Frankfurt am Main, May 10, 2019 -- Moody's Investors Service ("Moody's") has today affirmed the Government
of Estonia's issuer ratings at A1. The outlook is maintained
at stable.
The affirmation of Estonia's A1 rating balances the following key
rating drivers:
(1) The dynamism and resilience of the Estonian economy
(2) Government debt levels that remain among the lowest of the sovereigns
rated by Moody's
(3) Estonia's susceptibility to geopolitical risks
The stable outlook reflects Moody's expectation that forward-looking
economic policies will continue to support convergence with average EU
income levels, and that government debt levels will continue to
remain among the lowest of Moody's rated universe. It is
also based on the assumption that geopolitical risks will remain moderately
prominent over the near to medium term.
Estonia's local currency and foreign currency long-term bond and
deposit ceilings are unchanged at Aaa. The short-term foreign
currency bond and deposit ceilings remain unchanged at P-1.
RATINGS RATIONALE
RATIONALE FOR THE AFFIRMATION
FIRST DRIVER: THE DYNAMISM AND RESILIENCE OF THE ESTONIAN ECONOMY
While the Estonian economy is small and highly open, and is thus
susceptible to risks related to the external economic environment,
it is also an economy that has continued to show a notable degree of dynamism
and resilience over the past decade. Estonia recovered quickly
from the global financial crisis despite the large imbalances that had
built up in the economy in the run-up to the outbreak of the crisis
and has seen robust albeit relatively volatile rates of growth since 2009.
While the Estonian economy slowed down somewhat in 2015 over increasing
economic and geopolitical headwinds emanating from Russia, the country's
GDP has grown at an average rate of 4.1% in the last three
years, with exporters successfully shifting their focus to other
markets and growth increasingly being driven by domestic demand.
The dynamism of the Estonian economy is also evidenced by the increasing
importance of the services sector and the export of services over recent
years. While strong overall growth in services exports in part
reflects growth in sectors like transportation and construction,
growth has also been particularly rapid in more high value added sectors
such as ICT and business services. The increasing importance of
more high value added and less price sensitive sectors in the Estonian
export mix is also a contributing factor why Estonia has not lost overall
export market share in recent years, despite rapidly rising nominal
wages and unit labour costs.
Estonian policy makers have also been adept at taking measures to alleviate
some of the structural challenges the economy is facing, most notably
those related to population ageing and its impact on the labour force.
Past reforms have among other things successfully raised the employment
rate of persons previously on work-incapacity benefits and enabled
significant labour immigration in recent years, both focused on
relatively low skilled and short term work and more highly qualified labour
demanded by for instance the ICT services sector. However,
demographic trends will continue to pose a challenge for many years to
come. Over the nearer term the details of the policy programme
of Estonia's recently installed coalition government remain unclear.
Nevertheless, the county's strong track record of highly effective
pro-active and re-active policy making is an important supportive
institutional feature.
SECOND DRIVER: GOVERNMENT DEBT LEVELS THAT REMAIN AMONG THE LOWEST
OF THE SOVEREIGNS RATED BY MOODY'S
Estonia stands out both in a European and a broader international context
for having among the lowest levels of gross government debt of the sovereigns
rated by Moody's. Gross government debt has continued to
come down from already very low levels in recent years and stood at 7.9%
of GDP at end-2018. This is substantially below the median
for other sovereigns in the single A rated category, which currently
stands at 37% of GDP. Debt affordability is correspondingly
high, with interest payments to revenue standing at 0.1%
of GDP in 2018 compared to the single A median of 4%. In
addition, Estonia has substantial fiscal reserves across a number
of different funds, providing a significant cushion in the event
of unexpected economic or fiscal shocks, which at end-2018
stood at just over 7% of GDP.
Estonia recorded its highest structural budget deficit since the financial
crisis in 2018, estimated by the Estonian Ministry of Finance to
have reached 1.4% of potential GDP. Owing to the
favourable cyclical environment, the headline deficit was somewhat
smaller at 0.5% of GDP. Under Estonia's fiscal
framework, the government is required to take action to reduce the
structural deficit from 2019 onwards. Following the appointment
of a new coalition government on 24 April, there is currently a
lack of clarity about the government's medium term fiscal plans.
However, Estonia's long track record of fiscal rectitude suggests
that the commitment to fiscal prudence is institutionally well entrenched.
THIRD DRIVER: ESTONIA'S SUSCEPTIBILITY TO GEOPOLITICAL RISKS
We expect that geopolitical risk, stemming from geopolitical tensions
with Russia, will remain a negative feature of Estonia's rating
profile -- as it is for the Government of Latvia (A3, stable)
and the Government of Lithuania (A3, stable). While tensions
in relations with Russia increased with the outbreak of armed conflict
in Ukraine in 2014 and have remained at a more elevated level since then,
geopolitical tensions have also exhibited a degree of stability over recent
years.
We continue to believe that the risk of military intervention by Russia
in the Baltics is a highly unlikely event, given that Estonia and
its Baltic neighbours all are NATO members with multinational NATO battalions
also being stationed in all three countries since 2017. However,
it is also an event with a potentially very high impact. Moreover,
geopolitical risks could materialise in forms other than outright military
conflict such as cyber warfare attacks.
RATIONALE FOR THE STABLE OUTLOOK:
The stable outlook on the rating balances these competing credit drivers.
It incorporates the assumption that Estonia's strong credit profile will
continue to benefit from the country's forward-looking economic
policies, supporting further income convergence towards the European
Union (EU) average. Moody's also expects that Estonia's
fiscal position will continue to be among the strongest in our rating
universe, despite increasing structural and headline deficits in
recent years. Set against those strengths, the rating agency
sees no reason to assume that geopolitical risks will materially decrease
(or increase) over the near to medium term.
WHAT COULD MOVE THE RATING UP
Upward rating pressure would arise from an easing in geopolitical risk
in the region. Further improvements to Estonia's growth profile,
including reforms that further mitigate the economic impact of a declining
working age population, thus supporting more rapid income convergence
with wealthier EU economies, could also put upward pressure on the
rating.
WHAT COULD MOVE THE RATING DOWN
Conversely, a material and sustained deterioration in geopolitical
risk or Estonia's economic growth prospects could undermine the fiscal
position and have negative implications for the rating. Furthermore,
a material deterioration in cost competitiveness, owing to rapidly
growing nominal wages driven by labour shortages, which would result
in a negative impact on Estonia's export market share would also
give rise to downward pressure.
GDP per capita (PPP basis, US$): 32,130 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 4.9% (2017 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 3.8%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -0.4%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: 3.2% (2017 Actual) (also
known as External Balance)
External debt/GDP: [not available]
Level of economic development: High level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 07 May 2019, a rating committee was called to discuss the rating
of the Government of Estonia. The main points raised during the
discussion were: The issuer's economic fundamentals, including
its economic strength, have not materially changed. The issuer's
fiscal or financial strength, including its debt profile,
has not materially changed. The issuer's susceptibility to event
risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Petter Bryman
Asst Vice President - Analyst
Sovereign Risk Group
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Deutschland GmbH
An der Welle 5
Frankfurt am Main 60322
Germany
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
