Analytics, Economics, Estonia, Good for Business, Rating

The agency said that the affirmation of Estonia's A1 rating balances the following key rating drivers: the dynamism and resilience of the Estonian economy; government debt levels that remain among the lowest of the sovereigns rated by Moody's; and 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.

"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," Moody's said.

"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," it said.

Moody's said 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 labor costs," it said.

According to Moody's, 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 labor force. Past reforms have among other things successfully raised the employment rate of persons previously on work-incapacity benefits and enabled significant labor immigration in recent years, both focused on relatively low skilled and short term work and more highly qualified labor demanded by for instance the ICT services sector.

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, it said.

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.

"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 neighbors 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 materialize in forms other than outright military conflict such as cyber warfare attacks," Moody's said.

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, the agency added.