Bloomberg News

Estonia Credit Rating Raised by Fitch on Economy, Finances

July 05, 2011

(Adds S&P, Moody’s ratings in sixth paragraph, growth forecast in seventh.)

July 5 (Bloomberg) -- Estonia’s credit rating was raised by Fitch Ratings, which cited economic growth, improved public finances and the country’s adoption of the euro on Jan. 1.

The Baltic nation’s rating was raised one step to A+, the fifth-highest investment grade, with a stable outlook, Fitch said today in a statement from London. The rating is the second- highest in eastern Europe, behind the Slovenia at AA and on a par with the Czech Republic and Slovakia.

“The upgrade reflects Estonia’s solid economic growth performance, exceptionally strong public finances, declining external debt ratios and signs of increasing stabilization in the banking sector,” Michele Napolitano, a Fitch analyst, said in the statement.

Estonia’s $19 billion economy expanded 8.5 percent from a year earlier in the first quarter, the fastest growth rate in the European Union, as exports rose. The country endured the bloc’s second-deepest recession in 2008-09, behind Latvia, when gross domestic product shrank almost 20 percent.

The government implemented austerity measures equal to 9 percent of GDP in 2009, preventing the budget shortfall from ballooning and keeping the country on course to adopt the euro. Estonia had the EU’s only budget surplus, 0.1 percent of GDP, and lowest public debt, 6.6 percent, last year.

Standard & Poor’s raised its outlook on Estonia to positive from stable on April 21, indicating the company is more likely to raise the country’s rating than leave it unchanged or reduce it. S&P rates Estonia A, its sixth-highest investment grade. Moody’s Investors Service rates the country one step lower at A1, with a stable outlook.

‘V-Shaped Recovery’

Estonia’s economy may expand 4.8 percent this year and 4.2 percent in 2012, Fitch estimates.

Estonia is “experiencing a strong ‘V-shaped’ recovery” and growing “robustly without generating macroeconomic imbalances,” Fitch said in the report.

Any indication of “overheating,” including accelerating inflation or widening balance of payment imbalances, may increase the likelihood of a rating cut, the company said.

“Euro area membership has reduced markedly the risks of a balance of payment crisis as the large currency mismatches in banks’ loan portfolios have now been neutralized,” Fitch said in the statement.

Risks in the banking industry are declining, with capital adequacy ratios improving and asset quality stabilizing, Fitch said.

Credit-Default Swaps

While Estonia doesn’t have any outstanding bonds, investors trade credit-default swaps, used to speculate on a borrower’s credit worthiness, on the country’s debt. The five-year Estonian CDS trades at 85.75 basis points, compared with 85.54 for the Czech Republic, according to CMA Datavision prices.

Declining wages and prices during the crisis shows the economy’s flexibility, Fitch said.

“This flexibility is an important asset for a small country in a currency union, enabling it to adjust after a loss of competitiveness,” according to the report.

--Editors: Andrew Langley, Willy Morris

To contact the reporters on this story: Milda Seputyte in Vilnius at Aaron Eglitis in Riga at

To contact the editor responsible for this story: Balazs Penz at

The Good Business Issue
blog comments powered by Disqus