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International Internet Magazine. Baltic States news & analytics Thursday, 28.03.2024, 13:36

Fitch affirms Estonia at 'A+', outlook stable

BC, Tallinn, 25.05.2015.Print version
Fitch Ratings has affirmed Estonia's long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+'; the outlooks are stable, reports LETA.

The Country Ceiling has been affirmed at 'AAA' and the short-term foreign currency IDR at 'F1'.

 

The agency announced in a press release that Estonia's ratings are underpinned by a strong sovereign balance sheet, some strong credit fundamentals including governance indicators and a high level of economic development compared with rating peers, and a sound macroeconomic policy framework.

 

Public finances are a key rating strength. At end-2014, Estonia's general government debt was 10.6% of GDP – well below the rating peer median and the lowest in the European Union. Around a quarter of the debt stock is accounted for by European Financial Stability Facility (EFSF) guarantees. Estonia is one of only six OECD countries with a net asset position for the general government.

 

The new government intends to introduce additional fiscal measures for the coming years. Tax-free allowances will rise and social security contributions will be cut. These tax cuts will be offset by increases in indirect taxes. Fitch expects that the public deficit will be 0.5% of GDP this year and 0.4% in 2016.

 

The Estonian economy has shown a degree of resilience to adverse economic conditions affecting two of its three largest export markets (Finland and Russia). GDP growth was 2.1% last year, with domestic demand (and in particular household consumption) the driver of economic growth. Domestic demand will also drive growth in the forecast period. Fitch expects GDP growth this year to be broadly unchanged at 2.2%, before picking up to almost 3% in 2016.

 

Estonia's external sustainability has improved markedly in recent years. Deleveraging in the banking and corporate sectors and rising domestic funding for bank assets has brought net external debt down to –8% of GDP at end-2014.

 

Fitch does not expect domestic demand-driven growth to translate into sharp current account deterioration. In 2014 the current account balance improved, with the deficit falling from 1.1% in 2013 to just 0.1% of GDP. The improvement was primarily due to a higher services trade balance. Fitch expects the current account to rise only slightly over the forecast horizon.

 

Fitch's macroeconomic projections imply that the convergence of Estonian incomes per head with the eurozone average will continue. Incomes per head are currently slightly higher than the rating peer group but less than half of the 'AA' median. As a small open economy, Estonia is vulnerable to adverse shocks affecting its trading partners. GDP and inflation are much more volatile than rating peers.

 

Current demographic trends are another rating weakness. The overall and working-age population are both shrinking. Unemployment has fallen sharply in recent months. There is a risk that this translates into excessive upward pressure on wages. In the longer term, relatively larger falls in the working-age population would raise the dependency ratio and push down on growth potential, unless productivity growth offsets these trends.

 

Estonian banks are well-capitalised, and asset quality is strong. At the end of 2014, non-performing loans were 1.4% of the total loan book.






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