The international rating agency, Fitch, has affirmed Estonia’s long-term foreign and local-currency issuer default ratings at A+ with a positive outlook.
Improved business sentiment, high wage growth and positive employment growth support a continuation in broad-based growth, with Fitch projecting Estonia to grow 4.0% in 2018 and 3.5% in 2019, the Estonian Finance Ministry said.
While strong domestic demand has contributed to inflation above the peer group average and strong credit growth, Estonia’s track record of conservative fiscal policy and strengthened macro-prudential supervision will help limit the risk of significant economic imbalances, the ministry added.
The inflation rate reached 3.7% in 2017 from 0.8% in 2016, with the impact of increases in excise duties on alcohol, tobacco, fuels and gas contributing significantly.
Skills mismatches remain a problem
Estonia has benefited from positive net immigration in recent years, stabilising population growth. Combined with the government’s work capacity reform program, this has increased labour market participation, but skills mismatches remain a problem. Although productivity growth has improved since 2016 and outpaced the rise in labour costs in 2017, upward pressure on unit labour costs is likely to persist due to rising wages.
Estonia is expected to maintain modest budget deficits in 2018 and 2019, averaging 0.2% of GDP. The government’s expenditure will increase in areas of education and healthcare.
Fitch raised the sovereign rating of Estonia to A+ in July 2011. The neutral outlook on the rating was upgraded to positive in November 2017.