Moody’s raises Estonia’s ratings outlook

On Wednesday, March 31, Moody’s revised Estonia’s rating outlook to Stable from Negative and affirmed the country’s rating at A1, Bank of Estonia reports.

“The decision of Moody’s refers to an improvement in Estonia’s financial and economic situation compared to the same period a year ago,” Said Deputy Governor of Eesti Pank Märten Ross.

According to the rating agency, the country’s economy and financial sector are exhibiting signs of a gradual recovery. The government’s impressive measures to improve the budgetary position also have a role to play here – the steps taken provide an additional guarantee to the adoption of the euro.

Deputy Governor Ross drew attention to the rating agency’s observation that Estonia must continue to deal with the issue of raising competitiveness. “Although there are signs of a successful economic adjustment, it is important to carry on discussions regarding structural reforms and fiscal issues. And these discussions should result in decisions,” Ross noted.

On Tuesday, Fitch Ratings announced that Estonia’s credit ratings have been placed on Rating Watch Positive.

The last rating action of Moody’s on Estonia took place on 23 April 2009, when the rating agency affirmed Estonia’s sovereign rating at A1 and left the outlook from stable to negative.
The A1 rating has been valid since November 2002.

The press release of Moody’s:

Moody’s: Estonia’s ratings outlook raised to stable from negative

London — Moody’s Investors Service has today raised the outlook on the Estonian government’s A1 ratings to stable from negative, prompted by a clear improvement in the country’s financial and economic prospects since mid-2009, and the likelihood that the country will be admitted to the eurozone in January 2011. The outlook on the A1 foreign currency deposit ceiling was also raised to stable.

“Estonia’s economy and banking sector are exhibiting signs of a gradual recovery,” says Kenneth Orchard, Vice-President/Senior Credit Officer in Moody’s Sovereign Risk Group. “Equally important, the government’s impressive fiscal performance in 2009 means that Estonia is likely to be permitted to adopt the euro next year.”

After a two year-long contraction, it appears that the Estonian economy exited recession in Q4-2009. Moody’s forecasts that economic growth will be rather weak for several years, as the economy continues to adjust following the reversal of the domestic credit boom. This muted outlook for growth has prompted Moody’s to revise Estonia’s economic strength from “high” to “medium” in its sovereign bond ratings methodology. However, the deleveraging process should ultimately build a base for a more sustainable growth profile in the years ahead.

Moody’s notes that the problems in the banking sector show signs of easing, with a stabilisation of the stock of overdue loans over the past six months. Although nonperforming loans are expected to remain elevated for some time, the profitability of the banking sector is expected to gradually improve. This should also support economic growth over the medium term.

The Estonian government turned in an impressive fiscal performance in 2009, running a budget deficit of only 1.7% of GDP despite the massive (14% estimated) decline in economic output. Moody’s has accordingly adjusted Estonia’s institutional strength from “high” to “very high” in its sovereign ratings methodology.

As Estonia also has the lowest government debt ratios in the EU, the country therefore meets all of the main Maastricht criteria used for assessing eurozone entry. “Given the economic circumstances, and the relative fiscal performance compared to the current eurozone members, it will be very difficult for anyone to argue against Estonia’s entry,” remarks Orchard.

According to Moody’s, euro adoption, which is expected to be formalized by the various EU bodies in June, is an additional enhancement to the government’s creditworthiness. “EMU membership will eliminate balance of payments and currency risk emanating from the private sector’s large stock of foreign currency-denominated loans,” Orchard says.

Probable euro adoption, plus the much decreased risk of financial contagion emanating from Latvia, reduces Estonia’s susceptibility to event risk from “medium” to “low” in Moody’s sovereign ratings methodology.

However, the euro will not be a panacea for all that ails the Estonian economy, Orchard emphasised. “Estonia still needs to overcome a high degree of private sector leverage and weakened competitiveness that are a legacy of the boom years,” says Orchard. “Then again, a continuation of structural and fiscal reforms – supporting robust economic growth with low government debt – could place upward pressure on the ratings over the near to medium term.”

The last rating action on Estonia was implemented on 23 April 2009, when Moody’s confirmed the government’s local and foreign currency ratings at A1 and changed the outlook from stable to negative.

The principal methodology used in rating Estonia was Moody’s Sovereign Bond methodology, published in September 2008 and available on http://www.moodys.com in the Rating Methodologies sub-directory under the Research & Ratings tab. Other methodologies and factors that may have been considered in the process of rating this issuer can also be found in the Rating Methodologies sub-directory on Moody’s website.

Source: Eesti Pank

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Estonian industry to pay 40 pct more for power

Large Estonian exporters such as pulpmaker Estonian Cell and HeidelbergCement AG’s cement plant in Kunda will be hurt by a possible 40 percent increase in power prices when the electricity market is opened up today, writes Bloomberg.

Joining the Nordic power market, covering Norway, Sweden, Finland and Denmark, means prices will rise 35-40 percent on average for members of the Association of Large Electricity Consumers, said Tiit Kolk, head of the group that includes Estonian Cell and HeidelbergCement’s AS Kunda Nordic Tsement.

“The unprecedented price rise will probably result in some companies getting into financial difficulties or even quitting business,” said Kolk, also chief executive officer of chipboard maker AS Repo Vabrikud, a unit of Swiss-based Sorbes Group. “It’s clear this price increase will slow down the economic recovery and may even turn the recovery into another decline.”

The lobby group, whose members account for about 15 percent of Estonian consumption and about 4 percent of its exports, in January failed to persuade lawmakers to postpone opening up 35 percent of the Estonian market. The Baltic economy, which shrank 17.7 percent over the last two years, may grow as much as 2 percent this year, according to the largest Baltic lenders, Swedbank AB and SEB AB, mainly due to a recovery in exports.

Exports of oil products including shale oil, and of wood products, led a jump in Estonia’s exports in January with an annual increase of 153 percent and 25 percent, respectively.

‘Clearly Hit’

Viru Keemia Grupp, Estonia’s biggest shale oil producer, expects profitability to fall though export volumes probably won’t decline, spokeswoman Julia Aleksandrova said.

“The opening of the power market will pretty clearly hit the competitiveness of exporters in the short term,” said Tonu Palm, chief Tallinn-based economist at Nordea AB.

Industrial consumers in Estonia, which relies heavily on its oil shale-fired power plants, have enjoyed the lowest prices for electricity in the 27-member European Union, at 6.43 euros per 100 kilowatt hours at the beginning of 2009, compared with Malta’s 15.70 euros and the EU average of 10.51 euros, according to Eurostat data. 100 kilowatt hours are 0.1 megawatt hour.

Estonia is the last of the three former Soviet Baltic republics to partially liberalize its market, with a full opening scheduled for 2013.

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