Credit rating agency Fitch affirms Estonia at AA-

Fitch ratings.
Fitch ratings. Source: Wikicommons / Shashank457

Credit ratings agency Fitch has affirmed Estonia's long-term foreign-currency issuer default rating at AA-, with a stable outlook.

The finance ministry announced Fitches' latest rating Friday, and said that Estonia's AA- ratings reflect its strong institutions, underpinned by EU and eurozone membership, th country's record of sound fiscal policies, which have resulted in low public debt, and net external creditor position.

Despite its small size and relative openness, the Estonian economy exhibited a degree of resilience to the coronavirus pandemic shock, Fitch said, owing to a high proportion of information and communications technology services within its economic output, and low net dependence on tourism, which accounts for around 1 percent of GDP.

Nevertheless, the ratings agency expects the Estonian economy to contract by 5.7 percent in 2020, before recovering at 4.5 percent growth in 2021.

Fitch forecasts the average unemployment rate for the year at 7.5 percent in 2020, 8.0 percent in 2021, and then expects the rate to fall after that.

Fitch rating breakdown

  • Economy's small size and openness expose it to external shocks. 
  • Estonia entered the coronavirus pandemic with one of the lowest general government debt ratios across Fitch-rated sovereigns, at 8.4 percent of GDP in 2019.
  • Above ratio may rise to 15.2 percent next year, due to wider fiscal deficit associated with the operation of automatic stabilizers and its sizable fiscal stimulus, but still well below the forecast AA median of 49.3 percent.
  • Low level of income per capita relative to peers.
  • Fitch says a rebound in economic growth in 2021 will follow a contraction of 5.7 percent this year. 
  • Government's track record of low and stable deficits prior to pandemic gives confidence that the debt ratio will decline over the medium term, after peaking at just below 20 percent of GDP in 2022-2023, according to baseline projections by Fitch.
  • GDP growth will be boosted by €1.6 billion in grants under the Next Generation EU fund, equaling 6 percent of Estonia's GDP in 2020. Fitch expects only a small portion of these funds to be spent in 2021, as approval process would delay absorption.
  • Estonian labor market is highly flexible, and registered unemployment rate increased to 7.6 percent at end of August, from 5.6 percent before the pandemic.
  • Employment wage-support scheme expired in June.
  • Estonia entitled to grants equivalent to 3.6 percent of GDP annually on a gross basis, under new EU multi-annual financial framework (MFF) for 2021-2027.
  • The above is only slightly less than the 3.7 percent received during 2014-2020.
  • Full eurozone economy to contract by 9 percent in 2020.

Apart from a recent resurgence of the coronavirus in Estonia and other parts of Europe, the key risk to the growth outlook is a material rise in unemployment that weighs on private consumption, Fitch said, adding that stable and persistent current account surpluses underpin Estonia's net external creditor position, something it will hold despite increased government borrowing from abroad causing it to decline.

Fitch said sovereign net external creditor position for Estonia is 24.1 percent of GDP in 2020.

Room for improvement exists in structural indicators, including a significant narrowing of the differential in GDP per capita to rating peers.

An increase in national debt remaining over the medium term reflecting following th coronavirus subsides, including the wage-support scheme, or sustained weak GDP growth, could also harm future ratings, Fitch said.

Prime minister: Sometimes we're unduly harsh

One person ken to highlight the Fitch rating was prime minister Jüri Ratas, who said on his social media page that it was vindication both for the Estonian people and his administration's fiscal policies, particularly given the pandemic and accompanying aid measures.

This set the country ahead of its peers, he went on.

"Compared with other countries, Estonia's strengths continue to be its sound fiscal policies, strong institutions, membership of the EU and euro area, low debt burden and a long-term and stable current account surplus," Ratas wrote, adding that it qualified many of the in-house debates on, and criticisms of, economic policy, which Ratas said were sometimes overly harsh.

Ratas also said that heeding Fitches' suggestions should be kept in focus for promoting economic growth in future.

In March, just after the pandemic started in Estonia, Fitch set affirmed Estonia's long-term foreign-currency issuer default rating at AA- with a stable outlook. Competitor agency Standard and Poor's (S&P) put Estonia's long-term sovereign rating at AA-high a month before that.


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Editor: Andrew Whyte

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