Estonia Business Forecast Report Q3 2009

Publication Date	May 2009
Publisher	Business Monitor
Product Type	Report
Pages	60
ISBN Number	1744-8840
Product Code	BMI03892

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Summary

Expect A 10.3% Contraction

With its high external debt load and large current account deficit, Estonia is one of the worst positioned economies in the world to weather the global financial crisis. We forecast the economy to contract by 10.3% in 2009, driven by net capital outflows and a sustained process of domestic deleveraging that will result. Core views include a substantial widening of the fiscal deficit to 7.4% of GDP, elevated political risks and a devaluation of the currency by 2010. While we caution that there are risks of a balance of payments crisis in the short term, we also forecast the current account deficit to rapidly unwind, falling to 2.1% of GDP. The rapid pace by which the country's external asymmetries are expected to fall should ensure the beginnings of a recovery by 2011.

In conjunction with a rapidly worsening economic environment, we caution that upcoming European parliament and local elections will elevate the risks of a political crisis in Estonia. Increased policy uncertainty as fiscal conditions worsen further, alongside spiralling unemployment will not only continue to reduce the government's popularity but also elevate tensions within the coalition. As a result, Estonia's short-term political risk rating has been downgraded further to 69.0.

On the back of the unprecedented 9.4% real economic contraction in Q408, we have revised down our 2009 Estonian growth forecast to -10.3%. Leading indicators suggest that aggregate demand conditions deteriorated further in Q109 and with the resulting spike in unemployment, we expect the economic contraction to accelerate through Q209. That said, we maintain that H109 will be the trough of the global recession. A combination of base effects, drawdown in inventories and tentative improvement in global capital market conditions should ensure that the pace of negative economic growth is mitigated beginning in H209. That said, the recovery will be sluggish and we do not expect a marked recovery until H210.

Fitch ratings agency cut Estonia's sovereign foreign currency issuer default rating (IDR) to 'BBB+' from 'A-' on April 8. Estonia was not the only Baltic country to receive a downgrade, with Latvia and Lithuania cut to 'BB+' and 'BBB' respectively on the same day. The reduced sovereign rating will have a negative effect on borrowing spreads in the country, thus accentuating the credit constriction which has weighed on domestic consumption since H208. Indeed, with a lower rating, the risk premium across Estonian asset classes is likely to rise, thus reducing the prospects for foreign investment. Going forward, further downgrades can be expected and we do not discount the possibility of Estonia following Latvia's lead in falling below investment grade.

Content

Executive Summary
- Expect A 10.3% Contraction
Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Ratings
- Domestic Political Outlook
- Elections To Elevate Risks Of A Political Crisis
- In conjunction with a rapidly worsening economic environment, we caution that upcoming European Parliament and
- local elections will elevate the risks of a political crisis in Estonia.
Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Ratings
- Economic Activity
- H109 To Be The Trough, But Recovery Will Be Slow
- On the back of the unprecedented 9.7% real economic contraction in Q408, we have revised down our 2009 Estonian
- growth forecast to -10.3%.
- Balance Of Payments
- External Asymmetries To Unwind Rapidly
- The double-digit contraction we expect for the Estonian economy will result in a substantial unwinding of the country's
- external asymmetries.
- Fiscal Policy
- Deficit To Fall Below 3% Of GDP
- We forecast Estonia's general government budget deficit to widen to a record 7.4% of GDP in 2009.
- Regional Outlook
- Asia 1998 vs CEE 2009-2010: CEE Will Be Worse
- While there are similar dynamics worth considering, we believe that a comparison between the Asian financial crisis
- in 1997/1998 and Central and Eastern Europe (CEE) in 2008/2009 holds only limited value.
- Regional Outlook II
- Beyond 2010: The Aftermath Of A Crisis
- In the aftermath of the CEE financial and economic crisis, we see trend growth settling at a lower rate over the long
- term, weighed down by the marked slowdown in credit expansion, continued deleveraging, and a need to correct the
- region's substantial external asymmetries.
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.
Chapter 4: Special Report
- The Outlook For Global Banking
Chapter 5: Business Environment
- SWOT Analysis
- BMI Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: Key Sectors
- Automotives
Chapter 6: BMI Global Assumptions
- Global Outlook
List of Tables
- Table: Political Overview
- Table: ECONOMIC ACTIVITY
- Table: BALANCE OF PAYMENTS (Euro)
- Table: FISCAL POLICY
- Table: ESTONIA Long -Term Macroeconomic Forecasts
- Table: LOAN -TO-DEPOSIT RATIOS, Selected States
- Table: LOAN GROWTH (% CHG Y-O-Y), Selected States
- Table: COMMERCIAL BANKING BUSINESS ENVIRONMENT RATINGS SELECTED STATES,
- Table: BMI BUSINESS AND OPERATIONAL RISK RATINGS
- Table: BMI LEGAL FRAMEWORK RATINGS
- Table: Europe, FDI Annual Inflows
- Table: BMI TRADE RATINGS
- Table: TOP EXPORT DESTINATIONS
- Table: Estonia Automotive Sector Historical Data & Forecasts
- Table: GLOBAL ASSUMPTIONS
- Table: GLOBAL ASSUMPTIONS - LONG-TERM FORECASTS
- Table: Developed States, Real GDP Growth Forecast
- Table: EMERGING MARKETS, REAL GDP GROWTH FORECAST
- Table: Commodities
- Table: GLOBAL & REGIONAL REAL GDP GROWTH