Although the small size and openness of the economy expose it to shocks such as the current COVID-19 pandemic, the agency believes the government has responded swiftly to health risks associated with COVID-19.

These actions and weaker external demand will negatively affect Estonia's economic growth, however, the impact of the shock on the domestic economy will be partially softened by proposed government relief measures targeting businesses, employers, and citizens.

Fitch said the disruption caused by the pandemic is weighing on an economy that was already slowing. The agency has so far cut its forecast for Estonia's real GDP growth in 2020 to -1.1 percent, from 2.4 percent previously, with private consumption (-2 percent) and investment (-6 percent) driving the contraction.

Positive growth in public consumption will provide some limited cushion, on the back of increased spending in the healthcare sector. Growth is projected to rebound to 3.8 percent in 2021.

Fitch expects the tourism sector in Estonia to shrink by around 10 percent in 2020, with a sharp contraction in the second quarter of 2020. Tourism accounts for about 8 percent of GDP, including indirect effects. 

The agency expects unemployment to rise further in the second quarter of 2020, before subsiding in the second half of 2020 to an average of 6.9 percent in 2020. This would be the highest level since 2014, but much below the level registered in 2010 at the height of the global financial crisis, 16.7 percent.

Headline inflation will decline to 1.3 percent in 2020, in line with Fitch's average projection for the eurozone average, pulled down by lower wage pressures. Fitch expects inflation to rise to 1.5 percent in 2021 as the economy expands.

Fitch sees significant and growing downside risks to the 2020 baseline scenario, given the contractionary effects of the global spread of the coronavirus. In particular, growth could be lower as more countries impose lockdowns and unemployment could be correspondingly higher. 

Public finances are a key rating strength. A track record of fiscal discipline and extremely low government debt, 9.2 percent in the third quarter of 2019, provides space to accommodate shocks.

Fitch projects the deficit to rise to 8.1 percent of GDP in 2020, from 0.2 percent in 2019, based on the operation of automatic stabilizers and the direct budget impact, €600 million, from the government's package of €2 billion, close to 7 percent of GDP, to boost the economy. 

The main factors that, individually or collectively, could lead to negative rating action are severe economic or financial shocks sufficient to erode buffers in Estonia's public finances, or undermine the macroeconomic environment and financial stability over a sustained period, and a meaningful erosion of the net creditor position. The main factors that, individually or collectively, could lead to positive rating action are further improvement in the structural indicators, including a significant narrowing of the differential in GDP per capita to rating peers. 

In October, Fitch also affirmed Estonia's long-term foreign-currency issuer default rating at AA-, with a stable outlook.

Fitch Ratings Inc. is an American credit rating agency and is one of the "Big Three credit rating agencies", the other two being Moody's and Standard & Poor's. The company is a leading provider of credit ratings.

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