Republic of Estonia: Staff Report for the 2016 Article IV Consultation
Author:
International Monetary Fund. European Dept.
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Publication Date:
13 Jan 2017
eISBN:
9781475565881
Language:
English
Keywords:
ISCR; CR; government; labor market; Estonia; investment; government wage policy; structural surplus; productivity development; wage decentralization; labor resources
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Effectively addressing low productivity growth and risks to competitiveness requires a three-pronged approach: (i) making growth promotion more effective through oversight of programs by a dedicated productivity unit in the Prime Ministry, better calibrating programs to company's needs, incentivizing take-up, and scaling-up selected programs; (ii) re-anchoring wage developments in fundamentals by moderating government and minimum wage policies and mobilizing additional labor resources for the private sector, including through faster reduction of government employment; and (iii) social security contribution cuts to provide relief from pressures on profitability.

Abstract

Effectively addressing low productivity growth and risks to competitiveness requires a three-pronged approach: (i) making growth promotion more effective through oversight of programs by a dedicated productivity unit in the Prime Ministry, better calibrating programs to company's needs, incentivizing take-up, and scaling-up selected programs; (ii) re-anchoring wage developments in fundamentals by moderating government and minimum wage policies and mobilizing additional labor resources for the private sector, including through faster reduction of government employment; and (iii) social security contribution cuts to provide relief from pressures on profitability.

Context and Outlook

A. Context and Recent Developments

1. Thanks to strong institutions and determined market-oriented reforms, Estonia’s economic fundamentals remain solid. The business environment is one of the best in the region, there is no net public debt, and financial soundness indicators are exceptionally strong. The macroeconomy is broadly in internal and external balance, with labor force participation historically high, inflation running slightly above 1 percent, and the current account in small surplus. Some limited economic slack remains, mainly in the export and energy sectors. There is likewise some room for unemployment to decline further from its current rate of 7.5 percent and for hours worked per employee to increase.

2. Economic growth has, however, disappointed in recent years. Since mid-2013, growth has only marginally exceeded that of the euro area and labor productivity has been flat. During 2015 and the first three quarters of 2016 income convergence went into reverse. Adverse shocks are partly responsible, such as the particularly weak external environment,1 an investment hiatus related to the transition between the 2007–13 and 2014–20 Multiannual Financial Frameworks (MFF) for EU-funds, and more recently challenges for the oil shale sector from sharply lower global energy prices.2 But considering the rather long stretch of weak growth, it likely reflects not only adverse shocks, but also soft underlying dynamics. Private consumption was and remains the main engine of growth on the back of rapidly rising wages and expanding employment. Exports have started to recover, but contracting investment has not yet turned the corner.

Estonia and Euro Area: GDP Growth and Main Components, 2013:Q3 - 2016:Q3

(In percent per year)

article image
Sources: Statistics Estonia; and Eurostat.

3. Inflation is rising moderately, but remains contained amid muted euro area price dynamics. In November, headline inflation stood at 1.35 percent, compared to an average of 0.7 percent for the first eleven months of the year—a pickup reflecting primarily base effects, excise tax increases, and some pass-through from higher wages. But with core inflation hovering around 1.5 percent for the past 12 months and pass-through limited by the low inflation environment in Europe, price pressures remain well contained. The ECB’s monetary policy stance is broadly appropriate for Estonia. Estonia mainly benefits indirectly through higher growth in the euro area and hence better export opportunities in its most important market.

4. Wages are rising rapidly, partly reflecting a tightening labor market. Wage growth picked up to 7.6 percent in the first 9 months of 2016, from 5.9 percent in 2015, and 5.5 percent in 2014. With employment close to record highs, a tightening labor market is a key driver, but strong wage growth in the government sector and large minimum wage hikes are also important factors. In addition, wage growth seems to feed off expectations for a rapid narrowing of the pay gap with neighboring Finland.

