency operating
under the Ministry of Finance and implements all debt management operations
under the guidelines prepared by the Ministry.
9
Objective of debt
management
he guidelines set out e.g. the general principles
and objectives of debt management, instruments used in
debt management and risk limits as well as other restrictions
The objective of Finland’s central government debt
that have to be observed. The State Treasury is authorised to
management is to fulfil the State’s financial requirements
raise funds, provided that the nominal value of the central
and to keep the long-term costs of servicing the debt as low
government debt does not exceed EUR 125 billion until further
as possible in relation to risks resulting from the debt, in such
notice and that, at the time of borrowing, the value of short-
a way that the risks are acceptable in terms of national risk-
term debt of maximum term of 12 months does not exceed
bearing capacity.
The costs of servicing the debt are primarily determined by
EUR 18 billion of the total debt.
The State Treasury is also authorised to take out short-
the euro area interest rates. The cost of borrowing is mainly
term loans when necessary in order to safeguard the central
controlled by managing the debt interest rate risk position,
government’s liquidity, as well as to enter into derivative
and by implementing central government borrowing as cost-
contracts required when managing the risks under conditions
effectively as possible.
determined by the Ministry of Finance and under its direction.
The State Treasury reports regularly on debt management
Funding
to the Ministry of Finance. The government submits financial
statements to Parliament annually, including an overview of the
condition of the national economy and the productivity of the
The purpose of the Finnish central government’s funding is
Ministry of Finance’s administrative sector.
to fulfil the government’s financing needs in such a way that
Finland’s ability to discharge its financial commitments costeffectively under all circumstances is secured, and the risks
associated with financial operations are controlled. Funding is
implemented primarily through short-term Treasury bills and
long-term benchmark bonds.
In the long term, the aim is to secure the availability of
funding by identifying accessible sources and by maintaining
the preparedness for their exploitation. Funding is carried out
in such a way that the central government is not burdened by
significant funding concentrations in terms of the redemption
profile or funding source.
10
The Constitution of Finland, Section 82
“The incurrence of state debt shall be based on the consent of the Parliament, which
indicates the maximum level of new debt or the total level of state debt.”
Parliament
Government
Parliament authorises
the government to
borrow.
As the relevant agent within the government,
the Ministry of Finance authorises the State
Treasury to decide and implement the required
borrowing and debt management operations.
Ministry of
Finance
The Ministry of Finance prepares annual
guidelines for the State Treasury on
borrowing and debt management and
oversees their implementation.
Debt management
framework
State
Treasury
The State Treasury
prepares annual reports on
debt management to the
Ministry of Finance.
portfolio and the benchmark portfolio is the result of the State
Treasury’s debt management.
The central government debt management is based on a
benchmark portfolio. Broadly speaking, a reference portfolio for
Risk management
debt management defines an accurate target for operative
interest rate risk management. It also enables the State Treasury
Risk management is an integral part of sound debt
to quantify the profitability of its debt management operations.
management. The objective of risk management is to avoid
With regard to actual debt portfolio management, the
State Treasury may, within authorised limits, deviate from the
unexpected losses and safeguard the continuation of
benchmark portfolio interest rate risk exposure. The deviation
operations. The government’s objective is to manage all risks in
is interpreted as the State Treasury’s interest rate risk position.
a systematic manner.
The difference between the relative costs of the actual debt
11
Central
government’s
total balance
sheet boosts
transparency
by Sami Yläoutinen
12
he financial crisis of the past years has revealed
serious shortcomings in the ability of many, if not most,
countries to identify risks, particularly those outside the
traditional budget or central government accounts. Ultimately,
it is the central government that is responsible for the
functioning and continuity of society. Thus, the responsibilities
of the central government are diverse, and risks related to its
finances may originate from countless sources.
Thus, Finland has also attempted to broaden the perspective
on factors affecting public finances and to increase reporting
on public finances. As an example, take the preparation of the
annual review of the central government’s financial liabilities
and risks. 1
1
13
http://vm.fi/en/publication?pubid=12301
In February 2015, the International Monetary Fund (IMF)
published a so-called fiscal transparency evaluation pertaining
to Finland. 2 In this context, it published a rough balance
sheet for the Finnish public economy and recommended that
Finland should, among other measures, extend the final central
government accounts to cover funds and unincorporated state
More openness
enterprises external to the budget and gradually develop the
statistical consolidated reporting of the entire public sector to
cover real and financial assets and liabilities, including pension
The transparency and openness of the reporting policies
liabilities.
concerning the central government’s finances have been
improved by developing the description of the state of the
Also, the National Audit Office of Finland (NAOF) has stated
that the funds external to the budget decrease the transparency
central government’s finances using financial statement
of the central government’s financial position. In the absence of
accounts commonly used in businesses and other organisations
consolidated final accounts for the entire central government
in addition to the macroeconomic review. Accrual-based
and the balance sheet management based on that, there is a
accounting and financial statement reporting per se have
danger that the understanding of the central government’s
been used by the central government since 1998 and by the
financing position as a whole deteriorates. In addition, the
municipalities since 1997.
The general background of the budget proposal for 2016 and
Parliament’s Audit Committee has addressed the same issue.
