Estonian economy

Juri Sakkeus
Chair, Estonian Investment Agency

Estonia is a small country with a total population of 70 million. It is situated at the heart of Northern Europe. Our economic policy ensures Estonia has an open economy, with good access to neighbouring markets in the Baltic Sea region

Economic policy cornerstones

Estonia's successful economic reforms started in 1991 and form the crucial cornerstones for the nation's economic policy:

  • rapid privatisation - the private sector's share of Gross Domestic Product (GDP) at the end of last year was more than 70 per cent;
  • a stable currency and balanced State budget - Estonia introduced a Currency Board system and pegged its national currency to the DM in 1992. By law the State budget has to be balanced. In recent years, we have even run a surplus of the budget;
  • liberal foreign trade;
  • liberal policies and the free trade agreement have made Estonia the ideal base for access to both the European Union (EU) and the developing markets of Eastern Europe. The opening of the economy was a particularly effective way to introduce competition and promote re-structuring;
  • export promotion;
  • attract foreign direct investments (FDI).

Estonian foreign policy is based on rapid re-integration into European and western structures. A number of agreements have successfully re-oriented commerce towards western markets. During 1997 Estonia undertook much preparation for membership to the World Trade Organisation (WTO) and is expected to join in 1998.

Relations with Russia have markedly improved since independence, but there are still unsettled issues to be solved. Since the Estonian domestic market is limited, it is very important for investors to have access to neighbouring markets.

Economic performance in 1997

The improved performance of the economy further accelerated in 1997. GDP growth is estimated at ten per cent for 1997, led by the strong export growth of 63 per cent. Exports are dominated by clothing and textile products, wood, machinery and equipment, and chemical products. Exports of electronic products accounted for 50 per cent of total export turnover in 1997.

Inflation has declined from the annual rate of 15 per cent at the end of 1996 to 12 per cent in September 1997. Domestic demand was the driving force behind the growth. Real income per capita also remarkably increased, paving the way for future improvements in the living standard of the population.

Country ratings

In September 1997, the Moody's agency gave Estonia a Baa1 credit rating, which is equivalent to the Czech Republic and the EU member, Greece. The rating agency IBCA granted Estonia a foreign currency long-term credit rating of BBB. Both Baa1 and BBB are investment grade ratings, which means that the agencies consider Estonia to be an investment worthy country. All the ratings are outstanding in a Central and Eastern Europe context.

FDI into Estonia

According to data compiled by the Bank of Estonia, the total stock of FDI in Estonia in January 1998 was more than $1.1 billion, ie, more than $750 per capita. The leading investor countries are Finland (30.3 per cent), Sweden (20.7 per cent) and the USA (6.7 per cent). In terms of FDI in each sector of the economy, the most attractive are still industry (37.8 per cent), wholesale and retail trade (22.9 per cent), finance (14.2 per cent), and transport and communications (13.1 per cent).

FDI's role in the Estonian economy can be characterised by the following facts:

  • more than 50 per cent of Estonian exports are generated by businesses with foreign capital;
  • one-third of trade turnover is generated by businesses with foreign capital.

FDI during the first nine months of last year totalled $230 million. This is the best performance Estonia has achieved to date.

The sale of infrastructure companies should attract the interest of foreign investors and result in sizeable capital flows. However, as the opportunities opened up by the privatisation process are gradually exhausted, greenfield investments and the expansion of existing investments will have to become the main channels for foreign investment.

Estonia continues to improve its foreign investment climate. Most of the major legal obstacles have been removed. The suggestions for improvement of the investment climate in Estonia, prepared in co-operation with the World Bank's Foreign Investment Advisory Service, were already implemented last year. Among them were:

  • changes to the Commercial Code;
  • simplifying access to residence and work permits;
  • abolition of foreign investment licences;
  • and the introduction of a Business Visa type US L-1.

Following these changes, Estonia will correspond to all OECD criteria for Multilateral Agreement on Investments (MAI). We are ready to join this Agreement immediately - it has been signed by the OECD's member countries.

FDI from Estonia

The fast growths and the small market has prompted Estonian companies to look for investment opportunities abroad. Estonia has become one of the regional leaders in this regard.

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