5. Strong wage growth is eroding competitiveness, but poses no immediate threat to Estonia’s external position. With productivity stagnating, unit labor costs are sharply up, eroding Estonian firms’ profit margins and diminishing their ability to compete abroad. Export market shares have started to slip and resources are shifting toward nontradable sectors, where higher labor costs are easier to pass through to prices. However, despite subdued export growth, Estonia’s current account recorded a surplus of 1.7 percent of GDP in the first three quarters of this year—moderately stronger than consistent with medium-term fundamentals. Imports have been weak in recent years because of a decline in investment, which is currently some 6 ppts of GDP below its historical average. The real effective exchange rate is broadly in line with fundamentals (Box 1).

6. Public finances remain extraordinarily strong and are overperforming this year. Estonia’s fiscal policy has been firmly stability oriented and subject to a stringent fiscal rule. Gross public debt stands at only about 10 percent of GDP and is broadly matched by liquid fiscal reserves. The budget has been in structural surplus since 2009. Estonia’s Stability Program targeted a general government deficit of 0.4 percent of GDP this year, but so far fiscal outturns have been stronger than expected, mainly on account of buoyant revenues.

7. Estonia’s banking sector is sound and adequately supports the economy. Capital adequacy above 30 percent, liquidity coverage ratios of over 200 percent, and returns-on-assets running at 2 percent are all well above regulatory minima and readings in peers. Credit and leases to households and nonfinancial companies are expanding at a rate of some 6 percent, remaining prudent while providing adequate financing for investment, although companies chose to use much of the funding to retire foreign debt instead of investing. The loan-to-deposit ratio has been brought down sharply in recent years, but recently picked up mildly again to 110 percent when one bank discontinued accepting non-resident deposits. There are no immediate risks to financial stability, but the largely Nordic-owned banking sector remains subject to potential spillovers from vulnerabilities in parent banks.

8. Estonia’s new government has pledged to boost output growth and make it more inclusive. The coalition government headed by the pro-market Reform Party fell in November when the junior partners, the Social Democrats and the conservative Pro Patria and Res Publica Union, switched sides to form a new collation government with the Center Party. This is the first time an Estonian government has been led by a Prime Minister from the Center Party, ending a 17-year stretch of Reform Party governments. A coalition agreement sets out the new government’s policy intentions. In some areas reforms have already been spelled out in specific terms while other issues are addressed only in broad terms, pending further elaboration.3 The new government will retain the broad policy thrust of its predecessor, but:

  • try boost growth through (i) corporate income tax reform to lift investment; (ii) additional public investment of 0.5 percent of GDP in 2018, 2019, and 2020; (iii) raising labor supply by lowering the personal income tax for low-wage earners; (iv) yet to be specified plans to simplify and lower taxes and the administrative burden for small enterprises; and (iv) demand stimulus associated with somewhat looser fiscal policy.

  • try redress income inequality, primary through a more progressive personal income tax schedule, as well as moderate increases of child allowances and yet-to-be-specified spending on social benefits.

Estonia: External Stability Assessment

In 2016, the external position was assessed moderately stronger than the level consistent with medium-term fundamentals. The EBA-lite methodology finds a positive current account gap of 3.8 percent of GDP, more than half of which reflects current policy settings. Because the rest of the world is running a significantly looser fiscal policy than its norm, while Estonia is running a somewhat tighter fiscal policy than its norm, the current account is unusually strong. In addition, there are a number of temporary factors that boosted Estonia’s external balance in 2016: (i) investment was some 6 ppts of GDP below its long-run level; and (ii) Estonia’s current account is benefiting from substantial inflows of EU funds, which could decrease by over 1 percent of GDP in the 2021-27 MFF. Staff expects these factors to unwind over time with the current account deficit settling at just under 3 percent of GDP. The 2017 current account surplus is projected to decline to 0.2 percent of GDP.

Summary Table: External Stability Assessment

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Source: IMF staff estimates.

Considerable uncertainties surround the exchange rate assessment, but there is no clear indication of a sizable over- or undervaluation. The EBA-lite methodology estimates an undervaluation of 7.5 percent based on the unusually strong current account in 2016. But at least half the factors identified above that are behind this strength should unwind and deteriorate the current account without a need for the exchange rate to adjust. Moreover, undervaluation is not confirmed by the supplementary direct assessment of the equilibrium real exchange rate using the EBA-lite REER model, which suggests a small overvaluation of around 7 percent. On balance, this points to the exchange rate currently being broadly in line with fundamentals. Nonetheless, the exchange rate could become overvalued over time should the current wage and productivity trends persist.

