Estonia

Estonia’s public finances will remain manageable despite strong fiscal stimulus measures taken in 2020-2021 to mitigate the economic impact of the Covid-19 crisis and renewed, albeit more moderate, stimulus to mitigate the impact of the recession in 2022-2023. The government posted annual fiscal deficits of -5.6% of GDP in 2020 and -2.4% in 2021, and we forecast shortfalls of around -3.5% in 2022-2023. This should raise public debt from just 8.4% of GDP in 2019 to slightly more than 20% by 2023. However, this will still be very low compared to peers or the Eurozone average and in fact means that Estonia should have more room for fiscal leeway if needed.

Estonia’s external finances should remain manageable as well. Following seven years of annual surpluses from 2013 to 2019, the current account posted moderate deficits equivalent to -1.0% of GDP in 2020 and -1.8% in 2021, mainly due to a relative strong import performance in the context of a domestic investment boom. We forecast further annual external shortfalls of around -1% of GDP in 2022-2023, this time owing to Estonia’s significantly increased energy import bill.

Gross external debt is elevated in Estonia, having risen from 76% of GDP in 2019 to 85% in 2021 in the wake of the Covid-19 crisis. We forecast the ratio to remain above 80% in the next few years amid weak economic growth potential. Noteworthy, short-term external debt increased from just 28% of gross debt in 2018 to around 40% in mid-2022 and may require monitoring over the next few years. However, any concern about the gross external debt position is mitigated by the fact that Estonia remains a net external creditor and has actually enlarged that positon in recent years. At end-2021, net external assets accounted for 44% of GDP.