Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial-market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for the Republic of Estonia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: AA-/Negative Outlook; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 23 October 2023.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Estonia’s AA- rating reflect several credit strengths, including its: i) its sound institutions underpinned by its EU, euro area and NATO memberships, which provide a robust framework for fiscal and economic policy and strongly mitigate external security risks that have risen amid the current geopolitical tensions; ii) solid economic growth and improved macroeconomic resilience that have favoured a rapid convergence to euro area income levels over the past years; and iii) prudent fiscal policies and conservative debt management that have resulted in the country having one of the lowest debt-to-GDP ratios globally, backed by high financial reserves.

The main challenges for the ratings are: i) the still moderate per-capita income relative to the euro-area average, which, coupled with the economy’s high exposure to external shocks, increase Estonia’s vulnerability to the persistent inflationary pressures and cost-of-living crisis; and ii) the ageing population and skilled-labour shortages that are constraining the medium-run growth outlook.

The Estonian economy is affected by the lasting effects of the cost-of-living crisis. After negative growth of 0.5% in 2022, Scope expects the Estonian economy to shrink by a further 1.9% this year due to weak domestic demand, amid persistent inflationary pressures and tight financing conditions. Economic activity should recover from next year, driven by improvement in real incomes and a more favourable external environment.

After moderating to 0.9% of GDP in 2022, Scope estimates that the general government deficit will widen to 3.0% of GDP this year, from the effects of the Ukraine conflict and cost-of-living crisis. It should narrow to 2.6% in 2024, in line with the rebound in economic momentum and higher fiscal revenue from recent tax hikes, which should partly outweigh increased spending on defense and social benefits. Scope expects the debt-to-GDP ratio will remain on a gradual increasing trend over the medium term and to reach 22.2% by end-2024, all the while remaining amongst the lowest in the euro area.

The Negative Outlook reflects Scope’s view that risks to the ratings are tilted to the downside.

The Outlook could be revised back to Stable if, individually or collectively: i) geopolitical risks affecting the region moderated significantly; ii) the fiscal outlook improved, supported by a rapid rebalancing of government finances; iii) structural reforms and investment continued to sustain solid growth and income convergence; and/or iv) external vulnerabilities saw a further sustained reduction.

Conversely, the ratings could be downgraded if, individually or collectively: i) the fiscal position were not rebalanced, preventing the stabilisation of the debt-to-GDP at moderate levels; ii) macroeconomic imbalances increased, weakening medium-run growth prospects; iii) external and/or financial sector vulnerabilities increased substantially; and/or iv) heightened geopolitical risks undermined macroeconomic stability.

For the updated rating report, click here.

The methodology applicable for the reviewed ratings and rating Outlooks (Sovereign Rating Methodology, 27 September 2023) is available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Brian Marly, Analyst

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