Estonian Economy Overview

09.04.2012

Flexibility and openness are the characteristics and pervasive principles of Estonia's economic policy. Estonia is an e-country with a favourable business climate and cost advantages that is also open to growth.

Successive governments have adhered to the principles of Estonia’s economic success: a balanced state budget, liberal trade and investment laws, and the goal of joining the euro zone, which Estonia did in January 2011. The currency in Estonia is now the euro.
Estonia became the OECD’s 34th member country on 9 December 2010.

Economic policy goals

The goal of the economic policy of the Government is to create a good, stable and effective economic environment which will result in increased welfare. The prerequisite for stable economic development is ensured macroeconomic stability and flexibility as well as internal and external balance.

The global credit risk resulted in a strong contraction of the global economy and trade, resulting in serious deterioration of the future outlook of the Estonian economy, since it is an open economy. In the changed economic situation, the upholding of the reliability of the budgetary policy and its support to economic development are becoming more important. Maintaining a favourable business environment and increasing the economy’s flexibility have become the key issues.

The government’s objective is to continue pursuing a sustainable budgetary policy. The medium-term budgetary objective of the government is to keep the general government budget in surplus. A conservative fiscal policy will ensure a low level of government debt, which is a prerequisite for ensuring the long-term sustainability of public finances.

The mid-term fiscal policy objective of the government is to improve the fiscal position and to achieve public sector budget surplus by 2013.

• Enhancing economic growth and improving employment are the most important priorities of the government.
• Conservative fiscal policy will continue to be followed. The small amount of public debt will be decreased in the mid-term perspective.
• The government aims to restore the state reserves being used in the current situation.
• Tax policy will be kept stable, simple and transparent.
• Greater flexibility of the expenditure side of the budget will be pursued and the efficiency and effectiveness of budgeting will be improved.

More information: Ministry of Finance

International ratings

International Credit Ratings:

• Moody's: A1, outlook stable
• Standard & Poor's: AA-, outlook negative
• Fitch: A+, outlook stable

The Wall Street Journal and Heritage Foundation’s Index of Economic Freedom 2012 ranks Estonia as one of the freest economies in the world – 16th out of 183 countries.

Estonia ranks 12th out of 141 countries in the Economic Freedom of the World 2010 Report. The annual report was composed by the CATO Institute, Canada’s Fraser Institute, and more than 50 other institutes. Among the EU countries, Estonia is third after Ireland and the UK.

The World Economic Forum’s Global Competitiveness Index 2011-2012 ranks Estonia 33rd among 142 countries. The survey among business leaders measures economic competitiveness based on a combination of technology, the quality of public institutions, and the macroeconomic environment.

According to the World Competitiveness Yearbook 2011, published by the International Institute for Management Development, Estonia ranks 33rd among 58 countries and regional economies covered by the WCY.

Transparency International ranked Estonia 29th out of 183 countries in 2011. Among members of the European Union, Estonia places 15th.

The World Bank ranks Estonia 24th in its Doing Business in 2012 report, which covers 183 countries.
In the World Bank report for 2012 (which studies the ease of doing business in a country), there was a miscalculation made this year. Namely, the study did not take into account Estonia´s transition from the kroon to the euro, as a result of which the cost for getting a building permit was converted from 17 500 kroons to 17 500 euros without using the actual exchange rate. As a result of the error, Estonia fell from 24th place to 89th place in the ease of getting a building permit category.

The Bertelsmann Transformation Index in 2010 ranks Estonia among the most successful of 128 transformation countries in the world. In the status index, Estonia is fourth after the Czech Republic, Slovenia and Taiwan, and in the management index, Estonia is third after Uruguay and Chile.

GDP

In 2000–2008, Estonia’s economy saw an average growth of 7% per year, which placed Estonia among the three countries in the EU with the fastest growing real GDP. During that period, Estonia took a big jump in the improvement of living standards, increasing its GDP per capita from 45% of the EU27 average in 2000 to 67% in 2008.

The economic situation changed in spring 2007. The banks tightened the granting of credits, consumers’ confidence diminished, and the real estate market declined. Fast growth of income persisted, but in the beginning of 2008 insecurity increased, which was accompanied by a decrease in private consumption. Private sector investments also started to decrease, and the downward trend steepened.

