Analytics, Estonia, EU – Baltic States, Financial Services, Investments

The agency said that the ratings on Estonia are supported by the country's stable political environment, effective institutional framework, prudent government finances, and adaptable economy. The ratings are constrained by Estonia's moderate income levels compared to eurozone peers, Estonian finance ministry reported.

S&P said that following weak growth in 2013 and first-quarter 2014, Estonia's economic performance has improved. GDP grew by an estimated 2.1% year-on-year, on average, in the second and third quarters of 2014. The agency said that it has slightly increased its 2014 growth forecast for Estonia, mainly as a result of the ESA 2010 methodology restatements by Statistics Estonia, but also to reflect quarterly performance, and now forecasts GDP growth averaging 2.7% over 2014-2017. Domestic demand, especially private consumption, will likely be the key contributor. Net exports should contribute positively to GDP growth from 2016 as the external environment improves.

The stable outlook of the rating reflects S&P's expectation of a gradually improving economic performance and only-modest external imbalances. In the longer term, an upgrade could come from Estonia achieving income levels closer to the eurozone average, recording less volatility in growth and inflation, and demonstrating a longer track record of reduced reliance on external financing. S&P could consider lowering the ratings if they see a reversion to credit-fuelled growth combined with rapidly increasing wages leading to a loss of competitiveness, in turn increasing net external financing requirements.