Growth is set to slow but fundamentals remain strong


LOW RISK for entreprise

  • Economic risk

  • Business environment risk

  • Political risk

  • Commercial risk

  • Financing risk

GDP USD30.3bn (World ranking 101, World Bank 2018)
Population 1.32mn (World ranking 153, World Bank 2018)
Form of state Parliamentary Republic
Head of government Juri RATAS (Prime Minister)
Next elections 2021, presidential
  • 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

Strong investment drives growth but is gradually easing

Economic growth in Estonia has been strong in the past three years, with real GDP expanding by +5.7% in 2017, +4.8% in 2018 and an average +4.3% y/y in the first three quarters of 2019. The favorable performance has been mainly driven by robust private consumption (average annual +3.2%) and rapid investment growth (+9.5%). Private consumption has been supported by a lasting improvement in purchasing power on the back of solid employment growth and declining unemployment, as well as strong wage growth amid a tightening labor market. Investment spending has benefited from EU-funded projects entering the implementation phase during the past few years. Meanwhile, external trade activity gradually gained momentum in 2017-2019 as the adverse effects of the Russia crisis in 2015-2016 faded and any negative impact from slowing Eurozone demand in 2019 remained limited. In the first three quarters of 2019, real exports increased by +5.7% y/y, outpacing import expansion at +4.6%, so that net exports added +1pp to growth in that period.

Going forward, investment growth is forecast to remain strong but to moderate somewhat as EU-funded projects will begin to mature and base effects from the strong rise in 2019 will materialize. Consumer spending is likely to remain robust but should ease somewhat as employment growth is nearing its limits. External trade activity is forecast to lose some momentum in 2020 due to slowing demand from the Eurozone before picking up again in 2021. Overall, we forecast average annual real GDP growth in Estonia to decelerate to around +3% in in 2020-2021.

Sound economic policies

Estonia has been a member of the Eurozone since 2011 and thus monetary policy is conducted by the European Central Bank (ECB), which provides for low transfer and convertibility risk and has substan­tially decreased external vulnerabilities related to exchange rate risk. The ultra-loose monetary policy of the ECB, combined with strong wage growth in Estonia (+7.0% in 2017, +7.5% in 2018), pushed consumer price inflation to an average 3.7% in 2017 and 3.4% in 2018, well above the ECB’s “just below 2.0%” inflation target. Hence, Estonia in principle needed a somewhat tighter monetary policy. Yet, inflation fell back to an average 2.3% in 2019 – even though wage growth remained strong at +7.8% y/y in Q1-Q3 2019 – and we expect it to remain in check at just over 2.0% in 2020-2021 owing to slightly weakening domestic demand.

Estonia’s public finances remain favorable. Euler Hermes expects small annual fiscal deficits of around -0.2% of GDP in 2020-2021 and public debt should remain very low at about 8% of GDP.

Continued current account surpluses but external debt remains elevated

Estonia’s current account balance is favorable as well. Annual surpluses have been recorded since 2013, with the one in 2019 estimated at +1.5% of GDP. As energy prices are expected to pick up moderately, the annual surplus is forecast to narrow to around +1% of GDP in 2020-2021.

Gross external debt remains the weak spot. It soared to an alarming level of 125% of GDP in 2009, built up by earlier large current account deficits. The ratio has since fallen to around 74% and is forecast to reach 70% in 2021. Despite the positive trajectory, this is still a relatively high ratio as compared to peers and thus requires monitoring.

Trade structure by destination/origin

(% of total)

Exports Rank Imports
12% Finland
Finland 13%
11% Germany
Russian Federation 13%
11% Russian Federation
Latvia 9%
7% Latvia
Lithuania 5%
7% Poland

Trade structure by product

(% of total)

Exports Rank Imports
Telecommunications Equipment 12%
12% Refined Petroleum Products
Crude Oil 6%
6% Telecommunications Equipment
Electrical Apparatus 6%
6% Electrical Apparatus
Refined Petroleum Products 6%
4% Cars and Cycles
Non-Edible Agricultural Prod. 4%
4% Plastic Articles

  • Low

  • Medium

  • Sensitive

  • High

  • Payments

  • Court proceedings

  • Insolvency proceedings


Contact Euler Hermes

Economic Research Team

Country Risk Analyst:

Manfred Stamer      

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