Rating action

Scope Ratings GmbH (Scope) has today affirmed the Republic of Estonia (Estonia)’s long-term issuer and senior unsecured debt-category ratings at A+, in both local- and in foreign-currency, with Stable Outlooks. Scope has also affirmed Estonia’s short-term issuer rating at S-1+ in both local and foreign currency with a Stable Outlook.

The affirmation of Estonia’s credit ratings reflects the country’s strong institutional framework, which underpins sound macroeconomic policymaking and supports a robust long-term growth potential. Over the medium term, growth prospects are expected to benefit from substantial EU fund allocations and the implementation of structural reforms outlined in Estonia’s Recovery and Resilience Plan (RRP).

The affirmation of the ratings also takes into account Estonia’s low public debt levels. While sustained fiscal deficits over the coming years are expected to lead to a steady increase in public indebtedness, primarily due to significant increases in defence spending, the rise should be contained by Estonian authorities’ commitment to fiscal prudence and the country’s strong debt affordability, which together are expected to keep debt ratios among the lowest in the euro area.

The main credit challenges relate to: i) exposure to external shocks, given the Estonian economy’s small size, still comparatively moderate income levels, high openness, and geographic proximity to Russia; and ii) adverse demographic trends and high defence spending commitments that add long-term pressures to the fiscal trajectory.

For the updated rating report, click here.

Key rating drivers

Robust institutional framework, sound medium-term growth prospects. Estonia’s A+ ratings benefit from a robust track record of effective and proactive policymaking, including a strong commitment to fiscal prudence anchored by the country’s EU and euro area memberships. These provide a sound and credible framework for macro-fiscal policymaking and support the Estonian government’s ability to access capital markets even in periods of market stress. Together with ample access to EU funding for public investment and a track record of efficient absorption, these memberships have supported the country’s economic convergence over recent years. Estonia’s GDP per capita amounted to 67% of the euro area average in 2024, up from 51% in 2015. Measured in purchasing power standards, Estonia’s GDP per capita stands at 76% of the euro area average.

The Estonian economy has shown signs of gradual recovery since the first quarter of 2024, following a prolonged period of contraction. Despite this, overall output declined by 0.1% in 2024, following a sharper 2.7% contraction in 2023. Investment remained the primary drag on growth, constrained by restrictive funding conditions, subdued foreign demand, and low business confidence.

Economic performance in the first half of 2025 remained subdued, with real GDP growing by just 0.1% year-on-year. Private demand continued to be hampered by uncertainty and the dampening effect of tax hikes on purchasing power. However, it is expected to improve gradually in the coming months, supported by robust wage growth and declining interest rates, which should ease the burden of variable-rate private sector debt and stimulate both household consumption and private investment. While direct export exposure to the US is moderate, the rise in tariffs is expected to weigh on export growth via the impact on some of Estonia’s key trading partners (Germany, Nordic countries). Scope expects real growth to pick up gradually, to 0.7% in 2025, 2.3% in 2026 and 2.5% in 2027.

Scope estimates Estonia’s medium-term growth potential at about 2.2% annually, underpinned by significant allocations of EU funds, totaling EUR 4.4bn (around 11% of 2024 GDP) over 2021-27 under the RRP and Cohesion funds. Reform commitments outlined in Estonia’s RRP should also support an acceleration in productivity gains and support the long-term growth trajectory, including through policies aimed at improving the business environment and tackling labour and skill shortages. This healthy growth outlook will support continued convergence in income levels and productivity towards euro area averages, in turn yielding further improvements regarding the Estonian economy’s resilience to shocks.

Low government indebtedness and strong debt affordability. The affirmation of Estonia’s ratings also accounts for the government’s low debt levels and strong debt affordability. Estonia’s public debt-to-GDP ratio remains very low, at 23.3% as of year-end 2024, despite having increased significantly since the Covid-19 pandemic (up 14pps since year-end 2019).

The fiscal deficit narrowed to 1.5% of GDP in 2024, more than halving from the previous year and significantly outperforming the government’s initial target (2.7% of GDP). This improvement was driven by strong revenue growth, supported by recent tax reforms. Notably, hikes in the value-added tax (VAT) contributed significantly, alongside robust labour taxation receipts fueled by fast wage growth. Revenue from VAT and corporate income tax (CIT) on distributed dividends also rose, reflecting increased purchases of motor vehicles and large profit distributions made in anticipation of scheduled tax rate increases.

In 2025, the deficit is projected to moderate further to 1.2% of GDP, with revenue growth remaining strong. This momentum is underpinned by additional rate hikes across several tax categories and hikes in excise duties. The VAT rate was increased by 2pps to 24%, while both personal and corporate income tax rates rose by 2pps to 22%.

