Press Release

DBRS Morningstar Confirms Republic of Estonia at AA (low), Stable Trend

November 22, 2019

DBRS Ratings Limited (DBRS Morningstar) confirmed the Republic of Estonia’s Long-Term Foreign and Local Currency – Issuer Ratings at AA (low). At the same time, DBRS Morningstar confirmed the Republic of Estonia’s Short-Term Foreign and Local Currency – Issuer Ratings at R-1 (middle). The trends on all ratings are Stable.


The AA (low) ratings and Stable trends are underpinned by Estonia’s membership in the European Union (EU) and the Euro area, its stable macroeconomic policy framework, and its strong sovereign balance sheet. Estonia is a net recipient of EU structural funds, and the economy is supported by the free movement of goods and services offered by the single market. Public finances have been supported by effective fiscal policy and low public debt. The European Commission (EC) expects general government gross debt of only 8.7% of GDP in 2019, the lowest public debt burden in the eurozone. Debt appears even more negligible once offset by the State Treasury’s 4.5% of GDP in liquid savings.

The ratings are, nevertheless, constrained by structural challenges. Estonia’s small and open economy is vulnerable to higher growth volatility from external shocks and rising labour costs could weaken export price competitiveness. Moreover, convergence of Estonian income levels with the EU has slowed over the last decade. Income per capita in Estonia adjusted for purchasing power parity remains around three-quarters of the Euro area average.


DBRS Morningstar would consider placing upward pressure on the ratings if there is increased evidence of a persistent reduction in economic volatility inherent to Estonia’s small and open economy, or successful implementation of measures that improve income and productivity.

One or a combination of the following factors could lead to downward pressure on the ratings: (1) an external shock that causes sudden capital outflow from Estonia and material macroeconomic underperformance; (2) a return of excessive credit growth that leads to private sector over-indebtedness and financial sector instability; (3) an unexpected relaxing of fiscal discipline that significantly weakens Estonia’s public debt position.


Strong Economic Output, Though Expected to Moderate, Has Not Been Accompanied by Economic Imbalances

Growth of the Estonian economy has been strong in recent years. The EC expects growth of 3.2% in 2019, following average 5.3% growth in 2017-18. The strong economic outcome stems principally from robust domestic demand. Healthy construction has supported investment, and high employment and wage growth have driven private consumption. Furthermore, favourable commodity prices have increased exports across various sectors.

However, economic growth is expected to gradually decline in the coming years as the external environment weakens, the labour market reaches full employment, and investment levels moderate from the 2017 peak. The EC forecasts average 2.3% growth in 2020-21, which should narrow the EC’s calculation of a 3.0% positive output gap and calm any concerns over the reemergence of economic imbalances. DBRS Morningstar sees little evidence of excessive private sector leverage, housing market imbalances, or saving-investment misalignments – features of the pre-crisis years. The small size of the economy and its historical volatility explain Estonia’s weak performance on DBRS Morningstar’s economic building block metrics.

Estonia’s External Position Appears Stable, Yet Wage Growth May Eventually Weigh on External Competitiveness

Exports account for roughly three quarters of Estonia’s GDP and service-sector exports have been resilient. Following large deficits in the pre-crisis years, the current account has been mostly in surplus since 2009. The large swings to its current account reflect a structural vulnerability to Estonia’s small and open economy. Sustained surpluses have improved the external position, evident by lower external debt and a narrower net liability international investment position, which improved from -80.0% of GDP in 2009 to -27.7% in 2018. Much of the external debt is owed by Estonian subsidiaries to their parent companies, a source of substantial inward direct investment over the last decade. External deleveraging mitigates risks of sudden capital withdrawals and helps reduce vulnerabilities to external shocks.

Labour costs have risen steadily since 2010 and over time could lead to some erosion of external competitiveness. Although export volumes grew by 4.3% 2018, the growth rate of labour costs is outpacing labour productivity. From 2012 to 2018, an index of unit labour costs increased by 27% compared against the 11% growth of output per worker. The rising cost of labour can contribute to tightening profit margins and weakening external competitiveness. However, a limited period of moderate or high wage growth may have benefits. It can create a disincentive for outward migration and improves income convergence with the EU.

