A Dynamic Economy

Flexibility and openess are the characteristics and pervading principles of the Estonian economic policy. Estonia is an e-country with a favourable business climate and cost advantages that is also open to growth.

Successive governments have adhered to the principles of Estonia's economic success: a balanced state budget, a stable convertible currency pegged to the Euro (before 1 January 1999 to the Deutschmark), and liberal trade and investment laws.

Estonia's economy has experienced very strong growth in the last three years: during that time the economy has expanded by more than a quarter in real terms and almost by two-thirds in nominal terms. This has been achieved at the expense of taking very high risks. Now some of these risks have materialised, bringing the economy into a recession during the year 2009. Uncertainties surround next year’s growth expectations as well.

The main factor behind the recession is the strong downward correction in domestic demand. Moreover, external demand, which has so far supported the strong growth, has weakened too.

Economic policy goals

The goal of the economic policy of the Government is to create a good, stable and effective economic environment which will result in increased welfare and real convergence with the EU. The precondition for stable economic development is ensuring macroeconomic stability and flexibility as well as internal and external balance.

The short–term perspective of the Estonian economy is largely dependent on how great the loss of our international competitiveness was during the boom years and how long the restructuring process will last. In the changed economic environment, fiscal policy and its support for economic development is gaining greater importance. It is also imperative to maintain a favourable business environment and the flexibility of the economy.

The goal of the Government is to become a full member of the European Monetary Union (EMU) as soon as possible, in order to boost long-term economic development and increase monetary ability. To introduce the Euro, Estonia must fulfil the convergence criteria provided for in the Maastricht Treaty regarding public finance, price stability, interest rates and exchange rate stability. In order to fulfil the Maastricht criteria, the Government will continue to implement a conservative budgetary policy and avoid excessive administrative price increases.

The government is planning to continue with sustainable fiscal policy. The medium–term budgetary objective of the Government is to keep the general government budget in surplus. A conservative fiscal policy will ensure a low level of government debt, which is a prerequisite for ensuring the long-term sustainability of public finances.

International ratings

International Credit Ratings:

Moody's: A1, outlook negative
Standard & Poor's: A-, outlook stable
Fitch: BBB+, outlook stable

The Wall Street Journal and Heritage Foundation's Index of Economic Freedom 2010 ranks Estonia as one of the freest economies in the world – 16th out of 179 countries.

Estonia ranks 11th out of 141 countries in the Economic Freedom of the World 2009. The annual report was composed by the CATO Institute, Canada's Fraser Institute and more than 50 other institutes. Among the EU countries, Estonia is third after Ireland and the UK.

The World Economic Forum's Global Competitiveness Index 2009-2010 ranks Estonia 35th among 133 countries. The survey among business leaders measures economic competitiveness based on a combination of technology, the quality of public institutions, and the macroeconomic environment.

According to the World Competitiveness Yearbook 2009, published by the International Institute for Management Development, Estonia ranks 35th among 57 countries and regional economies covered by the WCY.

Transparency International ranks Estonia 27th out of 180 countries in 2009. Among members of the European Union, Estonia places 13th.

The World Bank ranks Estonia 24th in its Doing Business in 2010 report, which covers 183 countries.

The Bertelsmann Transformation Index in 2008 ranks Estonia among the most successful of 125 transformation countries in the world. In the status index, Estonia is third after the Czech Republic and Slovenia, and in the management index, Estonia is second after Chile.

GDP

GDP growth of 6.3% in 2007 placed Estonia among the fastest growing economies in the region. The economy had grown by an average of almost 9% per year since 2000. The continued growth of exports to Western markets, integration with Nordic countries, and institutional and regulatory reforms have laid a strong foundation for sustainable economic growth.

The cyclical cooling of the Estonian economy started already in 2007 and turned into recession in the middle of 2008. Driven by the global financial crisis, the recession was complemented by large uncertainty and, at the end of the year, a higher-than-expected decrease in external demand. These factors accelerated the year-on-year decline in GDP to as much as 9.7% in the fourth quarter. GDP for 2008 shrank by 3.6%.

According to the flash estimate of Statistics Estonia, the Estonian economy contracted in real terms by 15.8 % y-o-y in the first half of 2009. Economic downturn was caused by rapidly decreasing domestic demand and fallen export.

According to the 2009 forecast of the Estonian Ministry of Finance, the Estonian economy will have negative growth by 14.5% in 2009, and in 2010 negative growth by 2.0%.

