Population 1.34 million
GDP 21.417 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
2.3 |
7.6 |
3.3 |
3 |
|
Inflation (yearly average) (%)
|
3 |
5 |
4 |
3.2 |
|
Budget balance (% GDP)
|
0.4 |
1 |
-1.1 |
-0.7 |
|
Current account balance (% GDP)
|
2.9 |
2.1 |
-0.8 |
-0.5 |
|
Public debt (% GDP)
|
6.7 |
6 |
8.2 |
9.7 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Rapid growth since the late 90s thanks to vigorous reforms
- Very favourable business environment
- Development of high value-added sectors (especially electronics)
- Negligible public debt
- 17th member of the eurozone since 1 January 2011
WEAKNESSES
- Substantial private foreign debt, especially bank debt
- Contraction of working age population due to aging
- Rising youth unemployment
- Loss of export price competitiveness
Risk assessment
Consumption as driver of growth
The country held up well in 2012 against the contraction of activity in the eurozone, posting the highest growth rate in the region thanks to dynamic household consumption and investment which in 2013, will continue to drive growth. The government’s steps to support activity and boost employment in 2011 have proved effective: while unemployment hit 20% of the economically active population in 2010, at the end of 2012 it amounted to less than 10%. In 2013, this marked improvement will generate a renewed rise in household consumption facilitated by a real rise in salaries of 1.2%, of pensions of 1.8% and a revival in credit begun in 2012. Meanwhile, low interest rates will allow investment to remain dynamic. The revival in credit is, however, likely to be modest due to the extent of non-performing loans in the banks’ portfolios (mortgages) and the very bad experiences engendered by the bursting of the property bubble in 2008-2009. GDP growth will not reach its potential (4%) due to another year of recession in Europe. Nonetheless, Estonia’s neighbours and main trading partners have posted the highest growth in the region, which will allow Estonian exports to hold steady. Exports, therefore, especially capital goods, wood, textiles and chemical products will benefit from the relative good health of regional economies, namely Finland, Sweden, Russia and the Baltic countries which tap 65% of exports. Inflation stood at 4% in 2012 due to high food prices. It is expected to fall to around 3.5% in 2013 following a fall in food and oil prices. However, the total liberalisation of the electricity sector on 1 January 2013 could generate some inflationary pressure.
Sound macro-economic policy
Estonia has the lowest public debt in the eurozone (8.2% of GDP) and benefits from fiscal reserves accumulated during the boom years. In 2012, while all European Union mMember sStates were implementing austerity measures, Estonia had room to conduct an expansionary policy. The fiscal deficit remained very limited. The 2012 budget operated with a deficit above 2% of GDP in order to invest in energy saving, which will allow Estonia, in the future, to benefit from fiscal revenues based on the sale of CO2 emission rights. The government has accordingly planned to increase pensions by 5% and civil service salaries by 4.4% in 2013. These rises will result in a very low public deficit of 0.5%. Local elections in October 2013 could widen the deficit. Furthermore, the current account deficit will remain limited, as dynamic domestic demand will push imports higher than exports despite a more positive export trend than most European countries. However, foreign direct investment flows (mainly from eastern Europe) will, as in 2012, be very hard hit by European contraction and will only cover a very small portion of the current account deficit. Estonia’s external debt has fallen substantially since 2009, but has been stabilizing at around 90% of GDP since 2011. The level of debt at the end of 2013 is unlikely to change. Estonian banks have capitalisation ratios above Basel III levels and also benefit from the support of their Scandinavian parent companies, which have not been affected by the eurozone crisis. Nevertheless, the extent of the mortgage portfolios and, despite falling, the high level of non-performing loans, are weakening the banking system.
A centre-right coalition under social pressure
A centre-right coalition composed of the Reform Party (ER) and the Pro-patria Union (IRL) was re-elected in March 2011. However, growing distrust of the political class has arisen since the 2009 crisis due to the government’s austerity measures and the large-scale privatisations in many sectors (energy, aviation, and telecommunications). The former Prime Minister, Juhan Parts, current Minister of the Economy, had to face a vote of confidence in parliament in October 2012. With regard to international policy, the government aims to ease tensions with Russia over a territorial dispute dating back to the Second World War. Estonia counts on being able to rely on its integration within the European Union in order to influence its bilateral relations, especially with Russia.