Estonia’s net international investment position is improving and compares well with regional peers. Substantial inward direct investment is chiefly responsible for a position of -37 percent of GDP. At over 90 percent of GDP, gross external debt is high, but concerns about sudden withdrawals are largely mitigated by much of it being owed to parent companies or parent banks (Country Report No. 10/4, Box 2). Moreover, Estonia has large external debt claims, including from investment of the fiscal reserve and second-pillar pension funds abroad. Net external debt is negative, standing at about -12 percent of GDP by end-September 2016.

B. Outlook and Risks

9. The economy should gradually strengthen in the remainder of this year and next. Growth is projected at 1.3 percent in 2016 and 2.3 percent in 2017, with private consumption remaining robust and exports and investment befitting from the dissipation of the effects of adverse shocks. Medium-term growth could settle at around 3 percent despite adverse demographics, but this would require successfully implementing productivity-promoting policies, unlocking additional labor supply, and reining in wage growth. These projections imply reinvigorated convergence with living standards in Western Europe. Inflation is set to rise to 2.5 percent next year, reflecting a large contribution from further excise tax hikes together with a moderate pickup in underlying price dynamics. The current account should swing into moderate deficit as investment gathers steam and consumption continues to be strong.

10. Risks to the outlook are mainly to the downside. Compared to baseline projections, economic developments in trading partners are more likely to be weaker rather than stronger, partly because of political fragmentation risks, which if realized would pull down prospects for Estonia’s highly open economy. Direct effects from potentially more volatile global financial conditions would likely be limited, because of Estonia’s low public debt, its small financial markets, and euro area membership. But spillovers through more exposed Nordic banks cannot be ruled out and would likely affect credit supply and growth. On the domestic front, there is a risk that productivity growth fails to pick up and wages continue growing rapidly, undermining competitiveness and pulling resources into the less dynamic nontradable sector. On the upside, growth and productivity could rebound more forcefully as adverse shocks run their course and firms make the most of their existing work force.

Views of the Authorities

11. The authorities broadly concurred with the outlook and the risk assessment, but put more emphasis on the role of shocks in depressing growth. The Finance Ministry’s macroeconomic projections for the 2017 budget is close to those of staff, while the Bank of Estonia’s December projections revised growth down to a somewhat more pessimistic 1 percent for 2016. The authorities shared concerns about the disconnect between wage and productivity developments, although competitiveness effects are difficult to discern so far, perhaps because firms have sufficient liquidity to satisfy wage demands, and there is no convincing evidence of exchange rate misalignment. There was agreement that recent disappointing economic performance partly reflected weak underlying dynamics, but the Bank of Estonia put more emphasis on headwinds from feeble external demand, especially from Finland, and low energy prices that hit the oil shale sector hard. Moreover, adverse shocks affected primarily capital intensive sectors, pulling down the economy’s productivity through composition effects and helping explain simultaneous labor market tightness and growth weakness. It saw little to no slack in the economy and, to the extent that it existed, it was in sectors where domestic demand could not unlock it. Accordingly, the ECB’s monetary policy stance was seen as somewhat on the loose side for Estonia. The new government expressed concern about the “economic standstill.” Addressing it is a central plank of its program.

Estonia: Risk Assessment Matrix1

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The Risk Assessment Matrix (RAM) shows events that could materially alter the baseline path (the scenario most likely to materialize in the view of IMF staff). The relative likelihood is the staff’s subjective assessment of the risks surrounding the baseline (“low” is meant to indicate a probability below 10 percent, “medium” a probability between 10 and 30 percent, and “high” a probability between 30 and 50 percent). The RAM reflects staff views on the source of risks and overall level of concern as of the time of discussions with the authorities. Non-mutually exclusive risks may interact and materialize jointly. “Short term” and “medium term” are meant to indicate that the risk could materialize within 1 year and 3 years, respectively.