The fiscal balance is expected to deteriorate significantly in 2026, however. The planned increase in the personal income tax-free threshold is expected to materially weigh on government revenue growth and largely offset gains from other tax measures, including further hikes in personal income tax and CIT rates and the implementation of a motor vehicle tax. This deterioration will also reflect a sharp rise in defence spending, which is projected to increase from 3.4% of GDP in 2024 to at least 5% by 2026. Public investment is also expected to peak that year, driven by large-scale security-related and transportation projects. The fiscal outlook remains subject to some uncertainty, however, with ongoing discussions around potential changes to fiscal policy, including the potential softening of some tax hikes scheduled for 2026 and a revaluation of public sector wages.

Scope forecasts that the general government deficit will widen to 3.8% in 2026, before gradually receding in subsequent years, down to around 2.7% of GDP by 2030, supported by improvements in revenue growth and the implementation of cost-saving measures across central administrations. The debt-to-GDP ratio is expected to resume a steady upwards trajectory after remaining broadly stable this year (forecast at 23.6% by year-end 2025), rising to about 34% by end-2030 – thus remaining amongst the lowest within the euro area.

The public debt trajectory benefits from strong debt affordability, which should curb the increase in debt-servicing burden resulting from durably higher interest rates. The average interest rate of public debt remains low, at 2.7% as of year-end 2024. Interest payments are seen rising only moderately over the forecast horizon, remaining below 1.0% of general government revenue until 2030 (in net terms), up from 0.7% in 2024. A favourable debt structure and smooth refinancing profile should anchor gross financing needs at comparatively low levels (expected to average around 5-6% of GDP over 2025-30). Conservative liquidity management, with ample cash buffers of EUR 2.9bn on average in 2024 (more than 7% of GDP) further underpins funding flexibility.

Rating challenges: exposure to external shocks and longer-term demographic pressures

Estonia’s economy is small (GDP of EUR 39bn) and characterised by a significant degree of openness (export and import sectors accounting for around 76% of GDP each). This, coupled with still-moderate wealth levels (GDP per capita of EUR 28,700), exposes Estonia to external shocks. This vulnerability is exacerbated by the present environment of heightened geopolitical tensions following Russia’s invasion of Ukraine in February 2022. Scope assesses direct military risks from Russia as moderate due to Estonia’s strong international alliances. Nevertheless, the country’s geographical proximity to Russia and strategic location on the Baltic Sea make it one of the EU countries most exposed to spillovers from the conflict. This includes an increased exposure to broader security challenges such as cyber risk threats or disinformation campaigns. While Scope assesses the country’s preparedness to such hybrid forms of aggression positively compared to other Central and Eastern European peers, a protracted conflict adds significant uncertainty to the medium-term macroeconomic and fiscal outlooks.

Additionally, Estonia’s ratings are constrained by adverse demographic trends, which are likely to weigh on the long-run economic and fiscal outlooks. The country’s working-age population is expected to decline by an average of 0.3% annually over 2025-30, as per projections published by the European Commission. While demographic challenges were temporarily alleviated in recent years by large inflows of Ukrainian refugees, an ageing population is expected to exacerbate pressures in the labour market, where labour shortages already constitute a key bottleneck to output growth and risk fueling further wage increases. Wage growth that outpaces productivity gains would lead to an erosion of the country’s external competitiveness and could weigh on Estonia’s ability to sustain solid growth over the medium run.

Rating-change drivers

The Stable Outlook reflects Scope’s view that the risks Estonia faces over the next 12 to 18 months are balanced.

Upside scenarios for the ratings and Outlooks are if (individually or collectively):

1. Structural reforms and investment continued to sustain income convergence.
    
2. The public debt-to-GDP ratio remains anchored at low levels, supported by declining general government deficits over the medium run.
    
3. Strengthened resilience to external shocks, including geopolitical risks.

Downside scenarios for the ratings and Outlooks are if (individually or collectively):

1. Geopolitical risks increased, undermining macroeconomic stability.
    
2. The fiscal outlook worsened, leading the debt-to-GDP ratio to rise significantly above its presently-forecasted trend.
    
3. Macroeconomic imbalances increased materially, leading to a significant deterioration in growth prospects.
    
4. External and/or financial sector vulnerabilities increased substantially.

Sovereign Quantitative Model (SQM) and Qualitative Scorecard (QS)

Scope’s Sovereign Quantitative Model (SQM) provides a first indicative credit rating of ‘a+’ for Estonia. This ‘a+’ first indicative rating receives a one-notch uplift from the SQM’s reserve-currency adjustment and no negative adjustment from the political-risk adjustment. This sees a final SQM indicative credit rating of ‘aa-’ for Estonia. On this basis, the final SQM quantitative rating of ‘aa-’ is reviewed by the Qualitative Scorecard (QS) and can be adjusted by up to three notches depending on Estonia’s qualitative credit strengths or weaknesses compared against a peer group of sovereign states identified by the SQM.

