Fitch affirms Estonia at 'A+'; outlook stable

30 May 2013

Fitch Ratings has affirmed Estonia's long-term foreign and local currency Issuer Default Ratings (IDR) at 'A+' with a stable outlook. The agency has also affirmed the short-term foreign currency IDR at 'F1' and the Country Ceiling at 'AAA'.

The affirmation of Estonia's sovereign ratings reflects the following factors:

• Estonia's continuing economic recovery from its deep economic crisis without recurrence of macroeconomic imbalances. With real GDP growth of 3.2 per cent in 2012, Estonia was the fastest growing eurozone country for the second year in succession.
• Euro membership has reduced the risk of a balance-of-payments crisis, simultaneously raising the profile of Estonia's key rating attributes: fiscal conservatism, economic flexibility and underlying political and institutional strengths.
• Outstanding public finances represent a key rating strength. Although the general government balance swung into a small nominal deficit in 2012 (0.3 per cent of GDP), Estonia has never fallen foul of the EU's Excessive Debt Procedure and the authorities are confident of maintaining structural surpluses over the medium term.
• Public debt increased to 10 per cent of GDP in 2012 as Estonia assumed its share of contingent liabilities associated with European Financial Stability Facility (EFSF) and European Stability Mechanism (ESM) funding. Estonia's public debt however remains the lowest in the EU, while significant fiscal reserves help offset limited fiscal financing flexibility born out of shallow domestic capital markets.
• Product and labour market flexibility, coupled with unwavering popular support for tough austerity measures, has eliminated macro-economic imbalances and restored external competitiveness. While economic volatility is high relative to peers, the fact that recovery has occurred without rampant credit growth, a feature of the previous boom, is positive.
• As a small and open economy with close links to the eurozone and the EU, Estonia is inherently vulnerable to external economic and financial headwinds. To that extent, the risks of contagion through trade, investment and financial channels could be material.
• Although convergence with the eurozone has been strong over the past decade, income per capita levels remain the lowest in the eurozone and the gap with the 'A' median has widened since 2010.
• The key short-term risk for Estonia arises from developments in the broader eurozone, the repercussions of which could put renewed strains on the financial sector and snuff out recovery. Nonetheless, the foreign-owned financial sector has largely absolved the sovereign of contingent liabilities and overall the country is more resilient than it was to external shocks.

Full press release

© Fitch, Inc.