Economic Analysis - A Healthy Fiscal Outlook - MAY 2017

BMI View : Estonia's fiscal position will remain stable over the long term thanks to the likely continuation of fiscal prudence and measures being taken to improve the government's revenue base. We expect the budget to post a surplus over the long term and for the public debt ratio to remain the lowest in the eurozone. One possible concern comes from the rise in government spending relative to GDP, which poses a long-term threat to growth.

Government Debt: Estonia's government debt load will remain sustainable over the forecast period, and reflect a relatively small government footprint in the economy. The government debt ratio is the lowest in the eurozone at just 10.3% of GDP in 2015. Estonia's debt repayments are small in size, accounting for just 0.2% of total spending in 2015. The nominal debt load is likely to increase slightly over the next two years, but accelerating nominal GDP growth will result in a reduction in the debt-to-GDP ratio.

As we have outlined in previous articles, the lack of liquid government bonds issued by the Estonian government has caused problems for the ECB's quantitative easing programme. To bypass this problem the ECB has permitted the central bank to purchase corporate bonds of the semi-state energy company Elering. However, if it decided to tap capital markets Estonia would have little trouble in issuing debt. Though there is little by way of a benchmark to price new debt against, Estonia's strong fiscal position would mean a debt issuances would be an attractive offering to investors.

Budget Surpluses Contain Public Debt
Estonia - Public Debt & Fiscal Deficit, % GDP
Source: Statistics Estonia, BMI

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