Country Report Estonia October 2009

Outlook for 2010-11

• 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.
• Based on current poll ratings, opposition parties seem the most likely to be able to form a coalition after the parliamentary election that is due in 2011.
• Political relations with Russia will remain tense, which will have an adverse effect on the Estonian oil transit business.
• The Economist Intelligence Unit's central scenario is that the government will meet the Maastricht criterion for a budget deficit no higher than 3% of GDP only in 2010, although even this is subject to considerable doubt.
• A continued fall in domestic demand and poor export prospects are forecast to cause real GDP to drop by a further 3% in 2010, following an estimated contraction of 13% in 2009. The economy will recover slowly from 2011.
• Higher global commodity prices will push up inflation to an annual average of 0.8% in 2010, following deflation of an estimated 0.4% in 2009. A rise in domestic demand will again push up inflation slightly in 2011.
• The current account is forecast to remain in surplus in 2010, although the surplus will narrow from an estimated 5.8% of GDP in 2009. A pick-up in import costs and income debits will erode the surplus further in 2011.

Monthly review

• The campaign for the local elections to be held on October 18th has been slow to gather pace. The parties are packing the candidate lists with "showcase" candidates who are unlikely to take up their seats.
• The state budget registered a slight improvement in August, with the deficit for the first eight months of 2009 falling to EEK3.7bn (US$320m), from EEK4.1bn in January-July.
• The government has agreed on further spending cuts, but is struggling to cut the deficits on the Unemployment Insurance Fund and the Health Insurance Fund, with the two facing a combined full-year deficit of EEK2bn (US$174m).
• GDP contracted by 16.1% year on year in the second quarter of 2009, faster than the 15% recorded in the first quarter. Domestic demand is the main driver of the contraction, with private consumption down by 20% year on year.
• The decline in wages that began in the first quarter has accelerated, with nominal monthly gross wages down by 4.4% year on year in April-June.
• The current account recorded a surplus of 4.9% of GDP in April-June, compared with a deficit of 9.7% of GDP in the year-earlier period.

Source: Country Report