Independent agency Moody's affirmed the Government of Estonia's long-term issuer ratings at A1 on Friday. The outlook remains stable as the agency believes Russia's war on Ukraine will have a "relatively limited" impact.
In a statement, the firm said the rating reflects the agency's expectation that: "[T]he risk of a conventional military conflict directly impacting Estonia remains low, and that the country's progress towards bolstering its energy security will reduce the impact of energy-related risks.
"It also reflects Moody's expectation that the permanent damage of the Russia-Ukraine conflict on Estonia's economy will be relatively limited and that Estonia's fiscal metrics will remain significantly stronger than most of its A1-rated peers."
It noted Estonia has made progress in reducing its reliance on Russian energy.
The agency says Estonia could be "directly impacted" by "hybrid forms of attack, such as cyberattacks, disinformation campaigns, sabotage operations or efforts to foment civil unrest". However, these are much less likely to have a severe impact on Estonia's credit profile, it said.
It also said the size of Estonia's Russian population is an "additional risk factor" in the geopolitical context but that there is "no indication of inter-ethnic tensions in Estonia escalating into outright civil unrest since the start of the Russian invasion of Ukraine".
It considers the likelihood of a military attack on Estonia, a NATO country, "a very low risk, high impact scenario" but said this would cause the country's rating to be downgraded.
Weak growth expected
The agency said the Russian invasion of Ukraine will have "a significant, negative impact" on the Estonian economy.
This is due to a "sharp fall" in exports to and imports from Russia and Belarus combined with rising prices and a reduction in consumer purchasing power.
"We expect economic growth to be weak but positive at 0.6 percent of GDP this year and 2.1 percent in 2023. While a significant downward revision from our pre-invasion forecasts, the immediate economic impact of the military conflict is ultimately much less sharp than that of the coronavirus pandemic which caused the Estonian economy to contract by 3.0 percent of GDP in 2020," Moody's wrote.
Earlier this month, S&P lowered Estonia's economic outlook from 'positive' to 'stable'.
Editor: Helen Wright