Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the cases 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 of the Republic of Estonia (long-term local- and foreign-currency issuer and senior unsecured debt ratings: A+/Stable Outlook; short-term local- and foreign-currency issuer ratings: S-1+/Stable) on 30 September 2024.

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 ratings history can be found on www.scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, click here.

Estonia’s A+ long-term ratings are underpinned by the following credit strengths: i) its sound institutions underpinned by its euro area and NATO memberships, which provide a robust framework for fiscal and economic policy and strongly mitigate external security risks that have increased amid the current geopolitical tensions; ii) robust medium-term economic growth potential 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.

Estonia’s credit ratings are challenged by: 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 external shocks; and ii) the ageing population and skilled-labour shortages that are constraining the medium-run growth and fiscal outlooks.

The Estonian economy is affected by the lasting effects of the Russia-Ukraine war shock. After experiencing a 3.0% contraction in 2023, Scope expects real output to decline by a further 0.8% this year resulting from a prolonged weakness in private demand. The economic recovery is seen gathering pace towards the end of 2024, driven by improving consumption and business investment amid robust real wage growth, loosening funding conditions and improving external demand. Real growth is forecast to recover, with GDP rising by 3.0% in 2025 and 2.6% in 2026.

The fiscal deficit is expected to widen to 3.1% of GDP this year (up 0.5pps from 2023). The weak economic momentum is weighing on government revenue, while expenditure growth remains robust, in particular reflecting the revaluation of pensions and public sector wages in line with inflation. The fiscal outlook is also durably affected by permanent spending increases, notably on defense and social policy. The government deficit is expected to remain broadly stable in 2025 (3.2% of GDP) and to decrease to 2.8% of GDP in 2026, reflecting the progressive easing of inflation-related spending pressures, a gradual recovery in revenue growth and the effects of recently-announced consolidating measures (including the implementation of a ‘security tax’, the partial postponement of the personal income tax reforms and reductions in social transfers). The debt-to-GDP ratio is expected to increase to 22.4% by the end of the year (up 2.8 percentage points from 2023) and to remain on an increasing trend, up to around 31% by 2029.

The Stable Outlook represents Scope Ratings’ opinion of risks for the ratings remaining balanced.

The ratings/Outlooks could be upgraded if, individually or collectively: i) structural reforms and investment continued to sustain solid growth and income convergence; ii) the fiscal outlook improved, supported by a rebalancing of government finances; and/or iii) external vulnerabilities saw a further sustained reduction.

Conversely, the long-term ratings/Outlook could be downgraded if, individually or collectively: i) geopolitical risks increased, undermining macroeconomic stability; ii) the fiscal outlook worsened, leading the debt-to-GDP ratio to rise significantly above its presently-forecasted trend; iii) macroeconomic imbalances increased, weakening medium-run growth prospects; and/or iv) external and/or financial sector vulnerabilities increased substantially.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 29 January 2024) 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, Senior Analyst

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