Policy Discussions

The consultation centered on policies to boost productivity and contain wage pressures with a view to securing sustainable convergence with living standards in Western Europe and to safeguarding competitiveness. This included exploring the supportive role that fiscal policy could play in this context. Separately and regarding financial sector issues, the discussions also covered policies to best contain potential spillovers from vulnerabilities in Nordic parent banks.

A. Securing Sustainable Income Convergence and Safeguarding Competitiveness

12. Labor productivity growth has been worryingly weak in the past three years. It has stagnated since mid-2013 and turned negative more recently, lagging the performance in regional peers. Poor total factor productivity growth is chiefly responsible—growth contributions of employment have been small everywhere and investment in Estonia has historically been higher than in peers, although it has declined relatively strongly more recently. Detailed analysis shows that catching-up of firms with initially poor performance indicators has been a major driver of productivity growth in Estonia. There is also evidence that firms with larger productivity gains had lower employment growth, implying that some of the labor saved from productivity gains might have been reallocated to low productivity segments of the economy, dragging down average productivity in the economy. Only the moderate productivity gains in the high-tech services sector went together with relatively large employment gains (Box 2).

A01ufig1

Labor Productivity Growth - All Activities

(Percent)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat; and IMF staff calculations.

13. Estonia’s policy settings are already conducive to productivity growth, but could nonetheless be optimized further. Predictable and stability-oriented policies are important assets. The business environment is ranked the best in Central and Eastern Europe, although there remain a few issues that should be addressed.4 This leaves three main areas for further policy action:

  • Making existing growth-promoting programs more efficient. Estonia has a large number of programs in place, but the outcomes appear not to be commensurate with the scale of the efforts expended. A productivity unit housed at the highest executive level in the Prime Ministry should be established to oversee and guide these programs in a coherent and comprehensive manner. A report on growth commissioned by the previous Prime Minister was a positive step.

  • Filling gaps and selectively scaling-up growth promotion. There are numerous entities that offer innovation support, including competence centers, university technology transfer centers, science parks, and regional competence centers, but take-up by Estonian firms remains limited. Similarly, commendable offers for re-education and training of adults in the context of Estonia’s life-long learning strategy have still to attract more applicants. This may suggest a mismatch with companies’ needs and insufficient demand incentives. Program design needs to take fully into account that traditional firms still dominate the economy, despite a sizable ICT sector, and are responsible for the bulk of productivity growth and employment.5 Take-up incentives could be strengthened through an expanded voucher program that allows the purchase of more application-oriented services from a wider range of suppliers. The new Company Development Program is a welcome initiative and should be scaled up. Active labor market programs also remain too small with spending of only 0.2 percent of GDP.

  • Restoring high public investment. Estonia’s public investment has traditionally been among the highest in Europe, but has come down in recent years. Its envisaged reinvigoration in the 2017 budget and medium-term fiscal plans is welcome and should help fill remaining infrastructure gaps, provided that it is geared toward projects with high economic returns.

14. Despite stagnant productivity, wages have been growing rapidly in recent years, which is starting to undermine competitiveness. Since 2011, labor compensation has risen by 5.6 percent annually, pushing up nominal unit labor costs by 3.1 percent per year for the whole economy and by 5.1 percent in manufacturing. In contrast, unit labor costs were essentially flat in Central and Eastern Europe and the EU (Box 3). At the same time, export market shares have started to slip, profit margins are falling and economic resources are reallocating toward nontradable activities. So far, the current account has remained strong though, because declining investment has helped hold down import growth and because terms-of-trade have moved in Estonia’s favor.

A01ufig2

Profit-to-Turnover in Manufacturing, 2003-16

(Percent)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Statistics Estonia; and IMF staff calculations.
A01ufig3

Export Market Shares: Goods and Services

(2003 = 100)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: IMF, WEO; Statistics Estonia; and IMF staff calculations.

