2010-09-08 13:14:08 -
Estonia Business Forecast Report Q4 2010 - a new market research report on companiesandmarkets.com
The worst of the Estonian recession is over, with further sharp contractions in economic output not expected. That said, while the economy is unlikely to contract from H210 onward, this does not mean that we expect a rapid recovery. Indeed, the ´internal devaluation´ process will mean that key real sector indicators for the labour market, industrial sector, construction and domestic credit will remain weighed down and well off their peak highs through the long term. Indeed, we do not expect the Estonian economy to return to its 2008 size in nominal euro terms until 2014.
T he political consensus in Estonia towards fiscal austerity and an economic strategy of ´internal devaluation´ is likely to come under pressure in 2011, with
risks of elevated political ructions. Elections in Q111 will likely result in government and opposition parties escalating rhetoric to highlight differentiation ahead of the polls. At the same time, the successful adoption of the euro at the beginning of 2011 will remove a key policy anchor currently underpinning political consensus. While our core scenario is for Prime Minister Andrus Ansip´s centre-right coalition to renew its mandate at the elections, we caution that the outcome is by no means guaranteed, with potential for a new centre-left coalition comprising the Centre Party and Social Democrats gaining control.
T he macroeconomic environment will remain highly problematic for the local banking sector, with further asset and loan portfolio contractions expected in the latter half of 2010. We stress though, that the systemic crisis risks facing Estonian banks in 2009 have largely been mitigated, with the likely accession to the eurozone in 2011 significantly reducing risks from the large stock of euro denominated debt.
Capital flight remains a key risk for the Estonian economy, with widespread deleveraging likely to result in a major financial account deficit for the second consecutive year. The outflow of investment will weigh heavily on domestic demand growth, reinforcing our views for sustained current account surpluses and lacklustre real GDP growth through the long term.
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