Global credit rating agency Standard and Poor's (S&P) lowered Estonia's economic outlook from "positive" to "stable" due to the impacts of Russia's war in Ukraine. It did not change Estonia's AA- status.
The agency believes the war will impact Estonia's economic growth and increase budget expenditures due to higher spending on defense, compensation of household energy bills and the reception of Ukrainian refugees, the Ministry of Finance said in a statement on Friday.
As a result of the war, the agency forecasts Estonia's economic growth will be 1.8 percent. Inflation will also rise due to high raw material and energy prices. Weaker external demand is also hindering economic growth.
However, S&P said, in the long run, EU funds and strong macroeconomic indicators will allow the economy to return to "stable growth".
Head of the Ministry of Finances' Fiscal Policy Department Raoul Lättemäe said: "The agency changed the rating outlook due to the effects of the war, but it confirmed that our public finances and institutional framework are still sound and the level of public debt is low. In the long run, Estonia will be able to cope with the temporary slowdown in economic growth and pressures of higher prices without deterioration of its creditworthiness."
The agency considers it unlikely Estonia's rating will be raised in the short term as it is difficult to predict the outcome of the war. It could even lead to a downgrade if the effects turn out to be bigger than expected.
The Estonian government estimates the level of government debt will remain below 18 percent of GDP over the next three years.
Editor: Helen Wright