Scope identified the following QS relative credit strength for Estonia: external debt structure. Conversely, Scope identified the following QS relative credit weaknesses for Estonia: 1) resilience to short-term external shocks; 2) environmental factors; and 3) governance factors. On aggregate, the QS generates a one-notch negative adjustment for Estonia’s credit ratings, resulting in final A+ long-term ratings.

A rating committee has discussed and confirmed these results.

Environment, social and governance (ESG) factors

Scope explicitly factors in ESG issues in its ratings process via the sovereign-rating methodology’s stand-alone ESG sovereign-risk pillar, which holds a significant 25% weight under the quantitative model (SQM) and 20% weight under the methodology’s qualitative overlay (QS).

With respect to environmental factors, Estonia’s performance in the SQM is relatively strong. The country receives weak scores for its emissions per unit of GDP and per capita but obtains strong performance scores on exposure and vulnerability to natural disaster risks, and the ecological footprint of its consumption as compared with available biocapacity. Estonia’s QS evaluation on ‘environmental factors’ is ‘weak’ against a peer group of countries. Estonia has made significant progress in the development of renewable energy. The share of renewables in the energy mix stood at 41% in 2023, above the EU average of 25% and up from 17% in 2005. However, the Estonian economy is still one of the most carbon-intensive in the EU, with fossil fuels covering around two thirds of energy consumption, primarily owing to its dependence on domestic oil shale. The government aims to have renewable resources cover all its electricity needs by 2030, reduce CO2 emissions by 70% relative to 1990 levels and reach carbon neutrality by 2050.

Regarding socially-related criteria, in the SQM model, Estonia receives a very strong score on labour-force participation, an average mark on income inequality and a weak score on the old-age dependency ratio. The complementary QS assessment of ‘social factors’ is ‘neutral’ compared to a peer group of countries. Estonia’s labour market is inclusive, as reflected in high participation. The education system posts very strong outcomes, as reflected in the country’s high position in the latest OECD PISA assessments, which supports the labour force’s skill base. Income inequality and poverty risks are slightly above the EU average but have significantly declined in recent years. A key social challenge is posed by adverse demographic trends, as captured by the quantitative score.

The complementary QS assessment of ‘governance factors’ is ‘weak’ compared to peers to account for Estonia’s comparatively heightened exposure to spillover from the Russia-Ukraine war. External security risks for Estonia have increased materially since the escalation of the Russia-Ukraine war, though NATO and EU memberships strongly limit the risk that the conflict will expand into the Baltic region. Under governance-related factors in the SQM, Estonia performs very strongly relative to peers, in line with high scores under the World Bank’s Worldwide Governance Indicators. Policymaking has been effective and enjoyed broad continuity despite a multi-party system that requires coalition governments. EU and euro area memberships also enhance the quality of Estonia’s macroeconomic policies and macroprudential framework. In March 2025, Prime Minister (PM) Kristen Michal removed the Social Democratic Party from the governing coalition due to disagreements over some key policy areas, including taxation. The new coalition comprises PM Michal’s Reform Party and junior partner Estonia 200, holding a slim majority of 52 out of 101 seats in parliament. The coalition agreement focuses on bolstering economic competitiveness and reducing bureaucratic barriers all the while committing to higher defence spending and stronger support for Ukraine.

Rating committee
The main points discussed by the rating committee were: i) Estonia’s economic outlook and medium-term growth potential; ii) public finance risks, including fiscal framework and debt dynamics; iii) external economic risks, including effects of potential US tariffs; iv) financial stability and non-financial sector balance sheet developments; v) ESG considerations; and vi) peer developments.

Methodology
The methodology used for these Credit Ratings and Outlooks, (Sovereign Rating Methodology, 27 January 2025), is available on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The model used for these Credit Ratings and Outlooks is (Sovereign Quantitative Model Version 4.1), available in Scope Ratings’ list of models, published under scoperatings.com/governance-and-policies/rating-governance/methodologies.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at scoperatings.com/governance-and-policies/regulatory/eu-regulation. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): registers.esma.europa.eu/cerep-publication. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at scoperatings.com/governance-and-policies/rating-governance/definitions-and-scales. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on scoperatings.com/governance-and-policies/rating-governance/methodologies.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With Rated Entity or Related Third Party participation   YES
With access to internal documents                                 YES
With access to management                                           NO
The following substantially material sources of information were used to prepare the Credit Ratings: the Rated Entity and public domain.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting these Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings and Outlooks were not amended before being issued.
 
Regulatory disclosures
These Credit Ratings and Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlooks are UK-endorsed.
Lead analyst: Brian Marly, Senior Analyst
Person responsible for approval of the Credit Ratings: Eiko Sievert, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings in January 2003. The Credit Ratings/Outlooks were last updated on 19 April 2024.

Potential conflicts
See scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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