International credit rating agency Fitch Ratings (Fitch) has downgraded Estonia’s long-term rating from AA- to A+ with a stable future outlook, adding that the downgrade reflects the deterioration of the country’s financial state.
The agency predicts the general government debt will have increased to 21.1% of GDP by the end of 2023. The debt is expected to growth in the medium-term as well, despite the fiscal consolidation measures imposed in June.
Although the debt-to-GDP ratio will remain low (compared with comparable countries’ average index, it is 54%), it is still more than twice as large as 8.2% in 2018. That time Fitch upgraded Estonia’s credit rating to AA- and predicted the debt-to-GDP ratio would be stable.
This reflects a weakening of the historically strong fiscal stance,
exacerbated by the consequences of the war in Ukraine and the pandemic, the agency notes.
“Fitch’s decision to downgrade Estonia’s rating means the budget deficit’s financing using loans may become more expensive than before,” admits Estonia’s Minister of Finance Mart Võrklaev.
“If we don’t want higher interest payments, we have to put in more effort into reducing deficit and limiting the growth of debts. This is why we have presented several tax changes. We are also actively looking for ways to reduce costs in the state sector. Soon talks about the budget will commence. Ministries have submitted proposals for reduction of costs in their respective sectors. They cannot propose any additional requests,” adds the minister.
Fitch predicts this year Estonia’s fiscal deficit will be at 3.6% of GDP, considering good results in the first five months and the latest restrictions imposed on government expenditures. After that the deficit should drop to 2.6% in 2024 and 2% in 2025 thanks to the new revenue increase measures.
Fitch predicts that
Estonia’s economy will drop by 1.6% of GDP this year.
Next year Fitch predicts 3.5% growth. Inflation is down, and in June it was 9.2%, when compared with the peak reached in August 2022 (25.2%), according to Fitch. The agency predicts that inflation will have dropped to approximately 5% by the end of the year. The average annual inflation is expected to reach 9.7%.
Factors that could contribute to the rating potentially deteriorating further, according to Fitch, include substantial and sustained increase in the general government debt relative to GDP, a structural deterioration in the medium-term growth outlook and a significant increase in geopolitical risks that would adversely affect economic growth and fiscal policy.
This week Fitch maintained Latvia’s credit rating at A-. At the same time, the country’s future credit rating outlook was changed from stable to positive.
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