Prime Minister Sipilä’s government programme states that the
2017 now includes the so-called total accounts and liabilities
accounting policy of the central government’s finances should
for the central government’s finances. The review covers the
be altered to improve transparency and openness during the
budget accounts, income and expenses of state funds external
government’s term.
to the budget and unincorporated state enterprises, the
financial standing (balance sheet) and contingent liabilities
external to the balance sheet. Owing to the February 2015
amendment of the State Budget Decree, the corresponding
review must also be included in the government’s annual report
given by the government annually to Parliament. According to
the amendment, the annual report is to include also a review
of the state of the public economy and central government’s
finances as well as an estimate of the key financial risks for its
operations and their significance. The data are based largely on
2
the risk review.
http://www.imf.org/external/pubs/ft/scr/2015/cr1560.pdf
14
Better view of central
government’s finances
The profit and loss account indicates whether the income
from the financial year has sufficed to cover the expenses of
the financial year. According to the total accounts of 2015, the
central government’s income totalled EUR 45.0 billion while the
The purpose of the new state total accounts, prepared by
expenses totalled EUR 51.2 billion, giving a deficit of EUR 6.2
the State Treasury, is to provide an improved overall view of
billion. The deficit has decreased by EUR 0.8 billion since 2014.
the central government’s finances under the government’s
The deficit of the central government’s total accounts was
control (the government as a legal entity). The total accounts
EUR 1.5 billion greater than the deficit in the budget. This
have been prepared based on the official financial statements
is because of the elimination of internal transactions, the
of the above units but, to date, they have not been audited.
greatest of which were fund transfers ( e.g. EUR 2.3 billion
In the total accounts, the effect of items internal to the
from the State Pension Fund) and entry as income of profits
central government’s finances, i.e. transactions between state
from unincorporated enterprises (EUR 0.7 billion) to the budget
agencies, funds and unincorporated enterprises, have been
accounts. The total accounts provide a better view of the
eliminated from the profit and loss statement and the balance
deficit of the central government’s finances than the separately
sheet. Significant items eliminated include internal rent, asset
presented profit and income accounts.
items and income recognition of the profit of unincorporated
state enterprises, the cash balance in funds, central government
internal pension payments and transfers to the budget
accounts. Companies and joint ventures under the central
government’s control are included in the accounts in the fixed
assets securities.
15
The balance sheet describes the financial standing in terms
of assets and liabilities on the date of closing of the accounts.
The assets include the national property (cultural and natural
heritage, e.g. historical buildings, national parks), fixed assets
and other long-term assets ( e.g. land, buildings, information
The equity reflects the net assets, obtained by deducting
systems) and trading and current assets. The balance sheet
reserves and borrowed capital from assets. The equity in the
values are based on the central government’s accounting
central government’s total accounts is comprised of the equity
and are cost-based. The balance sheet total on 31 December
of the budget accounts, funds and unincorporated enterprises.
2015 was EUR 84.4 billion. In the assets, national property
The equity in the central government’s total accounts was
amounted to EUR 1.9 billion, fixed assets and other long-term
EUR -27.7 billion in 2015. Compared to 2014, the negative equity
assets totalled EUR 65.2 billion, and the trading and current
has grown by EUR 5.1 billion.
assets amounted to EUR 17.4 billion. The greatest single assets
The equity according to the central government’s total
were securities in fixed assets, 37.2 billion, and transportation
accounts is clearly less negative than the equity of the budget
networks, EUR 19.6 billion.
accounts. This is because of the significant positive equity of
The liabilities include borrowed capital divided into long-
the funds and unincorporated enterprises. The total equity,
term and short-term liabilities and reserves (only for funds). A however, has deteriorated during the past two years for which
debt or part of a debt is considered long-term if it matures in
information is available. This is largely because of the deficit in
one year or later. The central government’s debt according to
the state budget.
the total accounts was EUR 112 billion on 31 December 2015,
The balance sheet that commenced the central government’s
EUR 88.5 billion of which was long-term and EUR 23.6 billion
budget accounts on 1 January 1998 showed a negative equity
short-term. The amount of the debt has increased by EUR 6.0
of approximately EUR 30 billion. This was due to the severe
billion since 2014.
indebtedness at the beginning of the 1990s and due to the
solutions in the preparation of the initial balance sheet. Part of
the national property was excluded from the balance sheet and
state enterprises were valuated very moderately. The central
government’s profit and loss accounts in 1998–2008 were
mostly positive. This strengthened the central government’s
financial standing, making the equity in the 2008 budget
accounts only EUR 8.1 billion negative.
16
Because of the financial crisis, the financial statements for
the central government’s budget accounts have shown a loss
since 2009. This has deteriorated the central government’s
financial standing and resulted in the growth of its negative
equity. As of 2012, the central government’s financial standing
has nominally been weaker than in the initial balance sheet of
1998. In addition, the central government’s assets have not
grown in the same proportion as the borrowed capital. Noninvestment expenses have been covered by loans.
