A reasonable economic and fiscal policy and a strong institutional framework will help Estonia weather the repercussions of Russia's war on Ukraine and the weak external environment. 

While Estonia's budget position has recently weakened, S&P forecasts a strengthening in the medium term, bearing in mind revenue-raising measures adopted by the "new" government.  

S&P left in place the AA- (negative) rating given in December last year, a rating which reflected on the ongoing war and its potential for leading to higher-than-expected costs for Estonia's small and open economy.

Falling demand from key trade partners in Scandinavia and Western Europe have also made their effects known and been taken on board by S&P.

On the other hand, S&P says it does not see a further escalation of the current war, while Estonia's security is buoyed by its membership of NATO.

S&P predicts a 1 percent economic contraction for Estonia by the end of 2023, whereas over the longer term it forecasts a drop in the state budget deficit to below 2 percent of GDP by 2026, down from the current 3.1 percent, due to both instigated government measures and an expected economic recovery.

Unemployment, however, may continue to rise this year due to layoffs in industry and more data entering the statistics in respect of Ukrainian war refugees.

The report points out that the risks to economic growth may materialize if Supply chain disruptions and higher inflation levels, if they persist longer due to the war, can also serve to undermine economic growth, competitiveness and fiscal dynamism, while if the ramifications of the war bite further than expected, this would result in a downgrade in the S&P rating, the agency says.

On the other hand, a move in the opposite direction, from negative to stable, would follow an ebb in war risks and effects, the Ministry of Finance reports.

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