Characteristics of Productivity Growth at the Firm Level1

Productivity growth has slowed significantly since 2005, despite a sizeable productivity gap with Western Europe. Labor productivity registered only a modest increase according to macroeconomic data. Similarly, firm-level data point toward disappointing labor productivity and total factor productivity developments. Like in most countries, productivity growth slowed markedly following the 2008/09 crisis, but the extent of it in Estonia is surprising, considering the still very sizeable productivity gap of over 50 percent with Western Europe.

Exploring sectoral and firm-level data offers important clues about what drives aggregate productivity, as well as associated employment trends. Sectoral data help disentangle within-sector productivity developments from what is due to shifts between sectors with different productivity levels. The sectoral makeup of the Estonian economy changed significantly over the past decade, but this composition effect was nonetheless quantitatively of little importance for aggregate productivity developments. Analysis of firm-level data reveal which firm attributes, such as size, age, export-orientation, or high technology, are conducive to productivity growth. One can also explore the implications of these same attributes for employment generation.

Catching-up in the more traditional sectors accounted for the bulk of aggregate productivity gains. Low initial productivity and unfavorable performance metrics were key characteristics of firms with strong subsequent productivity growth. It was not the high-technology sectors that registered particularly large productivity gains, but rather the more traditional sectors within manufacturing and agriculture. The role of firm age changed over time—younger firms no longer posted superior productivity growth after 2009. This may be an indication of reduced economic dynamism.

A01ufig4

Initial Productivity and Firm Age

(Percent of average firm productivity)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Orbis; and IMF staff calculations.

Firms that witnessed greater productivity gains were more labor intensive and had lower average labor costs. Firms that increased productivity the most had lower assets per employee, and higher labor cost shares than firms that increased productivity the least. The labor costs per worker—a proxy for workers’ skill levels—was lower for firms belonging to the high productivity growth group, suggesting that firms that did well relied more on lower-skilled labor.

High productivity gains were associated with low employment reduction growth. Firms with relatively higher productivity growth tended to feature relatively lower employment growth—an association also visible in other countries but particularly strong in Estonia. This can be seen by looking at the elasticity of labor productivity with respect to the employment-share elasticity, calculated from sectoral data provided by Eurostat for Estonia and Western Europe. These elasticities are larger for Estonia. In line with the above findings, they are particularly large in the more traditional sectors.

A01ufig5

Employment Change

(Percent of average indicator level)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Orbis; and IMF staff calculations.
1/ Based on Selected Issues Chapter “Productivity Developments in Estonia: Evidence from Firm-level Data.”

Developments of Unit Labor Costs and Implications for Competitiveness1

Unit labor costs (ULCs) are a key indicator for assessing developments in external price competitiveness. Defined as the ratio of labor compensation per employee and real output per employed person, they are identical to real effective exchange rates when compared to ULCs in trading partners and expressed in a common currency. The concept has its shortcomings, primarily because of its crude measurement of productivity. Empirically, catching-up economies often feature faster ULC growth without losing competitiveness and the association between ULC and export developments is not straightforward to establish. Therefore, supplementary indicators need to be invoked. Powerful ones include: (i) real ULCs, which relate labor compensation to nominal productivity and resemble the labor share of income; (ii) export market shares; and (iii) exporters’ profitability.

ULC developments in Estonia raise a red flag. Over the last three years, they have risen by 17 percent, but were stable in the EU and declined slightly in Central and Eastern Europe (CEE). Conceptual shortcoming in ULCs do generally not bias results against Estonia, except for income convergence that might explain some 30 percent of the gap in ULC growth with the EU.

Recent real ULC growth also looks rather worrisome. In manufacturing, they have risen by 10 percent over the past three years, compared to a 5 percent decline in the EU and in CEE. Case studies for Korea and Italy suggest that sustained increases of real ULCs above 10 percent could begin to undermine growth and income convergence.

A01ufig6

Nominal Unit Labor Costs, 2003-2016:Q2

(Four-quarter moving average, in euros, 2002=100)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat and IMF staff calculations.CEE-4 comprises the Czech Republic Poland, Slovakia, and Hungary.
A01ufig7

Nominal Unit Labor Costs, 2013:Q2-2016:Q2

(Four-quarter moving average, in euros, 2013:Q2=100)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat; and IMF staff calculations.CEE-4 comprises the Czech Republic Poland, Slovakia, and Hungary.
A01ufig8

Real Unit Labor Costs, 2003-2016:Q2

(Four-quarter moving average, 2002=100)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat; and IMF staff calculations.
A01ufig9

Real Unit Labor Costs, 2013:Q2-2016:Q2

(Four-quarter moving average, 2013:Q2=100)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat; and IMF staff calculations.

