International rating agency Moody's Investors Service has affirmed Estonia's A1 government bond rating with a stable outlook.
The agency said that factors supporting the affirmation were the resilience of Estonia's economy to external shocks, the government's very low debt burden, and the country's susceptibility to geopolitical event risk.
The resilience of Estonia's economy to external shocks remained strong. Estonia's average economic growth of 3.7 percent between 2010 and 2014 had been amongst the highest in the eurozone, reflecting the significant competitiveness gains achieved in 2010 through a sharp reduction in labor costs. At the same time, Estonia's economy had largely withstood more recent shocks from the economic contraction in Russia and weak growth in Finland, the agency said.
Estonia's real exports grew by 4 percent in 2016, despite a contraction in Russia, one of its traditional export markets, and the ongoing trade embargo on agricultural exports to this country. This reflected Estonian exporters' ability to re-orientate towards faster growing markets, including China and Germany. Investment prospects had also improved, which supported by EU funds would enhance the resilience of the economic recovery underway. Estonia this year and in the next few years would also benefit from stronger growth in the demand of its main trading partners.
As a result, Moody's expects the economy to expand by 3 percent and 2.8 percent in 2017 and 2018, slower than pre-crisis, but above expected average growth in the eurozone over the next two years.
The rating outlook is expected to remain stable, as Moody's estimates that a planned fiscal loosening will not risk Estonia's very prudent fiscal position, which would continue to be “among the strongest in the agency's rating universe”. The country's forward looking economic policies also supported further income convergence towards the EU average.
On the labor market, Moody's expects that Estonia's limited domestic labor supply will contribute to a tightening and continue to place upward pressure on wage growth in the coming years, posing a threat to Estonia's future competitiveness. Furthermore, the European Commission expects Estonia's working age population will shrink over the next decade, adding to competitiveness challenges in the medium term. This will also likely restrict the availability of suitable skills in the economy, which acts as a constraint to foreign investment, although the authorities are taking some steps to ease restrictions on economic immigration, including in the growing IT sector.
Editor: Dario Cavegn