TALLINN - Moody's released its annual report, which gives Estonia the same rating for 2008 as for 2007 despite mounting difficulties over the budget deficit.
The ratings agency said the government's balance sheet is strong, characterized by minimal debt and substantial assets.
"An ongoing economic slowdown and pronounced external imbalances raise some concerns with regard to a disorderly adjustment, but these are mitigated by a foreign-bank-dominated financial system [and] the eventual prospect of EMU [European Monetary Union] entry," the report comments.
Moody's expects the economy to slow down into 2009 as the private and public sectors undergo a necessary restructuring, but the agency expects the economy to bounce back in 2010 or 2011.
The agency warned that if inflation and wage growth are not brought into check, the risks of a prolonged economic recession will increase.
"It is difficult to envisage a chain of events that would cause the current circumstances to end in a full-blown economic crisis. Confidence in the currency should be maintained by ERM2 membership and the prospect of Euro zone entry within the next five to ten years," says Moody's senior analyst Kenneth Orchard.
Moody's sovereign rating for Estonia stands at Aa1 with a stable outlook.
Estonia has an Aa-rated foreign currency bond ceiling and A-rated local and foreign currency government bonds. Ratings are based on its high economic resiliency and high financial robustness.
According to Moody's, a consistent economic policy framework has contributed to the building of a strong government balance sheet with low debt and sizable assets.
Balancing the budget
Meanwhile the row over dealing with the budget deficit continued. At a meeting on Sept. 16, the governing coalition did not resolve the issue of how to balance the books.
Opposition leaders stressed that public services should not be sacrificed because the government got its figures wrong. They also said they should have input on how decisions are made.
"It is necessary to put in place Estonia's spending priorities, and it is not important at which party's proposal those decisions are made," said chairman of Pro Patria and Res Publica Union and former prime minister Mart Laar.He named education and security as top priorities.
Laar said the process of drafting the 2009 budget is complicated, but he was positive about progress. The Cabinet will continue budget debates.
Prime Minister Andrus Ansip said at last week's governmental news conference that the 2009 budget will be approximately 94-96 billion kroons (6-6.13 billion euros). The government plans to send the budget to parliament on Sept. 25.
Ansip stressed the importance of continued strict budget policy at a meeting of his Reform Party's extended board Tuesday.
The prime minister listed a flexible labor market, research and development, export and a tight budget policy as the four mainstays of the economy.
Ansip said that a lack of qualified labor is at present the country's largest problem. "We definitely also should follow the example of Finland and Sweden and continue lowering our labor taxes," the Reform Party leader said.
At the same time, he observed, Estonia has in the last three years been among European leaders in research and development, and that this position must be maintained.
If economic growth was until now powered mainly by loan-based consumption, then export must now take over as the engine, Ansip said. He also stressed the need to continue a tight budget policy. "This is what we believe in and what investors believe in," he said.