Fitch upgrades Estonia to AA-, says economy is stable

Rating agency Fitch upgraded Estonia's long-term foreign and local-currency issuer default ratings (IDRs) to AA- from A+ on Friday, adding that they expect it to remain stable at this point.

As the key rating drivers behind the upgrade Fitch named Estonia's current account surplus and "continued external deleveraging in the private sector, both of which have strengthened Estonia's external position, underpinning a strong net external creditor position equivalent to 16.6% GDP at the end of 2017 and mitigating Estonia's potential vulnerability to external shocks derived from its small size and highly open economy," the Baltic News Service reported.

"Meanwhile, despite an increase in unit labor costs, Estonia has maintained competitiveness due to a gradual shift in the tradeable sector towards higher value exports, particularly in services. For 2018-2019, Fitch forecasts an average current account surplus of 2.7% of GDP, in line with the projected median current account surplus of its AA category peers," Fitch said in the rating action.

A track record of prudent fiscal management within a credible fiscal framework has kept Estonia's public finances a key rating strength. At 8.7 percent of GDP as of late 2017, Estonia's public debt ratio is lower than that all A-rated states, and the third-lowest among its AA-rated peers after Abu Dhabi with 7.8% GDP and Macao at 0% GDP. Estonia's public debt ratio is projected to decrease further in the medium term, with Fitch forecasting a debt ratio of 7.3% by 2020.

"Following a general government deficit of 0.3% of GDP in 2017, Fitch forecasts Estonia will achieve fiscal surpluses of 0.5% of GDP and 0.3 percent of GDP in 2018 and 2019, respectively, better than Fitch expected at the time of the last review. We expect the current positive economic cycle and this year's tax reform to personal and corporate income tax to have a positive impact on government revenues in 2019," it said.

Fitch named Estonia's strong economic institutions, enhanced by its eurozone and EU membership as another key factor in the rating.

"Banking sector developments remain stable. Amid robust economic growth and low interest rates, credit activity has been strong in both the household and corporate sectors. However, lending standards have remained prudent, and borrowers' capacity good. Banks' asset quality and capitalisation are sound, with the ratio of non-performing loans now less than 1% of total loans, and Tier 1 capital ratio at 31.3%. Estonia's financial system is dominated by Nordic parent banks, which provide approximately 18% of total funding requirements of the sector. A Nordic originated external shock remains a tail risk," Fitch said.

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