Image: Andrew Gombert / EPA

One of the world's biggest credit ratings agencies, Fitch, has lowered its outlook for Finland from "positive" to "stable". This Issuer Default Rating (IDR) is meant to guide investors on the risk level associated with Finnish state bonds.

Meanwhile another one of the three largest US-based ratings firms, Moody's, did not issue a previously scheduled announcement regarding Finland's rating on Friday. Moody's and the third major agency, S&P, now all have the same rating for Finland as Fitch.

Uncertainty over healthcare reform

Teppo Koivisto, Head of the Finance Division at the State Treasury of Finland, told Yle that there are two main reasons for Fitch's revised status.

"The outlook for Finland's public finances is slightly weaker than at the time of Fitch's last rating in 2018. The background to this is a slowing in growth," he said. "The other main reason is that there is no clear information as to how and when Finland will continue with structural reforms, particularly sote" – referring to the sweeping overhaul of the social and healthcare system. Its failure toppled the centre-right government of Prime Minister Juha Sipilä last spring.

World's third highest sustainability gap

In a statement issued late Friday Finnish time, Fitch said that the country's medium-term public debt trajectory "has weakened in light of the government's looser fiscal stance, weaker medium-term growth potential, and setbacks to progress with social and healthcare reform necessary to mitigate increasing ageing-related cost pressures".

Fitch added that Finland's worsening demographic trends further deepen the risks, noting that the country's old-age dependency ratio is the third highest in the world after Japan and Italy. At 39.2 percent, this refers to the number of people over age 64 compared to the working-age population, classified as those aged 15-64.

The agency predicts that the latter population will shrink, skewing this ratio towards 47.5 percent over the next decade.

Fitch notes that the centre-left government of Prime Minister Sanna Marin, which took office last month, has promised to tackle "the negative impact of adverse demographic trends on the economy and the public finances", partly by raising the employment rate to 75 percent within the next three years. It also plans to invest three billion euros in education, healthcare and labour market policies.

"Reform fatigue"

This "one-off spending does not fully address the pressing issue of age-related costs, particularly in the area of healthcare and long-term care", Fitch warns, pointing out that these costs are expected to climb to nearly 10 percent of GDP within the next decade.

Along with "reform fatigue" and the splintering of the political landscape, "the focus on improving external competitiveness also appears to have diminished", according to the agency.

Meanwhile Finland's net external debt is higher than that of most other 'AA' rated countries, it says, adding that the country has a persistent current account deficit and concentration of its energy import markets.

According to Statistics Finland, last year the country relied on neighbouring Russia for more than 60 percent of its energy imports.