Boston, MA -- (SBWIRE) -- 08/20/2013 -- We anticipate the economic recovery in Estonia to endure following the deep recession brought on by the eurozone debt crisis, with economic growth reaching 2.1% in 2013 and 3.2% in 2014 before gradually settling towards long-term trend growth of 2.6% . Domestic demand will be the main driver of growth, as weak external demand hinders export growth.
We maintain a positive view towards Estonia's fiscal trajectory. Following two straight years of low-level budget deficits, conservative expenditure targets and continued economic growth will allow for a return to fiscal surplus by 2014. Meanwhile, public debt is set to increase on the back of eurozone bailout fund contributions. However, Estonia's debt burden will peak in 2013, remaining well below other EU member states.
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Popular support for Estonia's ruling Reform Party, in power since 2007, has fallen significantly and is unlikely to regain previous highs. While the pro-Russian Centre Party will remain popular among the ethnically Russian electorate, we see little scope for its inclusion in a potential re-shuffling of the coalition given deep ethnic political divides.
Major Forecast Changes
Historical revisions to balance of payments data led to a sharp rise in the reported current account deficit in 2012. Although our core view on Estonia's external dynamics has not changed, this prompted us to revise our forecast for the current account deficit in 2013, to 2.3% of GDP from 1.6% previously.
Although we anticipated a slowdown in gross fixed capital formation in 2013, we did not expect the steep contraction observed in Q113 real GDP data. Indicative of a lack of private sector investment activity, this led us to revise down our 2013 GDP forecast to 2.1%, from 3.2% previously.
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