Balance sheet
interpretation is not
unambiguous
The interpretation of the central government’s balance sheet
is not unambiguous, and any policy conclusions resulting from
Sami Yläoutinen
it must be considered carefully, as the balance sheet review
does not consider the coming tax income based on the central
Sami Yläoutinen is Director General in the Ministry of
government’s taxation right as assets. Thus, the balance sheet
Finance. During 2011–2014 he worked in the Fiscal Affairs
review does not, for example, allow for drawing conclusions
Department of the International Monetary Fund in
regarding the sustainability of the central government’s
Washington. Previously employed by the Bank of Finland,
finances. Traditional sustainability calculations are more
he joined the Ministry of Finance in 1999 and has since
suitable for this task. The balance sheet review does, however,
held several positions in the Ministry. He holds a Doctor of
allow for a comprehensive review of the central government’s
Sciences degree in economics, and his dissertation focused
financial standing at a given time, and thus provides a good
on fiscal frameworks.
contribution to the review on its total risks.
17
Operating
environment
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.
18
Central government borrowing in 2016
EUR billion
Redemptions
Gross borrowing
14.5 = 16.7 =
Net Borrowing
Issuance by
instrument type
11.2
SERIAL
BONDS
3.3 T-BILLS
2.2 TERM ISSUES
2.2
OTHER LONG-
G
Excluding funding for intra-government funds and intra-year T-bill issuance
rowth outlook concerns resulted in ratings
The Eurosystem central banks continued their quantitative
downgrades in the first half of the year, but due to an improved
easing with the asset purchase programmes, most
economic outlook and coherent economic policies, all three
predominantly the public sector purchasing programme
major credit rating agencies currently have a stable credit
(PSPP). This was extended from EUR 60 billion monthly to
outlook for Finland with ratings at AA+/Aa1/AA+. The secondary
EUR 80 billion in April and complemented by a corporate sector
market trading levels of euro benchmarks stabilised to offer a
purchase programme in June. Due to accommodative monetary
pick-up over the Netherlands and Germany and, depending on
policies, interest rates remained very low and even negative in
the maturity, also Austria, while remaining tighter with respect
many maturities of Finnish government euro benchmark bonds.
to France.
These exceptional market conditions posed challenges for many
investors.
19
Redemptions and net borrowing
EUR billion
Net borrowing
Gross borrowing
30
Redemptions
Forecast
25
20
15
10
5
0
-5
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Source: Ministry of Finance Dec/2016
Secondary market liquidity for Republic of Finland
The realised gross borrowing amount in 2016 was EUR 16.7
Government Bonds (RFGB), i.e. the euro benchmarks, was not
billion. Long-term issuance amounted to EUR 13.4 billion. The
significantly affected by the increasing central bank holdings,
rest of the total was short-term borrowing. The gross borrowing
which reached some EUR 21 billion, i.e. almost 25 per cent of
requirement for the coming years is estimated to remain around
the outstanding RFGB stock by year end. Some signs of repo
EUR 20 billion annually.
specialness and patches of increased volatility were observed,
The budgeted net borrowing amount in 2016 was EUR 6.0
but the market remained very accessible to investors due to a
billion. However, the actual net borrowing was around EUR 2.2
committed Primary Dealer network.
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.
20
Central government debt
Year end
EUR billion
% of GDP
120
90
100
75
80
60
60
45
40
30
20
15
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
Ministry of Finance provisional
issued every two to three years. In 2016, the first issue in spring
Funding strategy
was a 10-year benchmark bond. The second syndicated issue
was in the 7-year tenor — expected demand in the negative
The funding strategy of the Republic of Finland is based on euro
yield environment contributed to this choice of maturity.
benchmark bond issuance. New benchmark bonds are issued
The net borrowing requirement in the government’s budget
in syndicated form. Syndications are complemented with bond
proposal for the year 2017 is EUR 5.6 billion. With redemptions
tap auctions that enable increases in the outstanding volumes
at EUR 17.1 billion, the total borrowing requirement sums up
of the existing bond lines. There is also a foreign currency
to EUR 22.7 billion for the year. The intention is to continue
bond issue programme, called the Euro Medium Term Note
the current funding strategy by issuing a new 10-year euro
programme. The current funding volume requires two new euro
benchmark and potentially re-extending the yield curve to 30
benchmark bond syndications per year, 2–4 auctions, and one
years with a new issue.
benchmark-sized USD bond issue. Short-term funding is carried
The State Treasury is motivated to preserve Finland’s place
out via Treasury bills.
in the global markets as one of the reliable and acknowledged
In terms of maturities, the focus is on issuing current coupon
bond issuers and thus maintain attractive debt instruments
bonds in 10- and 5-year tenors. However, longer bonds are
and bond issuance in the future.
21
Funding
operations
In 2016, the Republic of Finland issued two new euro-denominated
benchmark bonds and a new USD benchmark bond. In addition,
four tap auctions were conducted during the year. Short-term
funding was carried out via the Treasury bill programme.
22
Operations in 2016
EUR billion
Tap auction
Syndication
EMTN issue
T-bill issue
5
4
3
2
1
0
Jan
Feb
Mar
Apr
May
Jun
Jul
T
Aug
Sep
Oct
Nov
Dec
though the bond was issued with a negative yield, the order
book grew to EUR 11 billion with bids from more than 90
investors.
