Baltic Course, Tallinn, 21.08.2014
Estonia's credit strengths are supported by steady economic growth that, demographic constraints notwithstanding, is aided by the country's diversified, albeit small, economy, its moderately high level of affluence and the longer-term prospects for economic convergence with the core euro area, Moody’s Investors Service said in its annual review of the Estonian economy, reports LETA.
In addition, the country's A1 government bond rating remains supported by a track record of low general government debt and low financial deficits coupled with strong political consensus, very high institutional strength and low susceptibility to event risk, Moody’s said.
The rating agency's report is an update to the markets and does not constitute a rating action.
Estonia's government bond rating of A1 (stable outlook) is supported by resilient economic growth. Moody’s forecasts real GDP growth of 2.5% in 2014 and 3% in 2015. Moreover, Estonia is classified by the World Bank as a high-income country. "In 2013, GDP per capita, measured in purchasing power parity terms, was – at USD 23,144 – double that reported in 2002," says Kilbinder Dosanjh, a Moody’s Vice President – Senior Analyst and author of the report.
In addition, Estonia has the lowest debt ratios among its A-rated peers. "We expect the general government debt-to-GDP ratio to fall to 9.6% of GDP amid healthy GDP growth and low budget deficits," adds Dosanjh. Moody’s also highlights that the Estonian authorities also have a substantial financial buffer because of a large stock of liquid financial assets (equivalent to around 9.1% of estimated 2014 GDP).
Estonia benefits from a high degree of political consensus around its main fiscal policy goals, thus fostering policy continuity. Moody’s observes that the country tends to score strongly on international (World Bank) governance surveys, and the rating agency notes that the country's institutions have demonstrated exceptional flexibility and policy continuity over the past five years.
However, Moody’s also acknowledges Estonia's main credit challenges, which stem from the small size of its economy and its high degree of openness in comparison to those of most of its A-rated peers. It therefore remains vulnerable to contagion from shocks in the economies of its main trading partners. Other factors constraining the country's credit strength include a loan-to-deposit ratio in excess of 100%, but Moody’s notes that funding risk for the banking system is contained by the commitment of parent banks in the Nordics to their local subsidiaries. Furthermore, a high level of foreign ownership of the domestic banking system reduces contingent liabilities to the government balance sheet.
Moody’s: Estonia's credit strength supported by steady economic growth