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 that may act as a lender of last resort.

Scope performs monitoring reviews to determine whether material changes and/or changes in macro-economic 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 rating’s 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 and/or on its subscription platform ScopeOne.

Scope completed the monitoring review on 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 17 March 2025.

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 scoperatings.com.

Key rating factors

For the updated rating report accompanying this review, please see here.

Estonia’s A+ credit ratings are supported by several credit strengths, including: i) its robust institutional set-up, anchored by euro-area and NATO memberships, alongside a solid track record of policy continuity and responsiveness, which underpin a robust framework for macroeconomic policymaking while partly offsetting external risks; ii) 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; and iii) a favourable medium-term economic growth outlook, supported by sizable EU-fund allocations, which should support a resumption of the pre-crisis convergence trend towards euro area income levels and improvements in economic resilience.

The main challenges to the ratings are: i) exposure to external shocks, given the Estonian economy’s small size, still comparatively moderate income levels, elevated openness, and geographic proximity to Russia; and ii) adverse demographic trends and high defence spending commitments that add long-term pressures to the fiscal trajectory.

After experiencing a 3% contraction in 2023, the Estonian economy shrunk by 0.3% last year, primarily owing to weak investment. Scope expects the economic momentum to recover progressively, with real growth forecast at 1.7% of GDP this year and 2.6% in 2026. Private demand is expected to pick-up only gradually as the government’s fiscal consolidation efforts will weigh on household disposable incomes. Improving external demand and a loosening in financing conditions should support investment dynamics.

The fiscal deficit stood at an estimated 2.0% of GDP in 2024, down from 2.8% in the previous year and well below initial government estimates (2.9% of GDP). The resilience of the labour market despite a tepid economic momentum supported stronger-than-anticipated tax revenues. Corporate income tax receipts were bolstered by a significant increase in profit distribution of the private sector ahead of a tax hike which took effect in January 2025.

Scope expects the general government deficit to widen to 2.9% this year, in part driven by the postponement of some spending initially scheduled for 2024. It should resume a gradual declining trajectory in subsequent years, down to about 2.0% of GDP by 2029, supported by the implementation of the government’s fiscal consolidation measures (including tax increases labelled under the ‘security tax’ programme) aimed at funding Estonia’s very ambitious defence spending targets (recently raised to 5% of GDP over the medium-term, from 3.2% of GDP in 2024). The debt-to-GDP ratio is forecast to increase to 27.1% by 2026 and to around 31% by 2029, up from an estimated 23.3% at the end of 2024.

The break-up of the governing coalition in March 2025 will likely result in the cancellation of some previously planned tax increases, most notably a hike in the corporate income tax rate. Negotiations around a new coalition agreement between incumbent prime minister Kristen Michal’s Reform party and Eesti 200 are ongoing.

Estonia’s macroeconomic and fiscal outlooks remain significantly affected by the current environment of heightened geopolitical tensions, particularly so in view of the recent uncertainty around EU-US relations. Scope presently assesses direct military risks from Russia as low due to Estonia’s strong international alliances and the recent build-up of European-led security cooperation efforts in the Baltic region. Additionally, Scope views the country’s preparedness to potential hybrid forms of aggression positively compared to other European peers. Still, the country’s geographical location makes it one of the EU countries most exposed to spillovers from the conflict.

The Stable Outlook reflects Scope’s view that the risks Estonia faces over the next 12 to 18 months are well balanced.

Upside scenarios for the long-term ratings and Outlooks are (individually or collectively):

1. structural reforms and investment continued to sustain income convergence;
    
2. the public debt-to-GDP ratio remains anchored at low levels, supported by declining general government deficits over the medium run;
    
3. strengthened resilience to external shocks, including geopolitical risks.

Downside scenarios for the long-term ratings and Outlooks are (individually or collectively):

1. geopolitical risks increased, undermining macroeconomic stability;
    
2. the fiscal outlook worsened, leading the debt-to-GDP ratio to rise significantly above its presently-forecasted trend;
    
3. macroeconomic imbalances increased, weakening medium-run growth prospects;
    
4. external and/or financial sector vulnerabilities increased substantially.

The methodology applicable for the reviewed ratings and/or rating Outlooks (Sovereign Rating Methodology, 27 January 2025) is available on 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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