In autumn 2008, the economic crisis culminated, causing a rapid collapse of export capacities, worsening the availability of credit money, and increasing the insecurity of companies and households even more. The overall decrease in GDP growth rate for 2009 was 13.9%.

Economic growth turned positive in the 2nd quarter of 2010 and the annual GDP grew by 3.1% compared to the previous year.

According to Statistics Estonia, in 2011 the annual GDP increased by 7.6% (in 2010 – 3.1%), compared to the previous year. In the first three quarters of 2011, GDP growth was mainly driven by manufacturing. Construction and information and communication activities started to contribute the most to economic growth in the second half of the year. The value added from manufacturing grew mainly with the support of exports, with the manufacturing of computers and electronic and optical products having the biggest influence on this growth. The growth in construction was mainly supported by the repair and reconstruction work of buildings. The fast growth of information technology and telecommunication services had the biggest impact on the growth of the value added from information and communication.

According to the 2012 forecast of the Estonian Ministry of Finance, the Estonian economy will grow by 1.7% in 2012. In 2014-2016 Estonian economic growth is expected to stabilise at around 3.5%.

Taxes

Estonia’s long-serving system of low, flat rate taxes, in particular the 21% income tax, is simple with no “hidden extras”. To encourage companies to expand their business, all reinvested profits have been exempted from corporate income tax. However, any redistributed profits, for example profits paid for dividends, are taxed at 21%.

The system of VAT (set at 20%) is in harmony with EU requirements. Employers pay a social and health insurance tax, which is 33% of the gross wage.

More information: Estonian Tax and Customs Board

Banking and the financial market

The Scandinavian-connected banking system of Estonia is modern and efficient, encompassing the strongest and best-regulated banks in the region. These provide both domestic and international services (including Internet and telephone banking) at very competitive rates. Both local and international firms provide a full range of financial, insurance, accounting and legal services. Estonia has a highly advanced Internet banking system: the majority of Internet users make their everyday transactions via Internet banking and smart-phone applications.

More facts about the banking market of Estonia:

• The banking system is part of the common banking market of the Northern Baltic region and Europe.
• 7 banks are registered as companies operating in Estonia. All others are branches of banks located in other countries (Denmark, Sweden).
• Only the banks that are registered in Estonia are under the supervision of Estonia and participate in its deposit guarantee system. Branches of banks registered elsewhere are subject to the supervision and deposit guarantee systems of their home countries (i.e. countries where they are registered).

Current situation of the financial market of Estonia

The financial market of Estonia is relatively unique when compared to the rest of Europe. Our position in the current turbulent situation is better than that of some others due to the following reasons:

• The relatively small share of the financial sector in the total economy.
• More than 90% of the banks operating in Estonia are under Scandinavian ownership.
• The majority of banks operating here belong to major conservative banking groups.
• The concentration of the banking market is very high – the biggest market shares are divided between a few banking groups.
• The interbank money market is very small, which is why potential problems in one bank should not have a direct impact on other banks.
• The banks operating here are very well capitalised. This means that all funds in our banks are well protected.
• The loan burden ratio of the Estonian private sector to GDP is relatively low.
• Estonia has a small public debt.

Communications

Estonia’s open economy, excellent transportation links and central location make it an ideal base for production and distribution. Estonia has captured a considerable share of the rapidly growing transit trade through the Baltic Sea. The deep-water port and free zone of Muuga is one of the most advanced in the region. It serves as an entrepôt for the Baltic and CIS markets. The new multifunctional port and free zone in the north-east of Estonia, Sillamäe, is the easternmost port of the EU, capable of handling all cargo groups from oil products and dry bulk to containerised cargo. Passenger and freight links provide fast sea crossings across the Baltic Sea, while direct air connections give easy access to Tallinn from major European capitals.

In addition, Tartu airport was renovated in 2009 in order to provide regular international flights. Estonian railways use the same gauge that is used throughout Russia and the CIS, making Estonia an attractive European hub for bulk shipment of goods from the Far East: ca 76% of rail freight is transit traffic.