Four auctions
he first euro benchmark issue was a new 10-year
euro-denominated benchmark bond due 15 April 2026. The
bond was launched on 1 March with an issue size of EUR 4
In addition to the new lines, outstanding euro benchmarks were
billion, and an order book of EUR 8.3 billion. More than 110
tapped in four auctions during the year. The total auctioned
investors participated in the deal. The demand for the bond was
volume amounted to EUR 4.5 billion for the year. The first
strong with active participation by central banks and official
auction in late January was a dual tranche auction of two
institutions.
benchmark bonds, maturing in September 2020 and July 2042.
The total auctioned amount was EUR 1.5 billion, bringing the
The second euro benchmark bond issue of the year was
a 7-year maturity, issued on 31 August. The bond is due 15
outstanding amounts of the bonds to EUR 6 billion for the 2020
September 2023, and the size at issue was EUR 3 billion. Even
bond and EUR 4.5 billion for the 2042 bond.
23
Benchmark bonds
Outstanding amount
EUR billion
2017/4
RFGB 1.875% 15/04/2017
2017/9
RFGB 3.875% 15/09/2017
2018
RFGB 1.125% 15/09/2018
2019
RFGB 4.375% 04/07/2019
2020/4
RFGB 3.375% 15/04/2020
2020/9
RFGB 0.375% 15/09/2020
2021
RFGB 3.50% 15/04/2021
2022
RFGB 1.625% 15/09/2022
2023/4
RFGB 1.50% 15/04/2023
2023/9
RFGB 0.00% 15/09/2023
2024
RFGB 2.00% 15/04/2024
2025/7
RFGB 4.00% 04/07/2025
2025/9
RFGB 0.875% 15/09/2025
2026
RFGB 0.500% 15/04/2026
2028
RFGB 2.75% 04/07/2028
2031
RFGB 0.75% 15/04/2031
2042
RFGB 2.625% 04/07/2042
0
1
2
3
4
5
6
7
8
Serial bond, no benchmark statuss
Issuance in different
currencies
The second auction took place on 14 June for the bond
launched in March 2016, maturing on 15 April 2026. The
auctioned volume was EUR 1 billion, and the outstanding
amount of the bond after the auction is EUR 5 billion.
The EMTN programme enables issuance in currencies other than
The third auction in October targeted the bond maturing in
April 2031. The amount of the auction was EUR 1 billion, raising
the euro. A USD benchmark bond is part of the annual funding
the total outstanding amount of the bond to EUR 4.5 billion
strategy. In 2016, the dollar benchmark was launched in April,
after the auction.
and similar to the previous year, the maturity was three years.
The bond matures on 23 April 2019. The order book was strong,
The final auction for the year was conducted in November
for the bond maturing in September 2023. The outstanding
and the allocation to central banks and official institutions was
amount of the bond increased by EUR 1 billion, reaching EUR 4
record high at 75 per cent. More than 60 investors participated
billion after the auction.
in the transaction. The final issue size of the bond was USD 2
billion, which is on the large side in comparison to previous
years. The issue was hedged for currency risk.
24
Outstanding stock of Treasury bills in 2016
After swaps
End of month
EUR billion
Issued in EUR
Issued in USD
8
7
6
5
4
3
2
1
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Short-term funding
The short-term funding vehicle for the Republic of Finland
New issuance under the EMTN programme also included
is the Treasury bill programme. The programme is similar to
a SEK 1000 million transaction maturing on 28 January 2021.
European Commercial Paper programmes, and the T-bills are
Additionally, two existing GBP issues were tapped during the
issued in daily tapping windows during the year, the timing of
year, in February and in May. The taps were for the maturities
the issuance depending on the liquidity position of the central
December 2019 and December 2020, for 100 million and 150
government. Finland does not have regular announced auctions
million respectively.
of T-bills. The daily tapping window is flexible both for the issuer
The issuance in foreign currencies complements the euro-
and the investor, as the government liquidity management
denominated borrowing, and makes participation possible also
can be optimised using this instrument and the continuous
for investors who do not invest in euro-denominated bonds.
availability gives investors flexibility. Treasury bills are issued in
two currencies: euros and US dollars.
25
Liquid cash funds
Annual average
EUR billion
% of debt
12
30
10
25
8
20
6
15
4
10
2
5
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
0
Liquidity
management
In 2016, the vast majority of the Treasury bill issuance was
USD-denominated. The issuance window was open during four
time periods: in January, late May, mid-August and November.
The liquidity position of the central government remained
The average maturity of the T-bills was 3.7 months (5.4 months
strong during the year.
In the negative yield market environment it is costly to invest
in 2015), and the gross volume of the Treasury bill issuance was
USD 11.4 billion and EUR 242 million. The outstanding stock at
large cash reserves. For this reason, the State Treasury has
year end was USD 3.65 billion and EUR 172 million.
decreased the amount of cash reserves during 2015 and 2016
in comparison to previous years. Possible short positions are
covered with short-term money market loans. The flexibility in
the short-term funding is also beneficial in optimising the cash
position.
26
Cash flow forecast system
Liquidity management decisions
Investments
and loans
Income and
expenditure
forecasts
Government
entity 1
Income and
expenditure
forecasts
Government
entity 2
Income and
expenditure
forecasts
Government
entity n
Income and
expenditure
forecasts
Software
Forecasts and realized
cash flows
The cash reserves are invested in the short-term maturities.
