Analytics, Economics, Estonia

Estonia's credit challenges stem from its small and open economy, its shrinking working-age population and competitiveness challenges.

"However, Estonia's economy is highly flexible and diverse, which has supported its economic resilience during the financial crisis and the most recent challenging external environment in Russia (Ba1, Negative) and Finland (Aa1, Stable)," said Evan Wohlmann, Assistant Vice President -- Analyst and co-author of the report. "Estonia also has a healthy fiscal position and one of the lowest debt burdens in Moody's rated universe."

Moody's expects Estonia's economy to expand by 1.9% and 2.4% in 2016 and 2017, largely due to private consumption. This forecast is supported by growth in domestic spending seen in the first quarter of 2016, with GDP rising by 1.7% year-on-year, supported by a more than 5% increase in household consumption.

The debt burden as a percentage of GDP is expected to remain relatively stable at around 9.5% of GDP in 2016 and 2017, slightly below the level recorded in 2015. At the same time, fiscal reserves remain substantial at around 9% of GDP although these will fall to accommodate the expected small deficits in the next two years.

A record of steady economic growth that helps to mitigate vulnerabilities to external shocks would improve Estonia's creditworthiness over the longer-term. In contrast, a material and sustained deterioration in economic growth prospects would undermine fiscal consolidation efforts and have negative implications for the rating.

The annual Credit Analysis examines Estonia's credit profile in terms of economic strength, institutional strength, fiscal strength and susceptibility to event risk, which are the four main analytic factors in Moody's Sovereign Bond Rating Methodology.