Fitch affirms Estonia credit rating at AA-stable

Fitch ratings.
Fitch ratings. Source: Wikicommons / Shashank457

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

Fitch announced Friday that: "We forecast the fiscal deficit to narrow to 3.5 percent of GDP in 2021 from 4.9 percent in 2020, much better than our previous projection of 4.2 percent of GDP and the government's forecast of 6.0 percent of GDP.

"Tax receipts are strong as job losses have been concentrated mainly among low-wage sectors of the economy, such as trade, accommodation & food services and the wage dynamic was strong overall," Fitch continued in its statement, quoted by BNS.

Fitch has revised its real GDP growth forecast for Estonia to 9.7 percent this year, with 4.8 percent forecast for 2022 and 5.1 percent for 2023.

The agency's previous review suggested growth rates of 3.8 percent for 2021, and 4.3 percent for 2022.

The revision reflects the base effects from the very strong first half of 2021 and the agency's expectation for a continued recovery of the sectors most affected by the pandemic.

Fitch said the rating reflects the strong governance standards and institutions underpinned by EU and eurozone membership, and the record of sound fiscal policies that have resulted in low public debt, as well as Estonia's net external creditor position.

These are offset, however, by a lower income per capita relative to Estonia's peer nations, along with the economy's small size, which leaves it more exposed to shocks than larger economies.

Further improvement in structural indicators, including a significant narrowing of the differential in GDP per capita to rated peers, would lead to an upgrade of the rating, Fitch went on to say, whereas significantly higher government debt relative to GDP, reflecting persistently loose fiscal policy, and severe persistent economic overheating – leading to the creation of macro-financial imbalances – scenarios which could lead to a downgrading, Fitch says.

Fitch latest Estonia rating in brief:

  •  Coronavirus risks diminished in face of vaccination program and resilience of economy despite restrictions.
  • Economy has weathered shock of pandemic better than many peer countries' economies.
  • Estonia entered the pandemic with one of the lowest gross general government debt (GGGD)-to-GDP ratios across Fitch-rated sovereigns, at 8.4 percent of GDP in 2019.
  • EU fund absorption as current financing cycle under multi-annual financial framework 2014-2020 approaches its end in 2023, and the Next Generation EU (NGEU) fund comes on stream.
  • Balance of risks to growth now improved amid the positive effect of the investments and structural reforms under the NGEU on country's growth potential. 
  • Pension reform an expected pick-up in EU fund absorption should provide a substantial uplift to growth in 2022 and 2023. 
  • Debt ratio likely to decline over the medium term, after peaking at just below 20 percent  of GDP in 2021-2022.
  • Public debt sustainability is further underpinned by Estonia's favorable financing costs.

Fitch is one of the big three international credit ratings agencies, the other two being Moody's and Standard & Poor's.


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Editor: Andrew Whyte

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