LONDON, December 12 (Fitch) Fitch Ratings has affirmed Estonia's
foreign and local currency Issuer Default Ratings (IDRs) at 'A+'
with a Stable
Outlook. The Country Ceiling is affirmed at 'AAA' and the
currency IDR at 'F1'.
KEY RATING DRIVERS
Estonia's sovereign ratings reflect its sound public finances,
and institutional strengths, and reduced risk of
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
after a rise in 2012 due to the assumption of contingent
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
singled out Estonia (together with Germany) as being compliant
Stability and Growth Pact (SGP) provisions. Both the Estonian
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
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
trading partners improve.
The recession in 2008-2009 provisionally reversed the process of
real income per head with the eurozone. Income per head is still
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
mismatches amid already high wage and low productivity growth.
still high, although it is expected by Fitch to fall back to 8%
by 2015 from
8.8% at end-September 2013.
The Stable Outlook reflects Fitch's assessment that upside and
downside risks to
the rating are currently broadly balanced. However, future
could, individually or collectively, result in a positive rating
-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
Estonia's low productivity, structural unemployment and skills
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
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
The ratings and Outlooks are sensitive to a number of
-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
integration at the eurozone level in line with commitments made
makers. It also assumes that the risk of fragmentation of the
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Applicable criteria, 'Sovereign Rating Criteria' dated 13 August
'Country Ceilings' dated 09 August 2013, are available at
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