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Estonia Business Forecast Report Q3 2014

  • April 2014
  • -
  • Business Monitor International
  • -
  • 42 pages

Core Views

We believe Estonia is on a sustainable growth trajectory following the deep recession brought on by the eurozone debt crisis, with economic growth to average 3.1% from 2015-2017 before gradually settling towards long-term trend growth of 2.7%. Domestic demand will be the main driver of growth over the medium term, as sluggish regional economic activity hinders faster export growth Estonia’s external accounts pose few risks to macroeconomic stability. Low current account deficits in the coming years will be comfortably financed, and will not be associated with an unsustainable build up of short-term foreign liabilities, as in the pre-financial crisis era. We maintain a positive view towards Estonia’s fiscal trajectory, with total public debt to remain the lowest in Europe by a comfortable margin.

Major Forecast Changes

We have revised down our 2014 growth forecast, from 2.8% to 2.0%, as a sluggish recovery in external demand is weighing on the short-term growth outlook. However, we continue to expect a more robust recovery in 2015, as economic recoveries in the eurozone and Nordics gain traction and begin to spur higher regional trade volumes.

Table Of Contents

Estonia Business Forecast Report Q3 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
Russia Threat To Spook Investors 8
Russia will not intervene militarily in Estonia, but Moscow is likely to use economic threats to increase political pressure on its Baltic
neighbour. The implied threat to gas supplies and trade throughput alone is sufficient to hurt investor sentiment towards Estonia. That
said, we do not expect a significant escalation in tensions among Estonia's large ethnic Russian population.
TABLE: Politics Table 8
Long-Term Political Outlook 9
Few Risks To Structural Stability Over Long Term 9
Estonia is among the most structurally stable countries in emerging markets, as reflected in its very high 84.8 (out of 100) BMI long-term
political risk rating. Having fully converged to all major multilateral European institutions (European Union, European Monetary Union
and Schengen Agreement), Estonia will continue to benefit from a strong policy anchor and high degree of institutional capacity over
the long run. The country's often fractious relationship with neighbouring Russia, undermined by domestic divisions between ethnic
Estonian and ethnic Russians, presents the one key risk to stability.
Chapter 2: Economic Outlook 11
SWOT Analysis 11
BMI Economic Risk Ratings 11
Economic Activity 12
Stronger Recovery Hinges On External Demand 12
Real GDP in Estonia will expand by 2.0% in 2014, well below its long-run potential. A sluggish recovery in export volumes will continue
to weigh on the short-term growth outlook, with strong private consumption propping up economic activity as external demand stages a
gradual recovery. As such, we are more optimistic for 2015, when we forecast real GDP growth to accelerate to 3.3%.
Balance Of Payments 14
External Account Stability Limits Macro Risks 14
Estonia's balance of payments in the coming years will be characterised by small current account deficits and stable, long-term external
financing that imply few risks to macroeconomic stability. Our optimistic outlook for Estonia's export potential implies a return to current
account surplus over a longer term time horizon.
Fiscal Policy 16
Fiscal Stance To Remain Robust Amid Coalition Shakeup 16
Despite a shake-up of Estonia's governing coalition in March, we expect conservative fiscal policy to remain high on the agenda in 2014
and 2015. While we now forecast moderately higher expenditures, deficit and debt levels are set to remain among the lowest in the
eurozone by a comfortable margin. Beyond 2015, we highlight the potential for a shift away from Estonia's flat income tax towards a
more progressive system.
Regional Monetary Policy 18
Food Prices No Threat To Policy Trajectory 18
Food price deflation has been a key driver of falling consumer price growth across emerging Europe. However, with our Commodities
team forecasting a return of modest price growth in key food items, and domestic demand growth accelerating, inflationary pressures
are set to rise once again in H214.
Regional Investment Climate 19
Macro Implications Of Ukraine Crisis 19
Even without an escalation of tensions, the Ukraine crisis will have significant macro and investment implications for Emerging Europe.
Russia's investment profile and growth potential will be the hardest hit, followed by the Baltic economies which rely heavily on Russian
import demand. From a sector perspective, the crisis will speed up the search for alternative sources of energy among Russia's western
neighbours, although some Russian exporters may benefit.
FX Forecast 21
EUR: Monetary Policy Decoupling Will Weaken The Euro 21
We expect euro strength against the dollar and on a trade-weighted basis to persist in H114. However, we continue to argue that the
economic and monetary policy cycles in the eurozone are lagging further behind peers in the US and UK, which will trigger a re-pricing
of the euro towards the end of 2014. Indeed, we believe that weak eurozone economic growth and lingering deflationary risks will spur
the European Central Bank into loosen monetary policy further.
TABLE: BMI Euro zone Curency Forecast 21
Chapter 3: 10-Year Forecast 25
The Estonian Economy to 2023 25
Trend Growth To Average Much Less In 2017-2023 25
Trend average growth in Estonia is forecast to average 2. 7% between 201 7-202 3, well below the 7.6% from 2001-2007. That said, we
stress that the worst effects of the 2008-2010 recession are now passed and the economy is well positioned for sustainable long-term
TABLE: Long -Term Macroeconomic Forecasts 25
Chapter 4: Business Environment 27
SWOT Analysis 27
BMI Business Environment Risk Ratings 27
Business Environment Outlook 28
Institutions 28
Infrastructure 30
Market Orientation 32
Table: Top Exports, 2001-2009 32
Operational Risk 33
Chapter 5: Key Sectors 35
Freight Transport 35
TABLE: Road Freight 36
TABLE: Rail Freight 36
TABLE: Maritime Freight 36
TABLE: Air Freight 36
Other Key Sectors 39
table : Telecoms Sector Key Indicators 39
table : Infrastructure Sector Key Indicators 39
table : Food and Drink Sector Key Indicators 39
table : Autos Sector Key Indicators 40
table : Pharma Sector Key Indicators 40
Chapter 6: BMI Global Assumptions 41
Global Outlook 41
Chinese Economy Under Pressure 41
Table : Global Assumptions 41
Table : Developed States , Real GDP Growt H, % 42
Table : Emerging Markets , Real GDP Growth , % 43

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