It is mainly developments in wages rather than productivity that set Estonia apart from the rest of CEE. Labor productivity growth has been somewhat weaker than in CEE, but wage developments have diverged much more. They accounted for two-thirds of the difference in ULC growth since mid-2013.

Strong wage growth reflects labor market tightness, but is further fueled by wage policies and momentum. Empirically, wage developments are closely linked to economic growth and the business cycle. But public sector and minimum wages also play a role, contributing one percentage point each to annual wage growth in Estonia in the past three years. Contrary to popular perception, Estonia’s unfavorable demographics do not emerge as an important wage-push factor. Wages by sector of economic activity seem rather unrelated to sectors’ performance or sectors’ vacancy rates, suggesting that labor market tightness is far from the only reason why wages grow so rapidly in Estonia.

1/ Based on Selected Issues Chapter “How Worried Should We Be About Fast ULC Growth in Estonia?”

15. Efforts to contain wage growth need to complement measures to raise productivity. The current divergence between labor cost and productivity developments is unsustainable. Cooling wage growth requires both measures to address genuine labor market tightness by enhancing labor supply and measures to address wage dynamics where they are detaching from fundamentals. There are three levers to directly influence wage growth:

  • Government wages. Government wage policies have strong direct bearing on the average wage in the economy as sectors that are dominated by government employment account for almost a quarter of employment.6 They spill over to private-sector wages, because the average wage is a “household number” in Estonia serving as a key reference point for all wage agreements. Wages in the general government have been front-running general wage developments in the last few years with raises of 9 percent in 2013 and 8 percent in 2014 and 2015 each. This was partly deliberate policy as pay for certain occupational groups was seen as in need of catching up. It also reflects Estonia’s newly decentralized expenditure allocation system whereby government entities are given autonomy to raise wages at the expense of employment or sometimes even other current expenditure. Moreover, in some subsectors, such as health care, government is inadequately represented in wage negotiations. Going forward, the government should phase in relative raises for specific occupational groups more slowly and balance the effect on average government wages through lower increases for the rest of the government sector. Wage decentralization should be accompanied by strict performance targets for government entities, overall spending envelopes that anticipate efficiency gains, and safeguards that ensure equal pay for equal work across the general government. Government representation in wage negotiations should also be strengthened as needed.

  • Minimum wages. They are primarily determined in negotiations between social partners, but government representatives are present, minimum wage agreements are given legal force by government decree, and minimum wages feature in parties’ political platforms. Minimum wages have risen by 10 percent each year since 2013 and a further 10 percent increase has already been agreed for 2017. Even though only a small fraction of workers earns the minimum wage in Estonia, there are important knock-on effects for other wages that help fuel general wage dynamics. The government should exert its influence to cool minimum wage growth. A formal role for independent experts in minimum wage formation could also be useful.

  • Communication. Wage growth in Estonia seems to go much beyond what can be explained by labor market tightness alone. Effective government and Central Bank communication to the public on the risks of unmitigated wage growth when productivity stagnates could help break this momentum.

16. Efforts to boost labor supply are key to addressing genuine labor market tightness. With unemployment low by historical standards, employment at record highs, and the labor force declining for demographic reasons, there are genuine wage pressures. Mobilizing additional labor supply for the private sector and making the most of existing labor resources are the main avenues to alleviate them. Possible measures include:

  • Reducing general government employment. Employment in sectors dominated by the government is higher than in Central and Eastern Europe, as well as in Western Europe when social work activities are excluded. While a commendable policy to cut government employment in line with the declining labor force is in place, there seems to be room for a faster reduction that would free up labor resources for the private sector.7

  • Boosting labor force participation of younger women. Estonia’s total and female labor force participation rates are above the EU average, though not as high as in the Nordic countries. But this reflects primarily high rates for the older cohorts, presumably because of limited pension benefits. Rates for women in the age bracket 20–39 years are actually below the EU average. The design of parental leave, which is for 3 years with 18 months at full pay, may play a role. The recent reform that allows parents returning to work earlier to keep at least half the benefits they would otherwise be entitled to goes a long way toward reducing disincentives to work, but it will be important to monitor the results with a view to identifying other impediments, such as the unavailability of child care facilities, or to improving the design of parental benefits further.

