Press Release

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

January 28, 2022

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 reflects DBRS Morningstar’s assessment that Estonia’s macroeconomic framework before the pandemic has mitigated the risks brought on by the COVID-19 crisis. The economy contracted in 2020, although by less than most other EU countries, and rebounded drastically last year in spite of reoccurring waves of infections and renewed restrictions. Estonia’s sound fiscal policies and low public debt level allowed the government to support businesses and households, which resulted in a 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 EU funding programmes. 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.


Strong Economic Recovery in 2021, Following A Moderate Contraction in 2020

Estonia’s 3.0% economic contraction in 2020 was one of the least severe in Europe and the recovery since has been rapid. GDP returned to pre-pandemic levels in the first quarter of 2021. Healthy components of domestic demand, and a strong performance of high value added sectors such as information and communications technology (ICT) and manufacturing supported the strong GDP result in 2021, measured by the European Commission (EC) to have expanded by 9.0%. Support to households via reform to pillar-two pensions and favourable growth conditions of Estonia’s main trading partners represented economic windfalls. The outlook remains strong, even while ongoing supply chain disruptions, labour shortages, and rising price pressure pose downside risks to growth. The EC forecasts 3.7% growth in 2022 and 3.5% in 2023.

Following current account surpluses each year since 2013, Estonia recorded small deficits in 2020 and 2021. The IMF forecasts current account deficits in the years to come in part due to large inflows from Europe. The EU’s Multiannual Financial Framework (MFF) 2021‑2027 and the Next Generation EU recovery plan together amount to a transfer into the Estonian economy of EUR 6.8 billion, or 2.5% of GDP. The strong savings position over the last decade helped lower external debt and narrow the net liability international investment position, which improved from -80.0% of GDP in 2009 to -23.5% in Q3 2021.

Estonia’s General Government Debt To GDP Ratio Remains The Lowest In The Euro Area

The support measures to households and businesses and the decline in tax revenues led to a deterioration in public finances in 2020. The general government budget deficit amounted to 5.6% of GDP in 2020. Public support included spending on healthcare, tax reductions, support to businesses and to the unemployment insurance fund, a worker compensation programme, and a temporary suspension of second pillar pension payments. The strong economic recovery and the lower take up of measures in 2021 is expected to result in a lower 3.3% of GDP deficit. The 2022 Budget forecasts a 2.2% deficit this year. Estonia’s historically conservative fiscal policy and strong growth prospects suggest a gradual medium-term strengthening of Estonia’s fiscal position.

Due to the extraordinary measures to manage the COVID-19 shock and the economic contraction, the public debt-to-GDP ratio increased to 19.0% in 2020 – a roughly 10 percentage points increase from 2019. Strong nominal growth in 2021 will result in a small decline in the debt ratio to 17.7%. The Government expects the debt to GDP ratio to increase slightly in 2022, although remaining under 20%, before reverting back to its downward trend. COVID crisis notwithstanding, Estonia’s debt ratio remains the lowest in the euro area. In addition, the two reserve funds worth around 7% of GDP in 2021 serve as a liquidity cushion and point to an even stronger net debt position.

Price Pressures Increased In 2020; Strong Banking Sector Metrics Before The Pandemic

Drastic increases in energy prices and supply chain bottlenecks resulted in a 12.2% year-over-year inflation rate in December 2021. The rising cost of energy will continue to exert strong near-term price pressure. However, DBRS Morningstar has taken the view that recent inflationary pressures in Estonia and across Europe will dissipate over time, as base effects fade, as economic support measures wind down, and as consumers and producers alike adjust to the post-pandemic reality. This view is consistent with forecasts from Estonia’s central bank, which expects inflation in Estonia to peak in the first half of 2022 before moderating in the years to come.

The recovery of the economy along with Estonia’s strong banking sector metrics before the pandemic have helped contain the consequences of the pandemic on financial stability. Bank profitability has been only moderately affected and capital positions remain strong. The banking sector’s common equity tier 1 (CET1) capital ratio was 29.3% in the second quarter of 2021. The adverse effects on bank asset quality has also been limited. In Summer 2021, overdue loans on the corporate loan book stood at 1.2% and 1.3% of the household portfolio. Furthermore, less than 2% of the loan portfolio was under moratoria, down from 11% in the year before. Sectors most affected by the crisis include accommodation, catering, and leisure. With the majority of the banking system foreign owned, risks to financial stability are associated with spill overs from Nordic economies.

A Year Into Its Term, The New Estonian Government Has Maintained 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 with a mandate to strengthen the healthcare system, increase R&D spending, and prioritize 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. Despite recent regional geopolitical tensions, EU and NATO membership provide Estonia a broadly stable political environment.


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 $27,101 in 2021 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.


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 Autumn 2021), Statistical Office of the European Communities, International Monetary Fund (IMF WEO October 2021, 2021 Article IV Consultation—Press Release; and Staff Report), World Bank, 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: September 3, 2021

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