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Estonia Country Risk Reports Q2 2015

Estonia Country Risk Reports Q2 2015

Core Views

Following a transition to surplus in Q214, Estonia’s current account will again move into deficit in 2015-2016 as domestic demand causes imports to recover. This small current account deficit will not pose a threat to economic stability as we expect foreign direct investment in Estonia to sufficiently cover this deficit.

Economic growth is beginning to accelerate once more in Estonia and we expect a return to a higher GDP growth rate during 2015- 2016. Increased economic activity will be supported by consumer spending and private consumption. In the near-term we expect public spending and net exports to make a reduced contribution to growth.

In order to aid growth we expect the government to slightly increase public spending. However, given the country’s overall fiscal position this does not constitute an investment risk as it has significant room to expand spending while keeping its budget deficit and public debt in line with EU limits.

The political landscape of Estonia will remain stable following the March 2015 general election. Given the likelihood of the centre-right Reform Party remaining in power as senior coalition partner we feel its influence will direct policy in a similar direction to previous years.

Arenewed coalition with the Social Democrats may result in higher government spending but we do not expect this to pose a risk to Estonia’s strong fiscal record.


Executive Summary
Core Views
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Policy Continuation Expected Following Election
The political landscape of Estonia will not drastically alter following the March 2015 general election. Given the likelihood of the
governing centre-right Reform Party retaining its place as senior coalition partner we feel its influence will direct policy in a similar
direction to previous years. Partnering again with the Social Democrats may result in looser fiscal policy but not a significant
deviation.
table: Political Overview
Long-Term Political Outlook
Few Risks To Structural Stability Over Long Term
Estonia is among the most structurally stable countries in emerging markets, as reflected in its very high 84.8 (out of 100) BMI longterm
political risk index. Having fully converged to all major multilateral European institutions (the EU, 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.
Regional Political Outlook
EU Headed For Fresh Political Crises
The rise of far-left, far-right and other anti-establishment parties will cause significant problems for EU policymakers over the next few
years. While most of these non-traditional parties are unlikely to win power, mainstream parties will adopt some of their rhetoric to woo
their supporters. This means less progress trimming budget deficits in the eurozone periphery and more opposition to the EU's freedom
of movement for workers principle in Western Europe. Alongside the region's stuttering economy and perceived ineptitude dealing with
the Ukraine crisis over Russia, the EU's waning credibility suggests that existential threats to the eurozone could be the most significant
since 2012 over the next few years.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Recovery To Continue Despite External Conditions
We expect Estonia to return to a higher GDP growth rate during 2015-2016. Growth will be supported mostly by increased private
consumption, while contributions from government spending and net exports will fall.
Table: Economic Acti vit y
Fiscal Policy
Widening Deficit Still Not A Threat To Overall Position
In light of the weaker economic outlook, the government will slightly increase public spending and we forecast Estonia's nominal budget
deficit to reach 0.6% of GDP in 2015, slightly exceeding government projections of 0.5%. Debt-to-GDP peaked during 2014 and is now
set to decrease going forward. Despite deviating slightly from budgetary objectives Estonia looks set to remain fiscally sound over the
course of 2015-2016.
Table: Fiscal Policy
Balance Of Payments
Surplus Declining: Return To Deficit Likely In Near Future
Following a transition to surplus in Q214, Estonia's current account will again move into deficit in 2015-2016 as imports recover.
Small current account deficits will be manageable in the years to come given our positive outlook for foreign direct investment in
Estonia.
Table: Balance Of Payments
Regional Monetary Policy
Q&A On ECB QE
Table: Europea n Central Bank – Capita l Key for Eurozone Members
Chapter 3: 10-Year Forecast
The Estonian Economy To 2024
Trend Growth To Average Lower In 2018-2024
Trend average growth in Estonia is forecast to average 2.7% between 2018-2024, 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
growth.
Table: Long-Term Macr oec onomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
tABLE: Developed States – Lab our Mar ket Ris k
Table: Developed States – Logistics Risk
Table: Developed States – Crime & Security Ris k
Table: Developed States – Trade & Investme nt Ris k
Chapter 5: Key Sectors
Autos
Table: Aut os Tota l Mar ket – Hist orica l Data & Forecasts
Table: Motorc ycle Mar ket – Hist orica l Data & Forecasts
Food & Drink
Table: Food Consumpti on Indicators – Hist orica l Data & Forecasts
Table: Alcoholic Dri nks Va lue /Volume Sales , Producti on & Trade – Hist orica l Data & Forecasts
Table: Mas Grocer y Retai l Sales By Format – Hist orica l Data & Forecasts
Other Key Sectors
Table: Pharma Sector Key Indicators
Table: Telec oms Sector Key Indicators
Table: Infrastructure Sector Key Indicators
Table: Freight Key Indicators
Chapter 6: BMI Global Assumptions
Global Outlook
New Era For Oil
Table: Globa l Assumptions
Table: Developed States , Rea l GDP Growt H, %
Table: BMI VERSUS BLO MBERG CON SENSUS REAL GDP GROWTH FORECASTS, %
Table: Emergi ng Mar kets , Rea l GDP Growth , %

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