Two-folded inflation behaviour was the big theme in the bond market for the year 2023. The world economic growth was still weighed down by energy-driven inflation shock and rising yields. The year was also tinged with geopolitical crises, which added its fair share of uncertainty to the sovereign bond market outlook.
In the fall, a rapid slowdown in inflation started to accelerate expectations of central banks’ monetary policy easing causing a turnaround in market interest rates. Despite this, higher interest rate levels will keep governments’ financing costs elevated in coming years compared to the zero-interest rate environment of the previous decade. Deteriorating economic growth and higher debt financing costs have also put pressure on government budget deficits and public debt levels in most eurozone countries, not only in Finland.
On this account, the 2024 sovereign bond supply in the eurozone will be close to last year’s historical levels. The expiry of energy-related policy measures will mildly reduce the overall net supply, but central banks’ quantitative tightening (QT) can be viewed as additional net supply that has to be digested by new investor demand. These factors sustain a very competitive issuance environment for 2024, where a solid funding strategy, sufficient investor diversification, and stable credit outlook are strengths that will be rewarded.
No economy without nature
In his excellent report in 2021, Professor Partha Dasgupta made the world very aware of economies’ dependence on nature. Along with climate change, loss of biodiversity has become a key discussion topic wherever financial market participants meet, and for good reason. Investors are increasingly keen to analyze and understand how nature loss simultaneously with global warming affects sovereign credit risks in the medium and longer term.
Governments’ actions determine whether the loss of biodiversity can be stopped. Finland has participated in international cooperation on nature conservation for decades and as a member of the EU has committed to end the biodiversity loss by 2030. Biodiversity is always a local phenomenon and the means to protect it must always be based on national or local level actions. Professor Ilari Sääksjärvi gives an up-to-date and very accurate account of Finland’s possibilities to succeed in this work in section three.
Governments’ actions determine whether the loss of biodiversity can be stopped.
A year ago, I wrote about how Finland is undoubtedly one of the global forerunners of the green energy transition. In 2023, 94% of Finland’s electricity production was emission-free, and the price of electricity was the second lowest among EU countries. This supply of clean and affordable electricity gives a boost to industrial investments planned in Finland, of which there are currently more than EUR 200 bn in the pipeline. Janne Peljo gives further colour in section five.
NATO membership bolsters credit outlook
The legacy of year 2023 is a more stringent geopolitical environment associated with the global financial market.
The prolongation of Russia’s war of aggression in Ukraine maintains geopolitical tensions. The conflict in the Middle East that broke out in fall 2023 may have effect on the sensitive energy market. Therefore, for this year’s edition, a final inescapable theme is geopolitics and security. We have invited an expert, Dr Iro Särkkä, to give her view on Finland´s fresh NATO membership and its impact on the security and economic environment in Northern Europe.
By submitting its application to join NATO, Finland sent a strong message to financial markets.
Finland became a member of the NATO on April 4, 2023. In fact, already in May 2022, when submitting its NATO membership application at the same time with Sweden, Finland sent a strong confidence-inspiring message to the financial markets. Finland’s NATO membership increases both Finland’s national security in the new geopolitical environment and the stability and security of the whole Baltic Sea region and Northern Europe. Finland’s strong national defence and comprehensive security capabilities strengthens NATO and the common defence of the alliance. When Sweden becomes a NATO member, all the Nordic countries will belong to NATO (and can together promote issues important to them within the alliance). Finland will also benefit economically from the NATO membership.
Issuance outlook
The key function of the State Treasury is to safeguard the liquidity and funding for the central government. In 2023, the Republic of Finland successfully fulfilled its EUR 42 billion issuance programme with net borrowing of EUR 14 billion.
In 2024, the funding strategy of the Republic of Finland remains the same as in 2023 given the similarity in funding amounts. For 2024, the overall gross borrowing requirement amounts to EUR 43 billion. The net borrowing is expected to be EUR 13 billion.
Keeping our bonds attractive and creditworthy to investors remains our long-term goal. We believe that Finland’s strong credit outlook and commitment to sound governance and sustainability in its many forms will support our bonds and serve all our investors well in the years to come.
