Press Release

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

September 03, 2021

DBRS Ratings GmbH (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 confirmation of the Stable trends reflect DBRS Morningstar’s assessment that the risks to the ratings remain broadly balanced, even when confronted with the current crisis. The economy contracted in 2020, although by less than most other EU countries. Estonia’s stable macroeconomic policy framework allowed the government to support businesses and households. The policy measures to mitigate the impact of the pandemic resulted in a significant deterioration in public finances. However, Estonia entered the crisis with a sound fiscal position and the lowest public debt burden in the euro area. This allows for additional public support to the economy if necessary.

The ratings are also underpinned by Estonia’s membership of the European Union (EU) and the Euro area, and its strong institutions. The economy is supported by the free movement of goods and services offered by the single market that helped the economy grow by nearly 4% each year on average from 2011 to 2019, while maintaining balanced fiscal outcomes. The Estonian economy will also benefit in the years to come from generous spending at the EU level. Conversely, the ratings are constrained by structural challenges that existed prior to the pandemic. Income per capita in Estonia adjusted for purchasing power parity remains around three-quarters of the Euro area average.


The ratings could be upgraded if there is evidence of increased resilience to economic volatility inherent to Estonia’s small and open economy, or successful implementation of measures that improve income and productivity.

The ratings could be downgraded if the current external shock causes lasting material macroeconomic underperformance and permanent relaxing of fiscal discipline that over time significantly weakens Estonia’s public debt position; or if a return of excessive credit growth leads to private sector over-indebtedness and financial sector instability.


After Moderate GDP Contraction in 2020, Recovery Is Underway

The economic contraction in Estonia was less pronounced than initially anticipated and one of the lowest in Europe. Real GDP contracted by 2.9% in 2020 compared to a 6.4% drop in the euro area. High value added sectors such as information and communications technology (ICT) continued to perform well. Various service sectors such as travel and accommodation remained in negative territory. The restrictions introduced this year had a milder impact on economic activity than restrictions imposed last year, evident by strong 4.1% recovery in the first quarter of 2021 compared to a year earlier. Data from the second quarter of 2021 point to 12.9% growth year-over year.

The outlook for domestic and external demand should continue to improve due to the success of the vaccination rollout domestically as well as among its key trading partners, pent up demand and high private sector savings, and health investment prospects. The Estonian economy has already reached its pre-pandemic GDP level. The European Commission (EC) in its Summer 2021 forecast expects 4.9% real GDP growth this year and 3.8% in 2022, however, the strong performance in the first half of the year suggests growth this year could be much stronger. Large investments into Estonia by a Volkswagen subsidiary and support to households via reform to pillar-two pensions, represent economic windfalls. Looking ahead, the EU’s Multiannual Financial Framework (MFF) 2021‑2027 and the Next Generation EU recovery plan constitute additional upside risk for the Estonian economy. Taken together, the transfers amount to EUR 6.8 billion, or 2.5% of GDP.

After years of surpluses, Estonia’s current account turned to a small deficit of 0.9% of GDP in 2020, mainly due to the large import of computer software from the Volkswagen investment in the last quarter of 2020. Strong recovery of exports is expected to return the current account back to surplus this year. The current account surpluses each year since 2009 helped lower external debt and narrow the net liability international investment position, which improved from -80.0% of GDP in 2009 to -22% in Q1 2021.

Extraordinary Measures Weigh on Public Finances, But Debt Remains Modest

The Estonian government implemented various measures to respond to the COVID-19 shock, including direct spending on healthcare, tax reductions for businesses and the self-employed, the reduction of excise duties on fuel and electricity, support to the unemployment insurance fund, a worker compensation programme, and a temporary suspension of second pillar pension payments. The general government budget deficit amounted to -4.9% of GDP in 2020. The aid package also included liquidity support measures estimated at around 1.5% of GDP, although these have no immediate impact on the budget. The State Budget Strategy 2022-2025 expects a 6.0% deficit in 2021, before improving to 3.8% in 2022. DBRS Morningstar expects that because of the country’s historically conservative fiscal policy and improved growth prospects, Estonia could overperform current projections.

