Fitch affirms Estonia

Fitch Ratings said it affirmed the Republic of Estonia's A foreign currency issuer default rating with a positive outlook and A+ local currency issuer default rating with a stable outlook. Its F1 short-term rating and the AA- country ceiling are also affirmed.

Estonia's ratings are supported by its rapid GDP growth, open and flexible economy and convergence with Western Europe, the agency said. Real GDP growth in 2005 reached 9.6% and the growth rate is expected to remain above the estimated long-term potential rate of 6% to 7% for at least another year.

The general government is in surplus and this is expected to continue, regardless of the outcome of this year's presidential election and the parliamentary elections due in 2007, the agency predicted. Exceptional fiscal conservatism has brought public debt below 5% of GDP - the lowest in the European Union.

There are, however, some growing concerns of over-heating, as the rate of inflation has intensified since 2004 to over 4%, albeit largely because of price and indirect tax increases associated with EU membership and the sharp increase in international energy prices. Nevertheless, Fitch said there is a risk that inflation could fail to slow in line with the authorities' forecasts owing to strong demand pressures, due to growing labor shortages, rapid credit growth and a shortage of effective macroeconomic policy instruments.

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