To avoid credit risk, the investments are mainly triparty repo
agreements.
Liquidity management relies strongly on the cash flow
forecast system. All government accounting entities forecast
their income and expenditures for the next 12-month period
into the system. The State Treasury is using this data as a basis
for liquidity management decisions.
27
Cash inflows
and outflows
Bank 1
Cash inflows
and outflows
Bank 2
Cash inflows
and outflows
Bank 3
Secondary market
developments
It is a priority for the State Treasury to actively work with the Primary Dealers to
maintain and further enhance the liquidity of the Finnish government bonds.
28
10-year bond spreads to Germany in 2016
Basis points
Finland
Austria
Netherlands
France
Belgium
60
50
40
30
20
10
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Bloomberg
F
innish government benchmark bonds can be
the inter-dealer trading is based on the activity of the Primary
traded on the following inter-dealer platforms: MTS Finland,
Dealers and other market participants. In 2016, the nominal
BGC eSpeed, Eurex Bonds and ICAP BrokerTec. The State
interdealer trading volume increased in comparison to the
Treasury does not participate in secondary market activity, and
previous year.
29
Bid-offer spreads of Finnish government bonds in 2016
3-day moving average
Price cents
RFGB 2.625% 04/07/2042
RFGB 0.75% 15/04/2031
RFGB 0.5% 15/04/2026
RFGB 1.625% 15/09/2022
60
50
40
30
20
10
0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Source: Bloomberg
The State Treasury actively follows the Primary Dealer
Dealer benchmarked against the average. On a weekly basis,
quoting activity in the secondary markets. There are guidelines
the State Treasury reports the analysed spread data for the
for the Primary Dealers on quoting for different maturities
benchmark bond quotes back to the individual Primary Dealer
in the interdealer market, where the bid-offer spread of the
banks. The bid-offer spreads in the interdealer and customer
price quotes is observed and tracked. The average bid-offer
market segments remained stable in 2016 and in line with peer
spread of all the market makers is calculated and each Primary
sovereign countries.
30
Secondary market volumes of Finnish government bonds
Outstanding (nominal amount)
Monthly
%
Interdealer volume (% oustanding)
Customer volume (% outstanding)
End of month
EUR billion
30
90
25
75
20
60
15
45
10
30
5
15
0
1/2014
4/2014
7/2014
10/2014
1/2015
4/2015
7/2015
Primary dealers report customer trade volumes to the
10/2015
1/2016
4/2016
7/2016
10/2016
0
market customer trade volumes remained at a level similar
State Treasury within the European Harmonised Reporting
to 2015. The customer turnover volume (sales and purchases)
Framework (HRF). The reporting takes place on a monthly
amounted to approximately EUR 7 billion per month on average,
basis, and the data is consolidated and used for monitoring
which means that around 10 per cent of the outstanding euro
and analysing. The HRF data shows that in 2016 the secondary
benchmark stock was traded every month.
31
Primary dealers 2017
New York, USA
Stockholm, Sweden
Bank of America
Merrill Lynch
Nordea
Copenhagen, Denmark
Citigroup
Danske Bank
Goldman Sachs
Tokyo, Japan
J.P. Morgan
Nomura
London, UK
Barclays Capital
HSBC
Paris, France
NatWest Markets
BNP Paribas
Frankfurt, Germany
Crédit
Agricole CIB
Société Générale
In January 2016, the State Treasury launched a lender-of-lastresort securities lending facility. The purpose of the facility is
to enable fails mitigation and to increase confidence for market
making. A potential indicator of market liquidity is the absence
of requests to use this securities lending facility.
32
Deutsche Bank
Risk management
and internal control
The objective of risk management is to avoid unexpected losses and
safeguard the continuation of operations. The government’s objective
is to manage all risks in a systematic manner.
The risk management process
Primary risks:
consists of identification of risks,
quantification and evaluation of risks,
risk monitoring and reporting and
Financing risk (long-term refinancing
and short-term liquidity risk)
steering of risk position.
Market risk (interest rate risk and exchange rate risk)
Guidelines for debt management set
Credit risk
by the Ministry of Finance specify
Operational risk
the risk management framework,
Legal risk
e.g. objectives and limits for risk
management.
33
Interest expenses of budgetary debt
EUR billion
3
Forecast
2
1
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
Source: Ministry of Finance
issuance strategy strives towards a smooth redemption profile
and avoids concentrations in redeeming debt. Buybacks may
Financing risk
also be executed in order to reduce refinancing risk.
Short-term liquidity risk (i.e. risk below 12 months) is
Financing risk management covers both long-term refinancing
managed by short-term funding and maintaining an invested
and short-term liquidity risk.
liquidity buffer. Liquidity management is based on cash flow
In order to manage the long-term refinancing risk, the Finnish
forecasts covering the entire government administration.
government diversifies its funding by instruments, investor
The Ministry of Finance has set limits on the magnitude of
type and geographic areas and manages the maturity profile
uncovered net cash flows. When investing the surplus, the
of the debt. The foundation of government funding is built
government aims to minimise credit risk, e.g. via collateralised
upon benchmark bonds that secure funding even in extensive
investments. The short-term funding instruments are short-
volumes. The government launches new benchmark bonds
term credits as well as Treasury bills denominated in both euros
in medium- and long-term maturities via syndication. The
and US dollars.