The new growth cycle will be able to rely on the fundamentals of Estonia's economy, which remain strong: the credible banking system, flexible business environment and labour market, and the fiscal reserves accumulated in recent years. Growth will recover in 2011, assuming that the export market's economic situation improves. Positive effects from export recovery are expected to carry over to domestic demand through improving confidence.

Information about the state support package for the financing of exporting businesses

The Ministry of Economic Affairs and Communications has developed a state support package for the financing of exporting businesses in the total volume of 6.1 billion kroons. The five support measures proposed in the support package are intended to alleviate the financing problems of exporting Estonian enterprises. Enterprises operating in the manufacturing, construction, wholesale and retail trade, transportation and communications, accommodation, catering and business services sectors will be able to apply for the support.

The main principles of the state support package will be the following:

alleviation of financing problems, leaving business risks to entrepreneurs
provision of assistance only to sustainable enterprises, considering the individual circumstances of each enterprise
the target group will consist of exporting enterprises
more patient funds, but not for free
above all a financing transaction, not an expense
temporary intervention by the state, with a planned exit
the intervention has to be sufficient to have an impact on the macroeconomic situtation

Money

Estonia's national currency is the kroon (EEK). 1 kroon equals 100 sents. The Estonian kroon is pegged to the Euro. Estonia joined Europe's Exchange Rate Mechanism II (ERM II) on 27 June 2004. Entry to the ERM II leaves the exchange rate of Estonian kroon unchanged. In the coming years, Estonia will also run the currency board arrangement with a fixed exchange rate, one euro corresponding to 15.6466 Estonian kroons.

The Estonian monetary system is based on the currency board regulation. The currency board and currency peg have been fixed by law since June 1992. Estonian currency and gold reserves are stable.

Taxes

Estonia's long-serving system of low, flat rate taxes, in particular the 21% income tax, is simple with no "hidden extras". To encourage companies to expand their business, all reinvested profits have been exempted from corporate income tax. However, any redistributed profits, for example profits paid for dividends, are taxed at 21%.

The system of VAT (set at 20%) is in harmony with EU requirements. Employers pay a social and health insurance tax, which is 33% of the gross wage.

Banking and the financial market

The Scandinavian-connected banking system of Estonia is modern and efficient, encompassing the strongest and best-regulated banks in the region. These provide both domestic and international services (including Internet and telephone banking) at very competitive rates. Both local and international firms provide a full range of financial, insurance, accounting and legal services. Estonia has a highly advanced Internet banking system: the majority of Internet users make their everyday transactions via Internet banking. Some banks are developing mobile banking, offering banking services via WAP.

More facts about the banking market of Estonia:

The banking system is part of the common banking market of the Northern Baltic region and Europe.
6 banks are registered as companies operating in Estonia. All others are branches of banks located in other countries (Denmark, Sweden).
Only the banks that are registered in Estonia are under the supervision of Estonia and participate in its deposit guarantee system. Branches of banks registered elsewhere are subject to the supervision and deposit guarantee systems of their home countries (i.e. countries where they are registered).

Current situation of the financial market of Estonia

The financial market of Estonia is relatively unique when compared to the rest of Europe. Our position in the current turbulent situation is better than that of some others due to the following reasons:

The relatively small share of the financial sector in the total economy.
More than 90% of the banks operating in Estonia are under Scandinavian ownership.
The majority of banks operating here belong to major conservative banking groups.
Concentration of the banking market is very high – the biggest market shares are divided between a few banking groups.
The interbank moneymarket is very small, which is why potential problems in one bank should not have a direct impact on other banks.
The banks operating here are very well capitalised. This means that all funds in our banks are well protected.
The loan burden ration of the Estonian private sector to GDP is relatively low.
Estonia has a small public debt.

Communications

Estonia's open economy, excellent transportation links and central location make it an ideal base for production and distribution. Estonia has captured a considerable share of the rapidly growing transit trade through the Baltic Sea. The deepwater port and free zone of Muuga is one of the most advanced in the region. It serves as an entrepot for Baltic and CIS markets. The new multifunctional port and free zone in the North-East of Estonia, Sillamäe, is the easternmost port of the EU, capable to handle all cargo groups from oil-products and dry bulk to containerised cargo.

Passenger and freight links provide fast sea crossings across the Baltic Sea, while direct air connections give easy access to Tallinn from major European capitals.

