Fitch Affirms Estonia at 'A+'; Outlook Stable

Thu Dec 12, 2013 11:37am EST

LONDON, December 12 (Fitch) Fitch Ratings has affirmed Estonia's Long-term foreign and local currency Issuer Default Ratings (IDRs) at 'A+' with a Stable Outlook. The Country Ceiling is affirmed at 'AAA' and the Short-term foreign currency IDR at 'F1'. KEY RATING DRIVERS Estonia's sovereign ratings reflect its sound public finances, its governance and institutional strengths, and reduced risk of balance-of-payments crises through euro membership. Healthy public finances are a key credit strength. Estonia's government debt to GDP ratio of just under 10% is by far the lowest in the European Union, even after a rise in 2012 due to the assumption of contingent liabilities associated with the European Financial Stability Facility (EFSF) and the use of credit from the European Investment Bank to co-finance structural funds. In its recent assessment of draft budgetary plans, the European Commission singled out Estonia (together with Germany) as being compliant with the Stability and Growth Pact (SGP) provisions. Both the Estonian authorities and the European Commission expect that the budget will be in structural balance by 2014, in line with Estonia's medium-term objective. The headline government deficit was 0.3% of GDP in 2012, and edged up to 0.5% in 2Q13. Fitch expects the deficit for 2013 as a whole to widen to 1% of GDP, an increase in part due to one-off measures. Fitch expects the deficit to narrow to 0.2% by 2015. Estonia's external debt sustainability has improved over the past four years. Net external debt fell back to just over 7% of GDP in 2012, from 47% in 2009. This improvement is related to a reduction in banking sector reserve requirements following euro accession. As a small and an open economy, Estonia is particularly vulnerable to economic and financial sector developments in its trading partners. GDP growth has slowed sharply in 2013 to 1.1% from 3.9% in 2012, reflecting a combination of lower investment and exports. However, GDP growth is expected by Fitch to pick up over the next two years to 3-4% per annum, as economic prospects in Estonia's main trading partners improve. The recession in 2008-2009 provisionally reversed the process of convergence in real income per head with the eurozone. Income per head is still only around two-thirds of the euro area average. Demographic trends are creating pressures in the labour market. Both the total and the working-age population are shrinking. There is potential for skills mismatches amid already high wage and low productivity growth. Unemployment is still high, although it is expected by Fitch to fall back to 8% by 2015 from 8.8% at end-September 2013. RATING SENSITIVITIES The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently broadly balanced. However, future developments that could, individually or collectively, result in a positive rating action include: -Economic growth picking up in line with the economy's potential growth rate and without creating significant imbalances -Faster income convergence with eurozone peers; labour market reforms addressing Estonia's low productivity, structural unemployment and skills mismatches Future developments that could individually or collectively lead to a negative rating action include: -Further sharp rises in wages and an acceleration in house price inflation leading to a build-up of imbalances -A severe shock to economic growth in Estonia's main trading partners or the eurozone as a whole KEY ASSUMPTIONS The ratings and Outlooks are sensitive to a number of assumptions: -The rating affirmation is premised on the assumption that Estonia will continue to build on its long-standing track record of fiscal prudence -Fitch assumes there will be progress in deepening fiscal and financial integration at the eurozone level in line with commitments made by policy makers. It also assumes that the risk of fragmentation of the eurozone remains low Contact: Primary Analyst Alex Muscatelli Director +44 20 3530 1695 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Paul Rawkins Senior Director +44 20 3530 1046 Committee Chairperson Andrew Colquhoun Senior Director +852 2263 9938 Media Relations: Julia Belskaya von Tell, Moscow, Tel: +7 495 956 9908, Email: julia.belskayavontell@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Sovereign Rating Criteria' dated 13 August 2012 and 'Country Ceilings' dated 09 August 2013, are available at www.fitchratings.com. Applicable Criteria andALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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