34
Interest rate sensitivity of central government debt
Year end
Years
Average maturity
Duration
Average fixing
7
6
5
4
3
2
1
0
2008
2009
2010
2011
2012
2013
2014
2015
2016
Market risks
The central government takes no exchange rate risk in its new
The targeted interest rate risk profile is defined in terms
debt management operations and there was no open exchange
of average fixing (the average period of repricing/refixing
rate risk relating to the old debt outstanding at the end of 2016.
the debt). The State Treasury is allowed to deviate from the
Concerning the interest rate risk, the strategic target of the
benchmark’s risk profile within the limits set in the guidelines of
government has been expressed in the form of a benchmark
the Ministry of Finance. In order to fine-tune the government’s
portfolio since the beginning of 2005. The benchmark portfolio
interest rate risk exposure, the State Treasury executes mainly
also enables the government to evaluate the performance of
interest rate swaps. At the end of 2016, the average fixing of the
operative debt management carried out by the State Treasury.
central government debt was 4.72 years (duration 4.55 years).
35
Repayment profile of central government debt
EUR billion
Serial bonds
Other debt
20
15
10
5
0
2017
2018
2019
2020
2021
2022
2023
2024
2025
2026
2028
2031
2042
investments, the State Treasury places funds mainly on a shortterm basis with certain EU governments and, to a larger extent,
Credit risk
uses collateralised investments, primarily in the form of triparty
repo transactions.
Credit risk results from investment of cash funds and derivative
Long-term credit risk resulting from derivative transactions
positions. Credit risk is managed through limits and increasingly
is mitigated by the State Treasury through collateral. Like many
through collateral with respect to both derivatives and cash
other sovereign borrowers, Finland uses collateral agreements
investments. The issue of credit risk is especially relevant due to
under the ISDA agreements (CSA, Credit Support Annex). Under
the large amount of cash funds. The government requires high
the collateral system, the counterparty provides bonds or cash
credit ratings of its counterparties and the guidelines of the
as collateral for government receivables. At the end of 2016, the
Ministry of Finance stipulate counterparty limits in accordance
State Treasury had collateral agreements in place with 26 banks.
with these credit ratings. The minimum requirement for short-
The collateral agreements are unilateral, as the obligation to put
term uncollateralised investments up to 2 months is a rating
up collateral only has concerned the counterparty bank.
of BBB. In order to reduce credit risk associated with cash
36
Operational risk
State Treasury has internal guidelines concerning management
of legal risk. The cornerstones of legal risk management are
Operational risk is defined as a risk that results from external
knowledge of both domestic and foreign legislation, utilisation
factors, technology, or deficient functioning of personnel, the
of frame and standard agreements and the government’s own
organisation or processes. One area that needs special attention
model agreements. In addition, steps are taken to ensure that
is information security including the security of documents as
employees are familiar with the legislation, regulations and
well as the security of IT systems.
market practices concerning their activities.
The principles of operational risk management are
implemented in the daily operations. Descriptions of realised
Internal control
risk events and close calls are compiled and reported to
management. The State Treasury monitors the risk factors and
Internal control is an integral part of management of the State
risk events on a regular basis and makes risk assessments.
Treasury. The aim of internal control is to reach reasonable
assurance that operational functions are effective and
Legal risk
efficient, internal and external reporting is reliable and laws
and regulations are complied with. A sound system of internal
Legal risk is the risk resulting from non-compliance with
control helps all parts of the organisation to reach their targets.
legislation and established market practices as well as from
As part of internal control all main processes are evaluated
non-implementation, invalidity, nullity, voidability or the lack
on a regular basis. The assessment pays special attention to the
of documentation of contracts, agreements and decisions. The
clarity of objectives, risks and control procedures.
37
Finnish
government
net debt is
negative
by Roope Uusitalo
38
F
innish general government has gross debt that
currently exceeds 60 per cent of the GDP. However, the
government also has large amounts of financial assets,
mainly in the pension funds. As a result, the Finnish general
government net debt is negative and measured by net assets
the Finnish government is one of the wealthiest in the world.
Finnish general government gross debt has exceeded 60 per
cent of the GDP since 2015. Public debt is projected to increase
to 66 per cent of GDP by 2018, hence clearly breaking the debt
limits of the EU Stability and Growth Pact.
However, in Finland monitoring the growth of general
government gross debt is far from the full story. The Finnish
government also holds substantial amounts of financial assets.
Subtracting the financial assets from the gross debt reveals
that net debt is negative in Finland. According to the most
recent data from the IMF Fiscal monitor, the government
financial assets exceed the government debt by an amount that
corresponds to about 50 per cent of GDP. In fact, measured by
the net asset position, the Finnish government is the second
wealthiest government among the advanced nations. Only in
Norway is the net asset position stronger than in Finland.
