OREANDA-NEWS. Recent GDP data underline the challenges facing the Finnish economy from economic shocks to key industries, adverse demographics, and exposure to Russia's downturn, Fitch Ratings says. Finland has launched a fiscal policy response to counter the resulting deterioration in public finances, but it is too soon to see if it will prove effective.

Data for 3Q15 released on Friday indicate that real GDP declined 0.5% quarter-on-quarter. Fitch now estimates that real GDP will be little changed in 2015, where we had previously forecast of 0.3% growth. Our forecasts for 2016 and 2017 are unchanged at 1.0% and 1.1% respectively.

Weaker growth than forecast translates to worsening public finances. Our updated GDP estimate for 2015 implies that the government debt to GDP ratio will reach 66.9% by end-2017 - that is 0.7pp higher than our projection at the time of the most recent rating review in September. The debt ratio should then peak in 2020-2021 at around 69%.

A continued rise in the government debt to GDP ratio over the medium term is a sensitivity for Finland's sovereign rating, which we affirmed at 'AAA'/Negative in September. The Finnish government has embarked on a broad-based strategy to stabilise the public-debt-to-GDP ratio through a mix of immediate consolidation measures and structural reforms. If successfully implemented, these plans could reverse the deterioration in debt ratios.

For example, the government recently announced the next steps for reform to healthcare and social care provision by transferring responsibility from Finland's numerous local authorities to eighteen new regional authorities from January 2019.

These regions will provide services individually or with other regions, and will have the option of relying to some extent on private-sector and not-for-profit providers. New legislation on customer choice will also be part of the reform package. The new regions will also have other responsibilities such as rescue services.

The government is targeting estimated savings of EUR3bn to the public finances through these reforms to increase efficiency. If achieved, and assuming a three-year implementation period from 2019 with linear savings of EUR1bn each year, our medium-term debt sensitivity analysis would, other things equal, imply that the debt to GDP ratio would already be declining in 2020, and would drop back to 60.5% by 2024, retracing much of the increase seen in the previous 10 years (debt:GDP was 59% last year).

However, implementation of the reform carries considerable uncertainty, including potential constitutional objections to the status and activities of the new administrative regions relative to existing local authorities. It is also unclear to what extent savings through economies of scale will be negated by the costs of setting up the new regional administrative bodies.