Country Report Estonia July 2009

Outlook for 2009-10

• The current minority administration is highly unlikely to last out the forecast period. Conflicts with the opposition over fiscal policy will threaten its survival, possibly leading to a pre-term election.
• Political relations with Russia will remain tense, and this will have an adverse effect on the Estonian oil transit business.
• The economic downturn will lead to a shortfall in tax receipts in 2009. Spending pressures will remain high, despite continuing adjustments to budget expenditure plans.
• The budget deficit is set to exceed the Maastricht limit of 3% of GDP in 2009; we forecast that it will reach 3.7% of GDP. Our central scenario is that the 3% of GDP target will be met in 2010, but even this is subject to considerable doubt.
• A sharp contraction in domestic demand and poor export prospects are forecast to cause real GDP to fall by 13% in 2009 and by 3% in 2010.
• Weaker cost pressures and lower commodity prices will bring inflation down from 10.4% in 2008 to an annual average of just over 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 3% of GDP in 2010.

Monthly review

• The election to the European Parliament in June 2009 resulted in a steep drop in support for the ruling parties, which lost support to an independent candidate. The opposition Centre Party won the most votes.
• In June the minority administration succeeded in winning parliamentary approval for a further budget revision. In an attempt to boost revenue, the rate of value-added tax (VAT) is to increase from 18% to 20% from July 1st.
• The financial sector continues to suffer from the recession, with non-performing loans (NPLs) accounting for almost 3% of the total loan stock in April, compared with less than 1% in April 2008.
• Revised figures for the first quarter of 2009 show a contraction in real GDP of 15.1% year on year (compared with 15.6% in the initial estimate). Private consumption fell by 16.9% and fixed investment spending fell by 26.6%.
• Gross value added (GVA) in the manufacturing sector fell by almost 30% year on year in the first quarter. Export-oriented sectors were the worst hit, particularly wood products, machinery and electrical equipment.
• In January-March 2009 the current account was almost in balance, compared with a deficit of 16.4% of GDP in the year-earlier period. The trade deficit shrank by two-thirds.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37;60
NAICS Code: 336;52