In addition, Tartu airport has been renovated in 2009 in order to provide regular international flights.

Estonian railways use the same gauge as throughout Russia and the CIS, making Estonia an attractive European hub for bulk shipment of goods from the Far East: 90% of rail freight is transit traffic.

Foreign investors, mostly Nordic, have made considerable investments into high technology and communication networks in order to modernise the IT Communications infrastructure in Estonia. As a result, the Estonian telecommunications sector is one of the most developed in Central and Eastern Europe.

	12/ 2005	12/ 2006	12/ 2007	12/ 2008
Telephone main (fixed) lines per 100 inhabitants	32.8	33.7	35.7	37
Share of digital lines (%)	83	85	86	84
Number of mobile phone subscribers per 100 inhabitants	107	123	147.6	121.2
Broadband connections per 100 inhabitants (%)	13	17	21	24
Number of households connected to broadband per 100 homes	28	36	44	50

Sources: Estonian Competition Authority

International analysts consider Estonia to be the leader in Eastern Europe for broadband DSL access. In terms of DSL penetration per telephone lines, Estonia ranks presently among the top ten in the world.
In addition to the physical Internet access points, there are over 1 160 free wireless Internet (wifi) zones around the country (www.wifi.ee).
In recent years the number of fixed phone lines has decreased, as many consumers switched from fixed phones to mobile phones. All of Estonia is covered with digital mobile phone networks. Estonian Competition Authority, 2009).
The main task of Estonia's telecommunications policy is to ensure competition and openness in the sector. The main bodies in charge of telecommunications regulatory issues are the Ministry of Economic Affairs and Communications (www.mkm.ee) Technical Surveillance Authority (www.tja.ee) and Estonian Competition Authority (www.konkurentsiamet.ee).
The telecommunications sector has been completely liberalised since January 2001, when the special monopoly rights of the Estonian Telephone Company ended.
The advanced use of information technology demonstrates Estonia's commitment to global competitiveness. 71% of the population are Internet users. (Statistics Estonia, 2009).
63% of households have access to the Internet at home (2009, Statistics Estonia).

Labour

During the current year and the next, the number of employed people is expected to decrease by approximately 100 000 in total due to the recession. In following years, diminished economic activity and the accompanying decrease in demand for labour are expected to cause considerable growth in unemployment.

The unemployment rate is likely to peak at 14.4% in 2009 and 16.8% in 2010.

The average monthly salary in 2008 was 825 euros (in 2007 723 euros). In 2009 wages will decrease by 5.7% and in 2010 by 4.0%.

Foreign Trade

In 2008 75% of Estonia's total trade was with EU member countries. Estonia’s main trade partners are Finland, Sweden and Germany. Estonia's major exports are machinery and equipment, mineral products, and metals and metal products. Estonia's main imports are machinery and appliances, mineral products, and transport equipment.

As of 1 May 2004, the external trade relations of Estonia with third countries are based on the EU Common Commercial policy. All bilateral free trade agreements between Estonia and third countries were denunciated. As of the same date Estonia has implemented the conditions set out in the trade agreements between the EU and third countries and complies with the EU commitments made in the WTO.

Investment climate

Foreign investors are guaranteed a level playing field with local firms, which includes unrestricted repatriation of profits and capital along with the right to own land. There is a rapidly expanding supply of high quality commercial and office property, including a growing number of industrial parks. The establishment of free zones at Muuga Port and in Sillamäe has further enhanced Estonia's attractiveness to foreign investors.

Many costs such as energy, labour, transport services, telecommunications and property expenses are considerably lower than in other parts of the Baltic Sea Region. Nevertheless, Estonia has acquired a well-deserved reputation for the high quality of its products. Covering a wide range of industries, investors find they can achieve Scandinavian quality levels at lower costs.

Today foreign companies dominate in several sectors of the Estonian economy. Banking and telecommunications are dominated by the Nordic players, but the food and electronic industries also rely heavily on foreign capital. In relation to its size, Estonia has long been a leading Eastern European country in attracting foreign direct investments.

Estonia is one of the leaders in Central and Eastern Europe in terms of foreign direct investments (FDI) per capita. The stock of total FDI peaked at 11 648 million EUR as of 31 December 2008. Estonian companies have made significant foreign investments of its own, mainly (61.1%) in Latvia and Lithuania.