Fitch Upgrades Estonia to 'A'; Outlook Stable

Fitch Ratings has upgraded the Republic of Estonia's Long-term foreign and local currency Issuer Default Ratings (IDRs) to 'A' from 'BBB+' and 'A-', respectively, and removed them from Rating Watch Positive. A Stable Outlook is assigned.

At the same time, Estonia's Short-term foreign currency IDR has been upgraded to 'F1' from 'F2' and the Country Ceiling has been raised to 'AAA' from 'A+'. The upgrades follow formal Ecofin Council approval on13 July for Estonia's entry into the euro area on 1 January 2011.

"Joining the euro area improves Estonia's risk profile as it reduces risks associated with the country's sizeable external debt and FX lending in the domestic banking system, and gives its banks access to ECB liquidity facilities," says Douglas Renwick, Associate Director in Fitch's Sovereigns group. "Furthermore, Estonia's sound public finances and flexible economy make the country well-suited for a currency union."

Euro membership significantly reduces external financing and foreign currency risks associated with the country's high levels of external debt and FX domestic lending, and provides an exit to its currency board arrangement.

Upon joining the euro area, Estonia will become the poorest of 17 members. However, its long-term growth prospects are brighter than average. By some measures, Estonia already looks like an average member of the currency union, with strong governance and institutions, a robust policy framework and an accommodating business environment. However, the Estonian economy has been far more volatile than that of any euro country, with a cumulative 19% drop in GDP from Q407 to date and large swings in inflation (from double-digit to negative rates over eight months last year).

Baltic News Service