39
General government net debt
% of GDP
Gross debt
Net debt
300
200
100
0
r
No
-100
s
l
d
d
y
k
y
a
n
a
d
d
d
a
a
ia
ia
m
ae
an
wa nlan ede toni alan mar tral rlan nad atvi land ore uan man elan lgiu
Isr Irel
K
L
r
h
c
e
er
Es
e
Fi
I
e n Au s i t z e
t
Ca
Ze
Sw
i
B
h
G
D
L
t
w
Sw
Ne
Ne
UK
Sp
ain
US
Fra
nc
e
Ita
ly
rtu
Po
ga
l
Ja
pa
n
-200
Source: IMF Fiscal Monitor, Oct 2016
Large amounts of assets
Having simultaneously debt and substantial assets creates
In Finland the general government financial assets are mostly
an interesting question on which debt measure should be used
in pension funds. The pension insurance system is operated by
in assessing sustainability of government finances. Gross debt
private insurance companies, but all the rules regarding pension
is surely a poor measure and a measure that could be easily
benefits are stipulated in legislation and pension contributions
manipulated. One reason is that internal debts between the
are confirmed by the Ministry of Social Affairs. The insured
different sectors of government are not counted as debt when
carry no risk: should the pension expenditures increase in an
calculating gross general government debt. Hence, an easy
unexpected way, the contributions adjust. Including pension
way of reducing government gross debt would be to require
funds in the public sector is not unique; a similar classification
the pension funds to allocate a larger share of their assets to
is used also in many other EU countries. What is exceptional in
domestic government bonds. Naturally, such an investment
Finland is that the public pension system is partially pre-funded
policy would make little sense for the pension insurance
and has unusually large amounts of assets.
companies.
40
Measuring net assets is a clear improvement, even if only
financial assets were counted. Surely a government that has
simultaneously large amounts of assets and debts is in a
stronger position than a government with only a large debt.
In principle one could develop even better debt measures. If
pension funds are counted as assets, one should also count
pension liabilities as debt. In Finland these are reported on the
balance sheets of pension insurance companies. Making the
figures internationally comparable might be difficult, though.
Sustainability
calculations
Fortunately, better measures of fiscal sustainability than
gross or net debt already exist. Sustainability calculations are
projections of public sector revenues and expenditures into the
distant future. These calculations take into account both the
revenue from current assets and the burden of servicing the
Roope Uusitalo
current debt. The gap between the present value of the future
expenditures and the present value of the future revenues, i.e.
Roope Uusitalo is a professor of Economics at Jyväskylä
the sustainability gap, is a more comprehensive measure of
University School of Business and Economics. He is
financial health than either debt measure.
currently also Chairman of the Finnish Economic Policy
Sustainability calculations also reveal that wealthy countries
Council. His research interests include economics of
have their own problems. For most countries a low interest rate
education, labour economics and public economics and he
is good news as it decreases the burden of servicing the debt.
is currently heading a research group on education skills
For a country with positive net assets the opposite happens.
and the future of work.
The sustainability gap grows with a decrease in interest rate.
41
Finnish economy
and public finances
Finnish GDP is predicted to have grown faster in 2016 than earlier expected. Finnish GDP growth
came in at around 1.6%. Output growth was broad-based, but clearly driven by domestic
demand. Especially private investment and construction investment increased. Exports grew
only modestly in 2016. In the coming years, the Competitiveness Pact agreement reached by
the labour market will improve the price competitiveness of Finnish business and industry, thus
providing stimulus to Finnish exports. Public finances remained in deficit also in 2016 and there is
no clear change to be expected in the coming years.
42
GDP and employment
Percentage change
GDP
6
Employment
Forecast
4
2
0
-2
-4
-6
-8
-10
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Sources: Statistics Finland, Ministry of Finance Dec/2016
8.5%
The Finnish economy is expected to have grown by 1.6% in
2016. Private investment and construction investment, in
particular, increased in 2016 while export growth remained
sluggish. In 2017, GDP growth is predicted to be 0.9%. Public
consumption will contract in 2017 as the government’s
adjustment measures lower the operational costs of the central
and local government, thereby contributing negatively to GDP
In 2017, the unemployment rate will
continue to decline to 8.5%.
growth. The unemployment rate is projected to decline to 8.5%
while inflation will tick up to 1.3% in 2017.
43
Contribution to GDP growth in Finland
Percentage points
GDP
Net exports
Investment
6
Other domestic demand
Forecast
4
2
0
-2
-4
-6
-8
-10
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sources: Statistics Finland, Ministry of Finance Dec/2016
3.2%
Industrial output growth was broad-based in 2016, with only
primary production declining. Export growth was around
1% in 2016. Rebounding investment and consumption have
driven imports to stronger growth than exports, and therefore
foreign trade had a negative impact on GDP. In 2017, export
growth will accelerate to 2.4%. Private investment growth will
Private investment will
increase by 3.2% in 2017.
slow temporarily in 2017 with the turnaround in the growth
of construction investment. Also private consumption growth
will slow because of accelerating inflation and the slowdown of
growth in real household income.
44
Current account balance
% of GDP
Current account balance
Balance of goods and services
10
Forecast
8
6
4
2
0
-2
-4
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Sources: Statistics Finland, Ministry of Finance Dec/2016
-0.3%
The current account has improved modarately in recent years,
but it will still remain in deficit in the near future. The main
In 2017,
the current-account-to-GDP
ratio will be -0.3% of GDP.
reason for the deficit is the service account keeping the foreign
trade balance in deficit. Net exports will have a slightly negative
effect on the current account over the coming years.
