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S&P confirms Estonia's rating at AA- with stable outlook

Standard and Poor’s.
Standard and Poor’s. Source: (Emmanuel Dunand/Reuters/Scanpix)

Standard and Poor's (S&P) credit rating agency have confirmed its AA-/A-1+ long- and short-term foreign and local currency sovereign credit rating for Estonia. The outlook is described as 'stable'.

This is the highest rating that Estonia has currently received from any agency.

Estonia has the lowest debt burden in the Eurozone thanks mainly to a strong political commitment to fiscal balance and a long track record of minimal deficits. Estonia's external balance sheet has returned to a modest debtor position, S&P said in its overview on Estonia.

It has been stated that the stable outlook balances Estonia's strengthening credit fundamentals, as its ongoing strong economic growth sees income levels move closer to those of its peers, against the possibilities that imbalances could re-emerge, possibly undermining this convergence.

S&P said that in the longer term, it could even raise its ratings on Estonia if the country were to achieve income levels materially closer to the Eurozone average, by improving productivity and raising the importance of high value-added sectors in its economy.

It could however consider lowering the ratings if it sees certain factors increasingly weigh on economic development.

S&P believes both public and private investments which support labour productivity will help Estonia's sustainable economic growth. A significant risk to external competitiveness and long-term economic development overall comes from the tight labour market here.

The agency expects the Estonian government will incur only marginal deficits on average over its forecast horizon.

S&P points out that as a small, open economy, Estonia currently benefits from a cyclical upswing in growth closely linked to strong demand in its export markets, particularly from Finland and Sweden. Germany has overtaken Russia as Estonia's third-largest trading partner, S&P says.

Estonia will remain highly exposed to developments in its main export partners in the Eurozone and Scandinavia. Recent growth in construction does not represent a significant economic threat compared with the pre-crisis years, because growth rates will decelerate; and limited growth in capital allocation to that sector can also be observed, according to S&P.

Investments including projects to modernize the oil shale industry and improve rail links with the other two Baltic states and with Poland are expected to continue in the next few years. In S&P's view, such infrastructure investment supports sustainable economic growth, differing from the credit-fueled construction investment growth in the real estate sector seen in the pre-crisis years.

S&P expects investments to grow at slightly above 5% in real terms over the next few years as there is room for further growth outside construction. Private-sector productivity growth has slightly lagged behind regional peers, although this measure is potentially affected by slightly overstated employment figures.

Estonian corporations have accumulated financial headroom to make additional productivity-enhancing investments as profit levels have exceeded investments comfortably over the past six years.

S&P expects Estonia's external debt, net of public and financial sector external assets will decrease to a modest 19% of current account receipts through 2021. Given the high savings rate of the entire economy, the agency also expects to see Estonian investments in assets abroad given the narrow size of the domestic capital market and lack of domestic investment options.

The S&P rating remains unchanged on the figure for December 2017.

Editor: Andrew Whyte

Source: BNS

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