Estonia Business Forecast Report Q2 2008

Publication Date	February 2008
Publisher	Business Monitor
Product Type	Report
Pages	51
ISBN Number	1750-211X
Product Code	BMI01240

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Summary

Soft Landing Ahead?
Estonia's economy slowed by a little more than expected in Q307, alleviating - but not eradicating - concerns that it could be headed for a hard landing. Real GDP growth eased to a four-year low of 6.4% y-o-y down from 7.6%, in Q2, owing to a sharp deceleration in domestic demand growth and a contraction in exports. BMI expects the economy to lose further momentum in the short term and we expect real GDP growth to decline to 4 .6% in 2008 from an estimated 7.3% in 2007. With a soft landing not yet assured, the Bank of Estonia has urged the government to be prepared to cut spending if tax revenues increase by less than planned in 2008. The central bank has called on the government to keep the budget in a surplus of at least 2% of GDP, rather than loosening policy in line with its budget target of 1.3%.

Borrowing costs are increasing, credit standards have been tightened, loan growth is slowing and the property market has begun to turn down. Moreover, rising unit labour costs and weaker demand are beginning to take their toll on corporate profitability. A key downside risk going forward is that Estonians will overreact as economic activity slows, and cut their spending by much more than we expect, resulting in a deeper and more protracted downturn.

The slowdown in the economy has yet to have a significant impact on inflation, which continued to climb in the final months of 2007. The annual rate of consumer price inflation reached 9.6% in December, and is expected to climb higher in the early part of 2008 in response to hikes in excise tax rates and some administered price adjustments. However, weakening domestic demand and favourable base effects should help to drive the headline rate lower in the final months of the year and during 2009.

While the three-party coalition government is currently stable and reasonably popular, its cohesiveness is likely to be put to the test as the economy slows and job insecurity increases. The economy minister has already criticised the prime minister for his handling of the economy during his first term in office and the blame game could intensify should the economic mood sour. The political cycle is more favourable for the government than the economic cycle. Parliamentary elections are not due until 2011 by which time the hope is that the economy would have recovered and inflation would have returned to sufficiently low levels to make euro adoption possible.

Content

Executive Summary
Soft Landing Ahead?
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Ratings
Domestic Politics
The Personal And The Political
The three-party coalition government is currently stable and reasonably popular. That said, we believe that
coalition stability is likely to be put to the test as concerns of slowing economic growth and job insecurity increases.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Ratings
Economic Activity
Economy To Slow Further In 2008
We believe that Estonia's economy will slow further in 2008, though macroeconomic imbalances and balance
sheet weaknesses will leave it vulnerable to shocks.
Monetary Policy
Inflation To Remain Elevated During H108
Inflation picked up towards the end of 2007, but weakening domestic demand and favourable base effects
should help to drive the headline rate lower in the final months of the year and in 2009.
Fiscal Policy
A Bigger Surplus Needed?
We believe that owing to robust revenue collection and responsible government expenditures, fiscal policy
remains solid from a sustainability perspective.
Chapter 3: Special Report
Looking Beyond 2008
US: The Rebalancing Act
Unwinding The Imbalances
We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
China: What If We're All Wrong?
Our Core Scenario For China
We are retaining our positive headline growth projections for China across the forecast period to 2012, with
our expectations of the continued success of the urbanisation process and export-driven growth model
underpinning our assumptions.
Japan: Immigration Key To Long-Term Growth
Demographic Woes Portend Long-Term Decline
Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Business Monitor International Ltd
Estonia Q2 2008
Chapter 4: Business Environment
SWOT Analysis
BMI Business Environment Risk Ratings
Business Environment Outlook
Institutions
Infrastructure
Market Orientation
Tax
Operational Risk
Chapter 5: Key Sectors
Telecommunications Report
Executive Summary
BMI remains doubtful as to whether ProGroup Holdings will proceed with a 3G service launch anytime soon.
Market Data Analysis
Internet
Mobile
Industry Forecast Scenario
Industry Forecast
Industry Forecast
Market Overview
List of Tables
- Table: Estonian Cabinet & Other Key Posts (as of January 2008)
- Table: Economic Activity
- Table: Monetary Policy
- Table: Fiscal Policy
- Table: BMI Business And Operational Risk Ratings
- Table: BMI Legal Framework Ratings
- Table: Emerging Europe FDI
- Table: BMI Trade Ratings
- Table: Top Export Destinations
Table - Estonian Telecoms Sector Internet Historical Data & Forecasts

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Product features / use

Scope	Expert Insight/Opinion
Level	General Industry Strategies
Data	Detailed Market Forecasts
Profiles	Profiles of Key Companies
Features	Contains SWOT Analysis
Extra Info	Consumer Trends Highlighted