Exports affected by crisis in Russia but economic fundamentals remain strong

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euler hermes
euler hermes

General Information

GDP USD25.9bn (World ranking 104, World Bank 2014)
Population 1.31 million (World ranking 154, World Bank 2014)
Form of state Parliamentary Republic
Head of government Taavi ROIVAS
Next elections 2016, presidential

Country Rating AA1euler hermes


  • Low systemic political risk
  • Good regional and international relations (except with Russia), EU membership
  • One of the most open and liberal economies in the world
  • Eurozone membership provides for low transfer and convertibility risk
  • Healthy public finances
  • Strong business environment, supported by stable institutions and an independent judiciary


  • High gross external debt
  • Trade and energy dependence on Russia

Economic Overview


Growth affected by Russia crisis

Following the financial crisis and deep recession in 2008-2009, the Estonian economy rebounded strongly and showed resilience to the Eurozone crisis that emerged at end-2009, growing by an average annual +4% in 2010-2014, clearly outpacing the rest of the Eurozone. In 2014, however, external trade activity decelerated markedly as a result of sanctions on and the economic slowdown in Russia, but thanks to a strong inventory build-up (adding +2.5pps) annual real GDP still grew by +2.9%.

In 2015, the negative impact of the crisis in Russia has intensified. Real GDP contracted by -0.8% q/q in Q1, followed by +0.6% q/q growth in Q2 and another decline by -0.4% q/q in Q3. On a y/y basis in the first three quarters, real exports contracted by -0.8% and real imports by -2.2%. The latter mainly reflects a sharp drop in fixed investment by -7.1% and strong inventory de-stocking which subtracted -2.6pps from overall y/y GDP growth. Thanks to continued robust expansion of private consumption (+5.1% y/y) and public spending (+1.6% y/y), the economy still grew by +1.3% y/y in Q1-Q3. Euler Hermes expects a relatively weak Q4 and full-year growth of +1.1% in 2015. The negative impact from Russia should fade next year as trade with the eastern neighbour should stabilise, such that a moderate recovery with average annual economic growth of around +2.5% is forecast in 2016-2017. 


Deflation to fade gradually in 2016

Headline consumer price inflation has been in deflationary territory since June 2014 – except for May 2015 – and stood at -0.2% y/y in November 2015. Deflation has been mainly driven by sharply falling energy costs as well as lower food prices. As the effect of low oil and energy prices will wane in 2016, deflation should give way to positive inflation in the next quarters. Euler Hermes projects inflation to reach about 1% at end-2016.

Public finances to remain favourable

Estonia has had a long-lasting commitment to budget¬ary prudence, reflected in many years of large fiscal surpluses. But in the wake of the economic downturn in 2008 the fiscal account shifted into a deficit of -2.9% of GDP. Thanks to sharp fiscal tightening, the government achieved a remarkably low -1.9% of GDP fiscal deficit in 2009, despite the steep -14.3% contraction of GDP which eroded the tax base. Thanks to sizeable sales of so-called "Kyoto units" (representing an allowance to emit greenhouse gases), the fiscal balance shifted to small surpluses in 2010 and 2011, before it moved back into small deficits in 2012 and 2013. A fiscal surplus of +0.7% of GDP was achieved in 2014. As a result of the growth slowdown, the annual fiscal account is forecast to move to near zero in 2015-2016.

Gross public debt has remained very low, estimated at just above 10% of GDP currently, and the government has remained a net external creditor.

Eurozone membership is beneficial

Estonia joined the Eurozone at the start of 2011. While monetary policy is now conducted by the European Central Bank (ECB), membership of the Euro¬zone provides for low transfer and convertibility risk and has substan¬tially decreased external vulnerabilities related to exchange rate risk.


Export growth hit by Russia crisis ...

The Baltic States are more vulnerable to disruptions to export flows to Russia than other EU countries because their share of exports to Russia in total exports is much higher: 21% for Lithuania, 15% for Latvia and 10% for Estonia in 2014, as compared to an average 4% for the 11 EU members in Central Europe or just 2% for the whole EU. In H1 2015, nominal exports of goods to Russia dropped the most in Estonia, by -42% y/y. This caused total nominal exports of goods to decline by -2%.

... but current account surplus to remain

Following moderate annual deficits of -2.8% of GDP in 2012 and -0.1% in 2013, the current account swung to a +1.2% of GDP surplus in 2014, as the moderation in import growth was stronger than in exports. Since this pattern has continued in 2015 –nominal imports of goods and services contracted  by -4.2% y/y in Q1-Q3, nominal exports of goods and services by -2.9% y/y – Euler Hermes expects the current account surplus to widen further in 2015. A surplus should be retained in 2016-2017 but is forecast to narrow gradually as import growth is likely to gain momentum following two years of substantial declines in investment.

External debt is high but manageable

Gross external debt stood at EUR20bn in Q2 2015. This was still relatively high in relation to GDP (approxi­mately 100%), however, that ratio has improved from a peak of 122% in 2009. Moreover, external assets have increased substantially in recent years and reached EUR21bn in Q2 2015, i.e. Estonia has become a net external creditor. Around 46% of gross external debt is short-term.

Last review: 21/12/2015