The public debt-to-GDP ratio has increased in 2020, due to the extraordinary measures to manage the COVID-19 shock. The ratio nonetheless remains the lowest in the euro area. The government expects in its 2021 Stability Programme debt to increase to 21.4% this year and remain above 20% over the medium term. To cover the increased financing needs, the government returned to the capital markets for the first time since 2002 and also secured loans from European supranational institutions. In addition, Estonia’s two reserve funds worth 8.1% of GDP in 2020, serve as a liquidity cushion in the current crisis.

Risks to Financial Stability are Contained

The recovery of the economy along with the strong capital position of the Estonian banking sector mitigate the risks from the COVID-19 crisis. The common equity tier 1 (CET1) capital ratio of the sector was 29.1% in Q4 2020. Bank asset quality is likely to deteriorate if the recovery is delayed. Sectors most affected by the crisis include accommodation, catering, and leisure. However, the overall impact appears limited. At the end of 2020, payment holidays covered only 3% of the corporate loan book and 2% of the household portfolio. As the majority of the banking sector is foreign owned, risks to financial stability are associated with spill overs from Nordic economies. These risks are broadly mitigated by the strong asset quality, deposit funding, and capitalisation of banks operating in Estonia.

The New Estonian Government is Expected to Maintain Policy Continuity

Estonia benefits from a sound political and institutional framework, which is also reflected in its strong performance in the World Bank Governance indicators. Kaja Kallas, leader of the Reform Party, was appointed as Prime Minister in January 2021. The new government has committed to responding to the COVID-19 crisis, strengthening the health care system, increasing R&D spending, and prioritizing green energy transition policies. Estonia is also one of the most digitally advanced countries in the world, allowing the smooth operation of the public services during the COVID-19 crisis. According to EC’s Digital Economy and Society Index (DESI) Estonia ranks first among all EU countries in Digital Public Services.


Human Rights and Human Capital (S) subfactors were among the key ESG drivers behind this rating action. Estonia’s per capita GDP is relatively low at $23,330 in 2020 compared with its euro system peers. This factor has been taken into account within the “Economic Structure and Performance” building block.

A description of how DBRS Morningstar considers ESG factors within the DBRS Morningstar analytical framework can be found in the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings at

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


For more information regarding rating methodologies and Coronavirus Disease (COVID-19), please see the following DBRS Morningstar press release:

All figures are in 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 (July 9, 2021) Other applicable methodologies include DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (February 3, 2021)

The sources of information used for this rating include Ministry of Finance (State Budget Strategy 2022-2025 Stability Programme 2021), Bank of Estonia (Estonian Economy and Monetary Policy 2/2021, Financial Stability Review), Statistical Office of Estonia, European Commission (European Economic Forecast Summer 2021, Statistical office of the European Communities, International Monetary Fund, World Bank, United Nations Development Programme, Bank for International Settlements, Johns Hopkins University Coronavirus Resource Center, European Centre for Disease Prevention and Control, Social Progress Imperative, Global Carbon Project, Haver Analytics. DBRS Morningstar considers the information available to it for the purposes of providing this rating to be of satisfactory quality.

With respect to FCA and ESMA regulations in the United Kingdom and European Union, respectively, this is an unsolicited credit rating. This credit rating was not initiated at the request of the issuer.

With Rated Entity or Related Third Party Participation: YES
With Access to Internal Documents: NO
With Access to Management: NO

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 12-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: DBRS Morningstar understands further information on DBRS Morningstar historical default rates may be published by the Financial Conduct Authority (FCA) on its webpage:

The sensitivity analysis of the relevant key rating assumptions can be found at:

This rating is endorsed by DBRS Ratings Limited for use in the United Kingdom.

Lead Analyst: Jason Graffam, Vice President, Global Sovereign Ratings
Rating Committee Chair: Nichola James, Managing Director, Global Sovereign Ratings
Initial Rating Date: July 14, 2017
Last Rating Date: March 5, 2021

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