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Improved business sentiment, high wage growth and positive employment growth support a continuation in broad-based growth, with Fitch projecting Estonia to grow 4.0% in 2018 and 3.5% in 2019. While strong domestic demand has contributed to inflation above the peer group average and strong credit growth, Estonia's track record of conservative fiscal policy and strengthened macro-prudential supervision will help limit the risk of significant economic imbalances.

Inflation in 2017 reached 3.7% from 0.8% in 2016, with the impact of increases in excise duties on alcohol, tobacco, fuels and gas contributing significantly. Base effects will see headline inflation moderate in 2018, with Fitch forecasting inflation of 3.0%, falling to 2.5% in 2019. Easing of excessive domestic demand pressures will be supported by the government's commitment to achieving a balanced structural fiscal position by 2019.

Contrary to its Baltic peers, Estonia has benefited from positive net immigration in recent years, stabilizing population growth. Combined with the government's work capacity reform program, this has increased labor market participation, but skills mismatches remain a problem. Although productivity growth has improved since 2016 and outpaced the rise in labor costs in 2017, upward pressure on unit labor costs is likely to persist due to rising wages.

Estonia is expected to maintain modest headline fiscal deficits in 2018 and 2019, averaging 0.2% of GDP. In line with its fiscal program, government expenditure will increase in areas of education and healthcare. As a way of improving labour market dynamics, revenues will be predominately impacted by tax reform that shifts the burden from labor to consumption, the impact of which Fitch assesses will be more or less fiscally neutral.  

Estonia's external finances continue to strengthen. External deleveraging in the private sector, notably reduced banking sector reliance on parent bank funding, in addition to current account surpluses, have underpinned Estonia's net external creditor position, which by end-2017 reached 11.8% of GDP. This compares favorably with the median net external debtor position -- 12.7% of GDP -- of its 'A' category peers. Fitch projects current account surpluses to persist in 2018-2019, averaging 2.0% of GDP, strengthening the net external creditor position further, and mitigating vulnerability to external shocks derived from the small size and openness of the economy.

Fitch raised the sovereign rating of Estonia to A+ in July 2011. The neutral outlook on the rating was upgraded to positive in November 2017.