Credit rating agency S&P hikes Estonia's outlook to positive ({{contentCtrl.commentsTotal}})

Porto Franco construction work in January 2020. The construction sector is behind much of S&P's upgrading of Estonia's outlook to positive.
Porto Franco construction work in January 2020. The construction sector is behind much of S&P's upgrading of Estonia's outlook to positive. Source: Siim Lõvi /ERR

Credit rating agency Standard and Poor's (S&P) has confirmed Estonia's long-term sovereign rating to AA-high, and raised its outlook from stable to positive, the Ministry of Finance said on Friday.

The positive outlook derives mainly from Estonia's significant economic growth in recent years, and strong prospects for further growth in a weakening external environment, the agency said, according to ERR's online news in Estonian.

Economic growth has been supported by increased construction activity, backed by EU funding, and also by the contribution from the higher-paid services sector. The latter remains competitive ,despite strong wage growth, which in some sectors has raised wages to EU average levels.

Estonia's economic growth in the last three years has exceeded the S&P's expectations, it is reported. Against the background of rapid wage and employment growth, private consumption has grown strongly, and investment has been boosted by a faster-than-expected introduction of EU subsidies. The latest rating is also supported by Estonia's strong institutions and sustainable fiscal policy.

S&P projects only a small budget deficit for Estonia in the coming years, with a debt burden remaining the lowest in the eurozone. 

However, as a smaller member of the eurozone open economy, Estonia needs to maintain sufficient fiscal buffers against a possible economic downturn, S&P said.

In the coming years, growth conditions will remain favorable for Estonia, but further economic growth will be slower and more sustainable, S&P says. External demand is diminishing due to weakening economic growth with the major trading partners. Private consumption remains at a high level, though household saving rates remain high, reflecting overall caution in the future.

Even with the weaker projected growth figures, S&P estimates that the coming years will see Estonia approaching euro area averages.

In the medium and long term, the major obstacles to economic growth will continue to be a tight labor market and fast wage growth, and record employment rates. 

In the longer term, the decline in the working-age population will also remain a challenge, S&P says.

For the S&P rating to move even higher would require stronger revenue growth, indicating productivity gains in the higher value-added services sector, S&P noted.

U.S.-based S&P is one of the "big three" credit rating agencies, along with Moody's and Fitch. Its ratings generally range from AAA (highest) to CC/D.

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Editor: Andrew Whyte

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