Press Release

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

July 29, 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 mitigates credit risk brought on by the pandemic and by Russia’s invasion of Ukraine. The economy contracted in 2020, although by less than most other EU countries, and rebounded significantly in 2021 despite reoccurring waves of infections and renewed restrictions. Russia’s invasion, the associated sanctions, and the rise in energy and food prices have deteriorated the 2022 outlook. The dual shocks have resulted in record inflation and deterioration in public finances. However, Estonia entered the crises with a sound fiscal position and the lowest public debt burden in the euro area. This has allowed for ample public support to the economy when necessary.

The ratings are 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. The Estonian economy will also benefit in the years to come from EU funding programmes. Conversely, Estonia’s ratings are constrained by its comparatively small and volatile economy. Income per capita 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 external shocks cause lasting economic 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.

Following Strong Economic Growth In 2021, The Outlook For 2022 Has Deteriorated

Estonia’s economy expanded by a robust 8.3% in 2021, after a comparatively mild 3.0% contraction in 2020. 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 last year. Reform to pillar-two pensions and favourable growth conditions of Estonia’s main trading partners also represented economic windfalls. However, the outlook since the start of the year has deteriorated and forced downward revisions to growth. The disruption caused by Russia’s invasion of Ukraine passes through to Estonia’s economy via higher inflation and lower consumer and business confidence. The consumer price index (CPI) increased by 21.9% in June 2022 compared to a year earlier, the highest in Europe. Since Estonia is a net importer of energy and food, the exorbitant rise in the price of electricity, gas, and basic foodstuff are the main contributors to inflation. The pass through has also meant price pressures are felt across the consumption basket. CPI net of energy and unprocessed food reached 11.7% in June 2022, well above the 8.2% average wage growth in the first quarter. Economic growth is likely to stall in the second half of the year, as the combination of depleted pandemic-related household savings and the price shock reduce real incomes and consumption. The Economic Sentiment Indicator (ESI) contracted by 12.5% year-over-year in June 2022. While the Ministry of Finance (MoF) expects a 1.0% economic contraction this year, the EC forecasts 1.6% growth in 2022 and 1.9% in 2023.

Russia’s Invasion Of Ukraine Has Thus Far Unaffected Estonia’s External Indicators

Direct trade links to Russia or Ukraine are minimal, while exports of services elsewhere, particularly in ICT, remain strong. Likewise, the terms-of-trade shock has been comparatively mild since Estonia’s shale exports benefit from higher energy prices. Following small current account deficits in 2020 and 2021, the EC forecasts surpluses in the coming years despite large inflows from Europe. The EU’s Multiannual Financial Framework 2021‑2027 (roughly 12% of 2021 GDP) and the Next Generation EU recovery plan (3.4% of GDP) together amount to a large transfer into the Estonian economy. 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 -14.6% in Q1 2022.

The Dual Crises Deteriorated Estonia’s Public Finances; Repair To Take Longer Than Previously Expected

The COVID shock drove the general government budget deficit 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 deficit recovered in 2021 to 2.4% of GDP due to the strong economic recovery and the lower take up of measures. The additional shock from Russia’s invasion of Ukraine will once again reverse the trend. The government in April 2022 approved a supplementary budget of new measures worth roughly 2.5% of GDP to help offset impacts and risks from the war. The MoF in its Quarterly Review expects new spending and lower tax revenues from weaker output to increase the deficit to 5.3% of GDP this year and only improve gradually to below 3% by 2026.

Public Debt Has Increased Rapidly; Still The Lowest In Europe

The economic contraction and the fiscal measures to manage the pandemic resulted in a 10 percentage point increase in the public debt-to-GDP ratio, from 8.6% of GDP in 2019 to 19.0% in 2020. After a marginal decline in 2021, the debt ratio is once again on the rise. The MoF expects it to reach 20.7% of GDP this year and continue its upward trajectory over the forecast period, nearly reaching 30% by 2026. Estonia nonetheless entered the COVID crisis with the lowest debt ratio in the euro area. In addition, the two reserve funds worth 6.9% of GDP in 2021 serve as a liquidity cushion.

Banking Sector Remained Resilient During The Pandemic; Russia’s Invasion Of Ukraine Poses Risks

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. Nevertheless, Russia’s invasion of Ukraine poses new risks to the financial sector, mainly due to the deteriorating domestic and external macroeconomic environments. High inflation will weigh on households’ purchasing power and put additional pressure on businesses’ costs. The majority of the banking system is foreign owned, thus risks are linked to spill overs from Nordic economies and to the economic performance of the Baltic neighbours. Despite the high uncertainty, direct links of Estonia’s financial sector with Russia are limited. The strong profitability and good capital position of the Estonian banking system mitigate risks from stressed borrowers. The CET1 ratio was 25.9% at the end of 2021. Asset quality also remains strong with the overdue loans on the corporate loan book at 0.8% and 1.3% of the household portfolio in May 2022.

The New Estonian Government Is Expected To Maintain Policy Continuity

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. In June 2022, Kallas removed coalition partner, the Centre Party, over a dispute to education reform. Kallas was then able to form a new three party coalition with a slim 52 seat majority in the 101-seat parliament. Notwithstanding the challenges associated with Russia’s invasion of Ukraine and the macroeconomic deterioration, the popularity of the Reform party surged from 22% before the war to 33% as of July 2022, according to Politico’s Poll of Polls. EU and NATO membership provide Estonia a broadly stable political environment, and DBRS Morningstar expects policy continuity. Estonia benefits from a sound political and institutional framework, reflected in its strong performance in the World Bank Governance indicators.


Social (S) Factors

Human Rights and Human Capital (S) factor affects the ratings. DBRS Morningstar considered this factor within the Economic Structure and Performance building block. Estonia’s per capita GDP is relatively low at $27,300 in 2021 compared with its euro system peers.

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 the DBRS Morningstar Criteria: Approach to Environmental, Social, and Governance Risk Factors in Credit Ratings (May 17, 2022)

The sources of information used for this rating include Ministry of Finance (State Budget Strategy 2022-2025, Stability Programme 2022), Bank of Estonia (Estonian Economy and Monetary Policy 2022/2, Financial Stability Review 2022/1), Statistical Office of Estonia, European Commission (European Economic Forecast Summer 2022), Statistical Office of the European Communities, International Monetary Fund (IMF WEO April 2022, 2022 Article IV Consultation—Press Release; and Staff Report), World Bank, Bank for International Settlements, Politico Poll of Polls, 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.

The conditions that lead to the assignment of a Negative or Positive trend are generally 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: January 28, 2022

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