Financial Sector Risks from Nordic Parent Banks or Domestic Real Estate Appear Contained

Risks to financial stability associated with spillovers from Nordic economies and parent banks appear well managed. Ninety-percent of the Estonian banking sector is foreign owned, and the liquidity and funding position of the Estonian financial sector is directly and indirectly affected by the performance of Nordic economies. An economic slowdown in the Nordic region could reduce capital flows into Estonia and affect the income of Estonian exporters and their ability to service loans. These risks are mitigated by the improved economic conditions of Nordic countries, and strong asset quality, deposit funding, and capitalisation of banks operating in Estonia.

Credit growth and the domestic real estate sector are expanding at a healthy pace. Lending to households and the non-financial sector increased 5.7% yoy in the second quarter of 2019, while real estate prices advanced by 5.8%. With inflation above 2%, credit growth is more moderate in real terms. Even with healthy lending, private sector debt ratios have declined to pre-crisis levels. Household debt is 38% of GDP and non-financial corporate debt is 125% of GDP. Private sector savings rates are also at historical highs. If the lending environment turns excessive, the Bank of Estonia would likely raise capital buffer rates as its principal macro-prudential tool. Given strict loan-to-value and debt-to-income limits for obtaining mortgages, there is no evidence that banks have eased lending standards.

The Fiscal Position is Expected to Return to Rough Balance Over the Forecast Period, While Debt Remains Low

The average budget position in the fifteen years until 2015 was broadly in balance. From 2016-18, Estonia recorded average 0.6% deficits due to growth in investment spending, social expenditures, and rapidly growing public wages. The government’s 2020 budget shows some expenditure restraint, and the EC forecasts a 0.2% deficit in each year through 2021. The country’s historically conservative fiscal policy reduces the need to finance deficits. Debt is expected to remain around 8.5% of GDP. Net of the government’s two reserve funds worth roughly 4.5% of GDP, Estonia’s public debt burden is even more negligible.

DBRS Morningstar Expects Continuity Around Key Policy Issues, Following the 2019 Parliamentary Election

In the March 2019 parliamentary election, Prime Minister Jüri Ratas and his Centre party formed a three-party coalition with Pro Patria and the Conservative People’s Party. The controversial EKRE, self-identified as a national-conservative party, showed the most improvement and for the first time a far-right party enters Estonian government. DBRS Morningstar expects Estonian public institutions to remain strong and predictable. There is broad political consensus in Estonia around key policy issues, including sound fiscal prudence, European integration, and reforms to address the deteriorating demographic trends. Estonia is an exemplary performer, especially among its Baltic peers, on the World Bank Governance Indicators.

For more information on the Rating Committee decision, please see the Scorecard Indicators and Building Block Assessments.



All figures are in Euros (EUR) unless otherwise noted. Public finance statistics reported on a general government basis unless specified.

The principal methodology is the Global Methodology for Rating Sovereign Governments, which can be found on the DBRS Morningstar website at The principal rating policies are Commercial Paper and Short-Term Debt, and Short-Term and Long-Term Rating Relationships, which can be found on our website at

The sources of information used for this rating include Ministry of Finance, Bank of Estonia, Statistical Office of Estonia, European Commission, Statistical office of the European Communities, International Monetary Fund, World Bank, United Nations Development Programme, Bank for International Settlements, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

This is an unsolicited rating. This credit rating was not initiated at the request of the issuer.

This rating included participation by the rated entity or any related third party. DBRS Morningstar had no access to relevant internal documents for the rated entity or a related third party.

DBRS Morningstar does not audit the information it receives in connection with the rating process, and it does not and cannot independently verify that information in every instance.

Generally, the conditions that lead to the assignment of a Negative or Positive Trend are resolved within a twelve month period. DBRS Morningstar’s outlooks and ratings are under regular surveillance.

For further information on DBRS Morningstar historical default rates published by the European Securities and Markets Authority (ESMA) in a central repository, see:

Ratings assigned by DBRS Ratings Limited are subject to EU and US regulations only.

Lead Analyst: Jason Graffam, Vice President, Global Sovereign Ratings
Rating Committee Chair: Roger Lister, Managing Director, Chief Credit Officer, Global FIG and Sovereign Ratings
Initial Rating Date: July 14, 2017
Last Rating Date: May 24, 2019

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