Estonia ratings outlook cut to stable from positive

LONDON - Standard & Poor's Ratings Services said it has revised its outlook on the Republic of Estonia to stable from positive because its EMU membership could be delayed.

The 'A' long-term and 'A-1' short-term sovereign credit ratings were affirmed.

S&P credit analyst Eileen Zhang said: 'The near-term prospects for Estonian EMU accession have receded, due to the higher inflationary trend rooted in buoyant domestic demand as well as in higher-than-expected global energy prices.'

She added: 'Nevertheless, the ratings on Estonia remain supported by a strong track record on fiscal control, a competitive economy, and the prospect of adopting the euro by 2010.'

Despite a tendency for Estonian governments to be unstable, the country has established a sustained record of tight fiscal control since independence. Thanks to budget surpluses, Estonia's general government debt burden will remain exceptionally low, at less than 5 pct of GDP through to 2009.

The Estonian economy is forecast to expand by more than 7 pct per year, with investment accounting for almost one third of GDP.

Achieving real economic convergence with more highly rated sovereigns, however, remains a significant challenge and is a major constraint for the ratings on the sovereign.

The ratings are also constrained by Estonia's tendency to run sustained and high current account deficits, and external liquidity remains exceptionally weak. As euro adoption is likely to be delayed, the risk posed by significant external imbalances will persist as a major rating factor.