In December 2021, after a lengthy bidding process, the Finnish government authorised the Finnish Defence Forces to sign a procurement agreement with the US government for Finland’s next multi-role fighter. This fighter procurement represents the largest defence investment in Finland’s history, and it will significantly impact Finland’s defence capabilities well into the 2060s. The multi-role fighter that will replace Finland’s current Hornet fleet is the Lockheed Martin F-35A Lightning II. Finland’s first F-35A fighters will be ready by autumn 2025.
The F-35 fighter project – a significant hedging operation
The State Treasury implemented the currency hedging for the Finnish Defence Forces’ F-35 fighter project. In addition to the 64 multi-role fighters, this sizable investment includes weapons, software, equipment, and services. All purchases will be paid in US dollars, exposing the project to significant currency risk. For this reason, the Ministerial Committee on Economic Policy decided in December 2021 to hedge half of the approximately EUR 10 billion procurement against any exchange rate fluctuation-related risks.
The State Treasury carried out the hedging using foreign currency forward contracts, which are used to fix the price of a currency in advance for future currency transactions. The State Treasury executed the currency forward contracts between February 2023 and February 2024, with an average exchange rate of EUR 1 = USD 1.1256. The State Treasury’s hedging approach proved much more cost-effective than the offers received from banks.
The currency hedging will provide security and predictability for the Finnish Defence Forces and the entire public finances for the duration of the payment plan, which will last until 2030. In fact, the decision has already proven its worth – the strengthened US dollar has meant that any already matured hedges have brought significant savings to the central government.
The Finnish Border Guard’s multi-role aircraft project – concrete savings
In 2024, the State Treasury also implemented the currency hedging for the Finnish Border Guard’s multi-role aircraft project. The aircraft purchased from the American Sierra Nevada Corporation will significantly improve Finland’s border security and the monitoring of its territorial integrity. The approximately EUR 160 million procurement was made in US dollars.
Thanks to the currency hedging implemented by the State Treasury, the project achieved cost savings of over EUR 4 million compared to the fixed-euro price offered by the supplier. The State Treasury carried out its hedging with two days of market operations, setting the average exchange rate of the contracts to EUR 1 = USD 1.0994.
The currency hedging provided predictability for the aircraft procurement, and the achieved cost savings helped secure the acquisition of the project’s key capabilities. So far, the State Treasury’s hedging appears to have been a financially prudent decision for this project as well.
What is currency hedging and why does it matter?
Currency hedging is a way to manage the risks related to exchange rate fluctuations. Unhedged, currency-denominated procurements can result in significant cost fluctuations, jeopardising a project’s goals and the predictability of its budget. This is particularly critical for the public sector, where operational planning and transparency play a vitally important role.
Currency hedging uses financial instruments, such as currency forwards, which are used to set the exchange rate in advance.
Centralised currency hedging management brings savings
The central government’s procurement units have typically hedged against currency risks by requesting quotes in euros. However, this has resulted in significant hidden costs, with suppliers taking on the currency risk and pricing the associated hedging costs and risk premiums into their offers.
The State Treasury can implement its hedges at significantly cost-effective rates and, once commissioned, manage the entire hedging process from start to finish.
Why is the State Treasury an effective choice for currency hedging?
– Global networks: the State Treasury operates with large international financial institutions, allowing it to secure competitive market rates.
– Established processes, expertise, and IT systems: the State Treasury has decades of experience in the state’s borrowing and currency hedging-related market operations and associated IT systems.
– Cost-effectiveness: centralised operations minimise unnecessary costs and associated risks while also enabling centralised reporting.
Enhancing financial management through extended cooperation
One of the most significant administrative policy objectives of the current government term is improving the productivity of public administration. Extending currency hedging to other central government agencies is a good example of how overall economic efficiency could be improved, and these activities could be expanded even further.
The State Treasury is able to manage the significant currency hedging needs of all state procurement units. By strengthening its resources and utilising its current expertise, the State Treasury could, in some cases, also expand its efforts to interest rate hedging and providing support in procurement planning, economic assessment, and reporting activities. Centralised management and more extensive hedging activities would benefit both individual agencies and the central government’s entire administration and economy. These services would also allow ministries to centrally manage and report on their procurements.
Expanding the State Treasury’s centralised financial services would allow the state’s procurement units to focus more on their core tasks while also keeping the central government’s finances and risks better under control. All in all, these activities would provide significant long-term benefits to Finland’s public finances.
