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Debt Management Annual Review: Year 2022 tested the adaptability of markets, societies and government borrowing

In the sovereign bond markets, prices adjusted to higher interest rates but demand for Finnish government bonds remained strong. In Europe, the slowdown of economic growth and support packages to compensate for the rise in energy prices will bring much supply to the sovereign debt market, creating a very competitive issuance environment for 2023.

In 2022, the Finnish government successfully carried out an issuance programme totaling EUR 34.1 billion. Net borrowing amounted to EUR 12.7 billion.

At the end of 2022, central government debt totaled EUR 141.6 billion (51.6% of GDP, compared to 51.2% of GDP in 2021). Public debt in relation to GDP was 71.7% (72.4% in 2021).

The borrowing year 2022 was an eventful one, marked above all by the Russian invasion of Ukraine, followed by energy crisis, high inflation, the rapid rise of interest rates and the change in monetary policy as central banks started to gradually reducing their exceptional asset purchasing programmes. Even though the market had already prepared for higher rates before the Russian attack, this increase was much faster than expected.

“The long-term interest rates rose by three percentage points in ten months, and on top of that came so many different factors with interdependencies no one could see clearly of in advance. So much happened in one year that forming the big picture was, at times, very challenging,” says Teppo Koivisto, Director of Finance at the State Treasury.

Strong credit rating and solid funding strategy are Finnish assets in the sovereign bond market

On the other hand, the higher rates have resulted in an allocation change back to the fixed income markets. Government bonds are sought after by investors, but with plenty of supply, there is much competition too between issuers.

According to Koivisto, this puts investors to a centre stage. This is reflected in the fact that government bonds of the biggest issuers and EU have sold well as investors look for large amounts and liquidity that comes with it. For a smaller but frequent issuer like Finland, it simply means that things need to be done the right way.

Although year 2022 was exceptional in the financial markets, there were no changes in the investor allocation of the Finnish government bonds. The same investors continue to buy Finnish bonds.

“Of course you need to have a strong credit rating. But it’s also the predictability and stability of your issuance strategy that safeguards the investor base. For this reason, the Republic of Finland repeats the same strategy year after year”, says Koivisto.

Special focus on energy: Finland is firmly on the path towards green transition

The Debt Management Annual Review summarises Finnish government borrowing and liquidity management in 2022. For this year’s edition, the focus is on energy. Professor Veli-Pekka Tynkkynen of University of Helsinki has written an article on the Finnish “Ruxit” and energy security, emphasising how the energy transition can only be encouraged in Europe with a much better understanding of the cross-linkages characterising the current energy crisis. In the second theme article, Riku Huttunen, Director General of Energy Department in the Finnish Government, gives a review of Finland’s progress towards the green transition and national target of carbon neutrality in 2035.

Both authors estimate that Finland’s energy system and society adapted well to the new situation created by the Russian energy war – thanks to good preparedness, Finland’s top-class security of supply thinking and the high share of clean energy in the energy mix.

According to Teppo Koivisto, year 2022 proved the power that the markets and societies have in adapting to new circumstances.

“The energy crisis is a good example of how great a change may occur in one year.”

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