Estonia Business Forecast Report Q2 2009

Publication Date	February 2009
Publisher	Business Monitor
Product Type	Report
Pages	62
ISBN Number	not applicable
Product Code	BMI03435

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Summary

Deepest Recession Since 1992 The investment outlook for Estonia is set to deteriorate further in 2009 as the real macroeconomic and political impact of the financial crisis plays out. Alongside a deep economic contraction of - 6.4%, we expect unemployment to spike, real wage growth to fall and social instability to rise. At the core of the problem will be an economy-wide prolonged process of deleveraging which will impact the stability of the banking system and be reflected in marked reductions in new capital expenditures and industrial output. As companies wind down their leverage positions, growth is forecast to remain weak through to 2010, with real GDP expansion likely to register only 0.7%.

We have downgraded Estonia's short-term political risk rating (STPR) to 71.0 (out of 100), the lowest level recorded since the ratings series was initiated. The deep economic recession forecast for 2009 is the principal factor for the downgrade, particularly weighing on the outlook for social stability and policy continuity. Indeed, we have reduced the 'social stability' component of the STPR to just 57.5 (out of 100), while the 'policy continuity' component score has fallen to 80.0 (out of 100) after remaining at 95.0 through 2007 and 2008.

The Estonian economy is facing its worst recession since 1992, with real GDP growth forecast to come in at -6.4% in 2009. We expect widespread deleveraging throughout the economy to plunge private consumption growth to -6.0%, while the destruction of external demand will also send export growth into negative territory. Over the long term, a marked recovery is not likely until 2011 and from then on, we forecast Estonian economic growth to settle at a trend average of 4.0-5.0%.

Overdue loan ratios in the Estonian banking system spiked to 8.1% in November, according to data available at time of writing from the Bank of Estonia. The rise underpins our view that pressures are likely to build further in the domestic capital market in Estonia, as economic output contracts and bank assets are written down. The resulting weakness in the banking system will impact credit growth over the medium term, undermining investment activity and domestic consumption.

Content

Executive Summary
- Deepest Recession Since 1992
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Politics
- Political Risks To Rise With Recession
- We have lowered Estonias political risk ratings to reflect expectations of elevated social instability and policy
- shifts in 2009
- TA BLE: ESTONIA POLITICS
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- Economic Contraction To Be Worst Since 1993
- The Estonian economy is facing its worst recession since 1992, with real GDP growth forecast to come in at
- -6.4% in 2009
- TA BLE: ECONOMIC ACTIVITY
- Balance Of Payments
- Current Account Deficit To Narrow Significantly
- Amid a sharp contraction in import demand, we forecast Estonias current account deficit to fall to 4.3% of GDP in 2009
- TA BLE: BALANCE OF PAYMENTS (Euro)
- Exchange Rate Policy
- Euro-Adoption In 2012
- We hold to the view that Estonia will enter the eurozone in 2012
- TA BLE: EXCHANGE RATE POLICY
Chapter 3: 10-Year Forecast
- The Estonian Economy To 2018
- Trend Growth To Average Less In 2014-2018
- Convergence will remain the watchword for the Estonian economy over the long run. Not only do we expect the
- country to adopt the euro by 2012, but we also forecast economic growth to outstrip the eurozone average
- between 2014 and 2018
- TA BLE: Long-Term Macroeconomic Forecasts
Chapter 4: Special Report
- China
- A Seismic Upheaval In 2009?
- One of the biggest and least discussed wild cards that could rear its head in 2009 is dramatic political
- upheaval in China
- United States
- Europe
- Big Trouble For European Banks In 2009
- The deteriorating global macroeconomic outlook, high levels of leverage, and a broken business model will combine
- to spell trouble for the financial services sector in 2009
- Table: Banks Leverage Ratios
- Table: Assets As % of Home Country GDP
- Table: Assets As % of Home Country GDP When Eurozone Is Considered Home Country
- Table: Exposure As % of Total Exposure To Region
- Table: Banks Foreign Exposure (US$ mn)
- TA BLE: Exposure As % of National GDP
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- TABLE: BMI BUSINESS AND OPERATIONA L RISK RATINGS
- Institutions
- TABLE: BMI LEGAL FRAMEWORK RATINGS
- Infrastructure
- Market Orientation
- Table: Europe, FDI Annual Inflows
- TABLE: BMI TRADE RATINGS
- TABLE: TOP EXPORT DESTINATIONS
- Operational Risk
Chapter 6: Key Sectors
- Pharmaceuticals
- Table: Estonias Generics Market Indicators, 2004-2012
- Table: Estonias OT C Market Indicators, 2004-2012 (EEKmn unless otherwise stated)
Chapter 7: BMI Global Assumptions
- Global
- TABLE: GLOBAL ASSUMPTIONS
- Table: GLOBAL AND REGIONAL REAL GDP GROWTH, % chg y-o-y
- Economic Activity
- TABLE: DEVELOPED STAT ES, REAL GDP GROWTH FORECASTS
- TABLE: EMERGING MARKETS , REAL GDP GROWTH FORECASTS
- TABLE: DEVELOPED MARKET EXCHANGE RATES
- Monetary Policy
- TABLE: EMERGING MARKET EXCHANGE RATES