Estonia offers safer option than France or South Korea

By:
Jeremy Weltman
Published on:

The Baltic state leapfrogged both sovereigns in the global ratings last year, making its credit ratings outdated.

Taavi Roivas-R-600
Happy times for Estonia’s prime minister Taavi Roivas, in part due to the country’s sovereign debt burden of 10% of GDP – one of the lowest of any European borrower

Amid uncertainty over China and other emerging markets, with Russia and Finland in recession, and global equities in a panic, Estonia’s country risk score reached its highest level in two years at the end of 2015, according to Euromoney’s crowd-sourcing survey.

 

On a score of 70.4 points from a maximum 100, the sovereign climbed eight places higher within the second of ECR’s five tiered categories to 22nd out of 186 countries surveyed.

That’s less than half a point behind the Czech Republic, which makes Estonia safer than France or South Korea, both of which are rated double-A credits by all three agencies.

Yet Estonia is only AA- according to Standard & Poor’s, and Moody’s and Fitch award lower ratings of A1/A+, which are stable and unlikely to be raised soon.

Not all plain sailing…

Estonia, like other Baltic states, has been buffeted by exogenous events, including the European Union trade embargo on Russia and Finland’s weak economy, dampening exports. They are two of its top-five trade partners.

GDP growth slowed last year to 1.9% in real terms, from 2.9% in 2014, as exports and investment shrank.

Last year’s mild deflation will revert to inflation in 2016 as increases in administrative prices, excise taxes and wages – and, slowly, commodity prices – feed into the consumer price index.

There are other subtle risks to take account of, too, emphasized by the falling survey scores for corruption and soft infrastructure hinting at underlying problems.

…but economy ship-shape

However, nine of Estonia’s 15 surveyed risk indicators improved through 2015. Its debt ratings and capital-access scores also rose.

Estonia is benefiting from solid economic growth in Sweden, its largest export market, and is strong enough to ride out any buffeting from the global economy.

The fiscal budget is in virtual balance, the current account in surplus and the sovereign debt burden of just 10% of GDP is one of the lowest of any European borrower.

Not all risk indicators are better than France, but on the economy it wins hands-down:

 

Yet five-year CDS spreads are presently around 65 basis points, 18 points higher than for the Czech Republic, which has worse fiscal metrics, or Slovakia, four places below Estonia in ECR’s global rankings. France is just 27bp, signalling the market is out of line.

"Unemployment in Estonia crashed to as low a level as 5.2% in Q3 2015, putting the metric at par with the US," says Tonu Palm, chief economist for Estonia at Nordea, a bank which takes part in Euromoney’s survey.

"The labour participation rate has hit an all-time high of 70.9%," he adds.

GDP growth will pick up pace this year, most economists believe. The European Commission foresees a 2.6% rise for GDP, and the IMF 2.9%.

Latvia and Lithuania are further down ECR’s rankings, in ECR’s tier three.

Lithuania climbed two places last year to 38th, Latvia also rose two to 44th, but both countries have weaker economic, political and social institutions, and long-term structural problems.

"They both have current-account deficits, higher unemployment and outflows of human capital," says Constantin Gurdgiev, adjunct professor at Trinity College Dublin.

Estonia’s credit rating on the other hand clearly lags risk trends, especially since geopolitical spill-over risks in terms of the Russia-Ukraine conflict have abated.

According to Gurdgiev: "Estonia is overdue a one-notch upgrade from all agencies due to the expectation of accelerating economic growth, an improving labour market performance, the inflation outlook and improvements in the terms of trade stemming from the euro currency devaluation."

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.