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Estonia Country Risk Report Q1 2017

  • October 2016
  • -
  • Business Monitor International
  • -
  • 37 pages

Core Views

Elections for a new president to replace the term-limited incumbent Toomas Hendrik Ilves have become a protracted affair, leaving the country in constitutional deadlock. Once a new president is in place there are likely to be renewed calls to the election process to avoid such a protracted affair in the future. That said, Estonia's political risk indices are unchanged as the current uncertainty is unlikely to weigh on policymaking. The Estonian economy lost growth momentum in Q216 and we have revised down the country's 2016 real growth forecast to 1.6%, from 2.8% previously, to reflect recent weakness. However, the slowing headline growth rate masks some promising underlying trends in the domestically focused parts of the economy, which suggest that current weakness should prove temporary, and we forecast real GDP growth of 2.8% in 2017.

Table Of Contents

Estonia Country Risk Report Q1 2017
Executive Summary.................................................................................................................................. 5
Core Views.......................................................................................................................................................................................5
Key Risks.........................................................................................................................................................................................5
Chapter 1: Economic Outlook.................................................................................................................. 7
SWOT Analysis........................................................................................................................................................... 7
BMI Economic Risk Index.......................................................................................................................................... 7
Economic Growth Outlook........................................................................................................................................ 8
Revising Down Growth But H216 Recovery Likely......................................................................................................................8
The Estonian economy lost growth momentum in Q216 and we have revised down the country's 2016 real growth forecast to 1.6%, from
2.8% previously, to reflect recent weakness. However, the slowing headline growth rate masks some promising underlying trends in the
domestically focused parts of the economy, which suggest that current weakness should prove temporary, and we forecast real GDP
growth of 2.8% in 2017.
GDP By Expenditure Outlook.................................................................................................................................... 9
Balanced Growth Lies Ahead.........................................................................................................................................................9
Estonia will experience robust economic growth over our long-term outlook, thanks to strong levels of inward investment and domestic
savings. While the country's investment rate will not return to its pre-global financial crisis highs, growth will be more consumer-focused
in nature.
TABLE: GDP GROWTH FORECASTS....................................................................................................................................................................10
TABLE: PRIVATE CONSUMPTION FORECASTS..................................................................................................................................................10
TABLE: GOVERNMENT CONSUMPTION FORECASTS.......................................................................................................................................10
TABLE: FIXED INVESTMENT FORECASTS..........................................................................................................................................................10
TABLE: NET EXPORTS FORECASTS....................................................................................................................................................................11
Structural Fiscal Position........................................................................................................................................ 11
A Healthy Fiscal Outlook..............................................................................................................................................................11
Estonia's fiscal position will remain stable over the long term thanks to the likely continuation of fiscal prudence and measures being
taken to improve the government's revenue base. We expect the budget to post a surplus over the long term and for the public debt
ratio to remain the lowest in the eurozone.
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES.............................................................................................................................12
TABLE: FISCAL AND PUBLIC DEBT FORECASTS...............................................................................................................................................12
Outlook On External Position.................................................................................................................................. 12
External Risks Continue To Decline............................................................................................................................................12
Estonia's external position has undergone a remarkable transformation in recent years, with external indebtedness declining and the
current account flipping from a deficit to a surplus. We expect external vulnerabilities to decrease further over the next 10 years due to
strong economic growth.
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE.........................................................................................................................................13
TABLE: TOP 5 GOODS EXPORTS.........................................................................................................................................................................13
TABLE: TOP 5 GOODS IMPORTS..........................................................................................................................................................................13
Chapter 2: 10-Year Forecast................................................................................................................... 15
The Estonian Economy To 2025............................................................................................................................. 15
Trend Growth To Average Lower in 2016-2025..........................................................................................................................15
Average growth in Estonia is forecast to average 2.8% between 2016 and 2025, well below the 7.6% seen from 2001-2007. That said,
we stress that the worst effects of the 2008-2010 recession have now passed, and the economy is well-positioned for sustainable longterm
growth.
TABLE: LONG-TERM MACROECONOMIC FORECASTS..................................................................................................................................... 15
Chapter 3: Political Outlook................................................................................................................... 17
SWOT Analysis......................................................................................................................................................... 17
BMI Political Risk Index........................................................................................................................................... 17
Domestic Politics..................................................................................................................................................... 18
Constitutional Deadlock Poses Few Risks To Policy................................................................................................................18
Elections for a new president to replace the term-limited incumbent Toomas Hendrik Ilves have become a protracted affair, leaving the
country in constitutional deadlock. Once a new president is in place there are likely to be renewed calls to the election process to avoid
such a protracted affair in the future. That said, Estonia's political risk indices are unchanged as the current uncertainty is unlikely to
weigh on policymaking.
TABLE: POLITICAL OVERVIEW.............................................................................................................................................................................18
Long-Term Political Outlook................................................................................................................................... 19
Few Risks To Structural Stability................................................................................................................................................19
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 score. 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 4: Operational Risk................................................................................................................... 21
SWOT Analysis......................................................................................................................................................... 21
Operational Risk Index............................................................................................................................................ 21
Operational Risk....................................................................................................................................................... 22
TABLE: DEVELOPED STATES - LABOUR MARKET RISK...................................................................................................................................22
TABLE: DEVELOPED STATES - LOGISTICS RISK.............................................................................................................................................. 25
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK..........................................................................................................................28
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK.....................................................................................................................30
Chapter 5: BMI Global Macro Outlook................................................................................................... 33
Global Macro Outlook.............................................................................................................................................. 33
Broad Recovery But Three Notes Of Caution.............................................................................................................................33
TABLE: GLOBAL FORECASTS, 2015-2020...........................................................................................................................................................33
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %.................................................................................................................................... 34
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %................................................................................................................................... 35
TABLE: MACROECONOMIC DATA and FORECASTS..............................................................................................................................................37

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