45
Net lending by sector
Non-financial corporations
and housing corporations
% of GDP
Total economy
General government
Households and non-profit
institutions serving households
Financial and insurance
corporations
12
Forecast
8
4
0
-4
-8
-12
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Sources: Statistics Finland, Ministry of Finance Dec/2016
184.5
The projected rate of economic growth alone will not be
enough to correct the imbalance in public finances. The central
Earnings-related pension
assets were EUR 184.5 billion
in 2016 (Q3).
government and the local government are firmly in deficit, the
earnings-related pension institutions are running a surplus and
other social security funds are marginally in deficit. In contrast
to the public sector, Finnish corporations are clearly in surplus.
46
General government revenue, tax revenue and expenditure
% of GDP
Revenue
Expenditure
Tax revenue
70
Forecast
60
50
40
30
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
Sources: Statistics Finland, Ministry of Finance Dec/2016
65.3%
Finnish general government finances have long been in deficit
and therefore the general government debt burden has grown
rapidly. Public debt exceeds the 60% reference value and will
continue to rise. Sluggish economic growth is not generating
The general government
gross debt will stand at
65.3% of GDP in 2017.
enough tax revenue to finance public expenditure, which
is increasing with population ageing. However, the fiscal
adjustment efforts of successive governments have managed to
curb the growth of the deficit.
47
Central government financial balance
Year end
% of GDP
EUR billion
2
2
Forecast
0
0
-2
-2
-4
-4
-6
-6
-8
-8
-10
-10
-12
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
-12
Sources: Statistics Finland, Ministry of Finance Dec/2016
-2.6%
Central government revenue increased in 2016 with the
rebounding economy and the deficit shrank. The 2017
central government budget will still show a deficit. Reduced
social security contributions and cuts to holiday bonuses as
set out under the Competitiveness Pact will reduce labour
The central government
financial balance will be -2.6%
relative to GDP in 2017.
costs. Furthermore, longer working hours will reduce central
government spending on employee compensations. On the
other hand, tax cuts will have the effect of reducing central
government tax revenue.
The text is based on the Economic Survey of the Ministry of Finance (Winter 2016) released on 22 December 2016.
All figures for 2016–2018 are forecasts by the Ministry of Finance.
48
Key figures
Economy
2014
2015
2016
2017
2018
GDP at market prices, change in volume, %
-0.7
0.2
1.6
0.9
1.0
Imports, change in volume, %
-0.2
1.9
1.6
2.4
3.4
Exports, change in volume, %
-1.7
-0.2
1
2.4
3.2
1
-0.2
0.3
1.3
1.3
Unemployment rate, %
8.7
9.4
8.9
8.5
8.1
Current account, relative to GDP, %
-1.1
-0.4
-0.2
-0.3
-0.4
43.9
44.1
44.4
43.2
42.8
General government net lending, relative to GDP, %
-3.2
-2.8
-2.2
-2.5
-2.0
Central government net lending, relative to GDP, %
-3.7
-3.0
-2.6
-2.6
-2.1
General government gross debt (EMU), relative to GDP, %
60.2
63.6
63.7
65.3
66.1
Central government debt, relative to GDP, %
46.3
47.7
47.7
49.2
50.2
Consumer price index, change %
Tax ratio, relative to GDP, %
Government Finances
Forecast, Ministry of Finance
Central government debt and borrowing
Central government debt, EUR billion
95.1
99.8
102.4
Serial bonds, EUR billion
78.5
82.5
87.5
Gross issuance, EUR billion
16.3
15.9
16.7
Net borrowing, EUR billion
5.4
4.3
2.2
Interest on central government debt, EUR billion
1.7
1.6
1.6
Effective interest rate on debt portfolio, %
1.7
1.5
1.3
49
Contacts
State Treasury of Finland
Finance
Portfolio Management
PO Box 14
FI-00054 STATE TREASURY
Deputy Director
Finland
Juha Savolainen
+358 295 50 2905
Address: Sörnäisten Rantatie 13, Helsinki, Finland
www.treasuryfinland.fi
Legal Affairs and Back Office
E-mail: [email protected]
Deputy Director
Tel. +358 295 50 2000
Anna von Knorring
+358 295 50 2653
Director of Finance, Head of Division
Teppo Koivisto
Senior Manager, Back Office
+358 295 50 2550
Taina Nissinen
+358 295 50 2580
Assistant
Suvi Vuorinen
+358 295 50 2568
Risks and Strategy
Deputy Director
Funding and Liquidity Management
Mika Arola
+358 295 50 2604
Deputy Director
Anu Sammallahti
Senior Risk Manager, Treasury Risk Control
+358 295 50 2575
John Rogers
+358 295 50 2656
Senior Manager
Mika Tasa
Communications
+358 295 50 2552
Communications Specialist
Suvi Asikainen
+358 295 50 2302
50
An online version of the Annual
Review with interactive graphs is available at
www.treasuryfinland.fi/annualreview2016.
Photos by Lauri Rotko • Printed by Grano, Helsinki 2017