Analytics, Economics, Estonia, Good for Business, Rating

Estonia's AA- ratings reflect its record of sound policies supported by strong economic institutions and EU and eurozone membership, which have underpinned very low debt levels and a net external creditor position.

Public debt dipped to an estimated 8.1% of GDP as of the first quarter of 2019, and is projected to fall further to 7.5% at end-2020 owing to continued prudent fiscal policy. Estonia's public debt ratio is currently the third-lowest of all Fitch-rated sovereigns.

Fitch forecasts a general government deficit of -0.3% in 2019. The agency forecasts the deficit to average -0.2% of GDP in 2020-2021, as a tighter labor market supports income tax collection growth and capital expenditure rises to match EU funds absorption. 

Real GDP growth will ease to 3.2% in 2019. Growth remained solid in the second quarter, but is showing signs of slowing. Consumption has started to weaken, but this was partly offset by the strong investment growth, Fitch said.

The agency projects the unemployment rate to decline further, to 5.0% in 2019 from 5.4% the previous year. The strength of the economy continues to tighten labor market conditions, pushing nominal wage growth to 8.6%. Productivity growth has not kept up with real wage growth, raising concerns over competitiveness. 

Headline inflation should decline to 2.4% in 2019. A slowing economy will pull inflation down to 2.0% by 2021.

Fitch projects the current account surplus to narrow to 1.3% of GDP in 2019 from 1.9 % in 2018.  The agency expects the surplus to stabilize at around 1.2% in 2020-2021.

Further improvement in structural indicators could lead to a more positive rating, whereas factors that could lead to negative rating action include economic or financial shocks that adversely affect Estonia's public finances, macroeconomic environment and financial stability.