Foreign investors, mostly Nordic, have made considerable investments into high technology and communication networks in order to modernise the IT communications infrastructure in Estonia. As a result, the Estonian telecommunications sector is one of the most developed in Central and Eastern Europe.

International analysts consider Estonia to be the leader in Eastern Europe for broadband DSL access. In terms of DSL penetration per telephone line, Estonia presently ranks among the top ten in the world.

In addition to physical Internet access points, there are over 1 100 free wireless Internet (wifi) zones around the country (www.wifi.ee).
In recent years the number of fixed phone lines has decreased as many consumers switched from fixed phones to mobile phones. All of Estonia is covered with digital mobile phone networks. There are more mobile phone contracts than residents - 139 per 100 people (Estonian Competition Authority, 2011).

The main goal of Estonia’s telecommunications policy is to ensure competition and openness in the sector. The main bodies in charge of telecommunications regulatory issues are the Ministry of Economic Affairs and Communications, Technical Surveillance Authority, and Estonian Competition Authority.

The telecommunications sector has been completely liberalised since January 2001, when the special monopoly rights of the Estonian Telephone Company ended.

The advanced use of information technology demonstrates Estonia's commitment to global competitiveness. 77% of the population are Internet users (Statistics Estonia, 2011). 71% of households have access to the Internet at home (Statistics Estonia, 2011).

Labour

The annual average unemployment rate was 12.5% in 2011 and 16.9% in 2010. The unemployment rate will decrease to 11.5% in 2012. By the end of the forecast period, i.e. by 2016 the unemployment rate will fall below 8.2%.
The average monthly salary in 2010 was 792 € (in 2009 it was 784 €). In 2012 the average gross salary will increase by 0.5%.

Foreign Trade

In 2011 72% of Estonia’s total trade was with EU member countries. In 2011 the value of goods exported from Estonia to the European Union (EU27) countries was 7.84 billion euros, accounting for 66% of Estonia’s total exports. Imports from the EU27 countries to Estonia totalled 9.90 billion euros with the share of 78% of Estonia’s total imports in 2011.

Estonia’s main trade partners are Finland, Sweden, Russia and Latvia. Estonia’s major exports are machinery and equipment, mineral products, metals (metal products), agricultural products and food preparations, and wood (wood products).

Estonia’s main imports are machinery and equipment, mineral products, agricultural products and food preparations and metals (metal products).

As of 1 May 2004, the external trade relations of Estonia with third countries are based on the EU Common Commercial policy. All bilateral free trade agreements between Estonia and third countries were denunciated. As of the same date, Estonia has implemented the conditions set out in the trade agreements between the EU and third countries and complies with the EU commitments made in the WTO.

Investment climate

Foreign investors are guaranteed a level playing field with local firms, including unrestricted repatriation of profits and capital along with the right to own land. There is a rapidly expanding supply of high-quality commercial and office property, including a growing number of industrial parks. The establishment of free zones at Muuga Port and in Sillamäe has further enhanced Estonia's attractiveness to foreign investors.

Many costs such as energy, labour, transport services, telecommunications and property expenses are considerably lower than in other parts of the Baltic Sea region. Nevertheless, Estonia has acquired a well-deserved reputation for the high quality of its products. Covering a wide range of industries, investors find they can achieve Scandinavian quality levels at lower costs.

Today foreign companies dominate in several sectors of the Estonian economy. Banking and telecommunications are dominated by the Nordic players, but the food and electronics industries also rely heavily on foreign capital. In relation to its size, Estonia has long been a leading Eastern European country in attracting foreign direct investments. Estonia is one of the leaders in Central and Eastern Europe in terms of foreign direct investments (FDI) per capita. The stock of total FDI peaked at 12.8 billion EUR as of 31 December 2011. 52.5% of foreign investment came from Sweden and Finland.

Estonian companies have made significant foreign investments of their own, mainly in Lithuania and Latvia (40.3%).

More information: Estonian Investment and Trade Agency

More about Estonia's economy

Bank of Estonia
Statistical Office of Estonia
Ministry of Finance
Ministry of Economic Affairs and Communications
Tallinn Stock Exchange
Enterprise Estonia
Estonian Chamber of Commerce and Industry