Country Report Estonia April 2009

Outlook for 2009-10

• Strains within the ruling coalition are likely to deepen over the next two years, possibly threatening its stability. Continuing conflicts over fiscal policy will exacerbate tensions.
• Political relations with Russia will remain tense, and this will have an adverse effect on Estonia's oil transit business. However, this is unlikely to have a significant impact on the economy overall.
• The economic slowdown will lead to a shortfall in tax receipts in 2009. The general government budget deficit is set to exceed the Maastricht limit of 3% of GDP in 2009, but we expect it to fall back to 2.9% of GDP in 2010.
• A sharper than previously expected contraction in domestic demand and much poorer export prospects are forecast to cause real GDP to fall by 10% in 2009 and by 2.5% in 2010.
• Weaker cost pressures and lower commodity prices will bring inflation down from 10.4% in 2008 to an annual average of less than 1% in 2009-10.
• As domestic demand weakens, the current-account deficit is set to narrow sharply, from 9.4% of GDP in 2008 to less than 2% of GDP in 2010.

Monthly review

• Controversial plans by Tallinn city council to redraw electoral boundaries have led to continuing political manoeuvring, with parliament repeatedly attempting to push through legislation that would outlaw such a move.
• Against the background of continuing speculation about the stability of the currency board, the government has announced that it is targeting euro adoption in January 2011.
• The Ministry of Finance expects the 2009 budget deficit to meet the Maastricht deficit criterion for euro adoption, but has highlighted downside risks and warned that further expenditure cuts may be necessary.
• The prime minister, Andrus Ansip, has ruled out the possibility of a further supplementary budget, and intends to reduce government expenditure by suspending payments to the second-pillar pension scheme.
• Real GDP contracted by 9.7% in the fourth quarter of 2008, bringing the fall in GDP for the year to 3.6%. Private consumption slowed sharply in the fourth quarter, and retail sales data suggest an even sharper fall in early 2009.
• The current-account deficit contracted by 71% year on year in US dollar terms in the fourth quarter. The deficit for 2008 narrowed to 9.4% of GDP from 18.1% in 2007. Initial estimates point to a sharper contraction in January 2009.