Estonia’s Rating Affirmed by Fitch Amid Economic Recovery

Estonia’s credit rating was affirmed by Fitch Ratings, which cited the Baltic country’s balanced economic recovery since it adopted the euro almost 1 1/2 years ago and its companies’ lower dependence on external financing.

The Baltic nation’s long-term foreign and local-currency bond rating was kept at A+, the fifth-highest investment grade, with a stable outlook, Fitch said today in an e-mailed statement from London. The rating is on par with fellow euro-area member Slovakia.

Estonia’s $19 billion economy may expand 1.7 percent this year following the European Union’s fastest growth pace of 7.6 percent last year, the Finance Ministry forecast last month. The newest euro-area member faces ebbing demand for its electronics and metals exports in Sweden and Finland as Europe’s debt crisis deepens.

The rating decision reflects “the country’s near seamless transition to full membership of the euro zone starting on 1 January 2011, coupled with a more balanced economic recovery and the continued deleveraging of the private sector,” Paul Rawkins, a London-based senior director at the ratings company, said in the statement. Still, “the economy continues to display a high level of volatility, while the risk of contagion associated with a potential Greek exit from the euro zone clouds the near term outlook.”

Budget Surpluses

Estonia was the only euro-area member to report budget surpluses for the last two years and had the lowest public debt among the region’s 17 members in 2011 at 6 percent of gross domestic product. Still, debt is expected to rise to 11 percent by next year, mainly due to the nation’s contribution to Europe’s temporary rescue mechanism. The interest rate on government debt with the World Bank would rise to 4.9 percent by 2016 from 3.4 percent last year, the ministry said April 26.

The Cabinet plans a deficit of 2.6 percent of GDP this year as it resumes contributions to a mandatory pension fund and spends revenue from selling spare carbon-emissions quotas. Prime Minister Andrus Ansip’s government in April postponed its target for returning the budget to a surplus by a year to 2014, citing Europe’s debt crisis.

While Estonia has no outstanding bonds, investors speculate on its creditworthiness by trading credit-default swaps. Five-year Estonian CDS closed 3 basis points lower yesterday at 120, according to prices from data provider CMA. The third-riskiest EU member three years ago, it’s now among the three safest in the euro area behind Finland and Germany.

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