International credit rating agency Fitch has affirmed Estonia's long-term sovereign rating at AA-stable, the finance ministry announced Friday. Estonia's economy was less severely impacted by the COVID-19 pandemic than some other countries in the same rating bracket, Fitch says, though reducing the national debt burden once the virus starts to recede will be key to future development, the agency says.
The rating is backed by Estonia's strong institutions, EU and Eurozone membership, sound fiscal policy with low debt burden, and its net lender position, Fitch says.
At a contraction of 2.9 percent, the economic downturn Estonia experienced in 2020 as a result largely of the pandemic was nevertheless one of the smallest experienced by any country.
Ongoing wage growth in the ICT, financial and insurance sectors offset the overall decline in revenue.
Fitch forecasts budget deficit to shrink this year, to 4.2 percent of GDP, followed by 3.4 percent in 2022, as coronavirus crisis measures are gradually phased out and restrictions lifted.
Fitch also said a legal change which made membership of Estonia's pension scheme second pillar – referring to employer/employee contributions – will have positive short-term impacts on the budgetary position and economy as a whole, though over the long-run will engender challenges for public finances.
Pension reform and the introduction of EU subsidies will bring with it a greater boost to the economy in the new year as well, Fitch says, with the uptake of EU grants accelerating as euro money from the previous grant period must be utilized by year-end 2023, while the union's Recovery and Resilience Facility is making €672.5 billion in loans and grants available to member states.
Effective use of this may help increase productivity and offset structural challenges, such as an aging population.
According to the European Commission, Estonia's working-age population has shrunk four percent over the past decade, and will fall by another 12 percent between 2015 and 2035.
The economy has weathered the coronavirus storms better than many other countries in the same Fitch rating bracket, the agency says, while the country's stable debt burden – thus far – has prompted Fitch to forecast a medium term fall after its 2023-2024 peak of 19 percent of GDP.
At the same time, the pandemic – particularly recent rises in COVID-19 rates and tightened restrictions, could hamper growth, Fitch says, while the recent supplementary budget will be replaced by a stricter fiscal discipline than under the previous administration, once the pandemic subsides.
Estonia could obtain a higher Fitch rating by making structural improvements to the economy and reaching a GDP per capita level similar to that of nations in higher rating brackets.
At the same time, the rating would fall if Estonia's debt burden remains high in the medium term, i.e if it is not alleviated once the pandemic passes or economic growth remains low, Fitch says.
Editor: Andrew Whyte