  • Reforming the disability system. The authorities are rolling out their commendable “Work Ability Reform.” It will strengthen assessment of the capacity to work, step up activation measures, tie the receipt of benefits to the use of activation measures, compensate employers for workplace adjustment costs, and subsidize social security contributions for those with partial work capacity. The authorities expect the reform to raise employment by around 1.5 percent by 2018.

  • Allowing more immigration from outside the EU. It is currently capped at only 0.1 percent of the population and immigrants must be paid at least 1.24 times the average wage.

A01ufig10

Employment in Public Administration, Defence, Education, Humand Health, and Social Works Activities, 2013

(Percent of total employment)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Eurostat; and IMF staff calculations.

17. Social security contribution cuts would provide useful relief from competitiveness pressures. With social security contributions paid by employers, cuts would initially help counteract pressures from wages on profits. In the longer run and as wage contracts are renegotiated, the benefits would be shared by employers and employees. The previous government had embarked on a program to reduce social security contribution rates by 0.5 ppts annually in 2016, 2017, and 2018, which should be accelerated, but the new government reversed course and plans to leave rates unchanged.

Views of the Authorities

18. The authorities shared the concerns about stagnant productivity and agreed on the need to boost labor supply. While composition effects may have dragged down labor productivity, underlying dynamics have also been weak and the low take-up of innovation promotion programs is an issue. The new government has not yet formed a view on the establishment of a productivity unit in the Prime Ministry or how to make innovation programs more effective, but plans a number of steps to boost growth: (i) a cut in corporate income taxes; (ii) reduced taxes and minimal red tape for small companies and startups; and (iii) additional public investment worth 0.5 percent of GDP from 2018 onward over and above the increase envisaged by the previous government. The authorities underscored their determination to keep the government sector lean, targeting a yearly staff reduction of 0.7 percent, which has been overachieved in the past 12 months. They will follow up on staff’s finding regarding the size of government. The reform of the disability pension system should make more labor resources available. The planned lowering of the personal income tax for low-wage earners may also boost labor supply.

19. On wages, the authorities are keenly aware of their rapid rise, but see little scope for the government to influence them directly. Wage growth looks worrisome and needs close monitoring, but it may partly be a natural byproduct of an economy advancing out of labor intensive activities. Company closures have been rare so far, and, where they happened, displaced workers mostly secured other jobs with relative ease. The authorities maintained that minimum wages are outside the government’s control. They agreed in principle that the government should not front-run general wage developments, but underscored their determination to bring pay for teachers to 120 percent of average wages by 2019 and noted that labor turnover in the government sector has become very high. Wage decentralization was designed to incentivize efficiency gains in government entities.

20. The authorities were skeptical about social security contribution cuts. While they conceded that the proposal has some logic, the new government has opted to direct fiscal resources to lowering personal income taxes instead. Both approaches would reduce Estonia’s still relatively high labor tax wedge, but the planned personal income tax cut also helps address income inequality.

B. Putting Fiscal Policy at Fuller Service to the Economy

21. Public finances are likely to record a surplus in 2016. Considering the good performance during the first nine months of this year and the revenue-friendly growth composition with strong wage and consumption growth, a surplus of 0.8 percent of GDP is likely, corresponding to a structural surplus of 1.5 percent of GDP. An additional contributing factor is the low execution rate of investment, due to delays in unlocking EU funds from the 2014–20 MFF.

22. The 2017 draft budget targets a small headline deficit and a structural surplus, but better results are likely. It was largely prepared by the previous government with only limited and budget neutral changes added by the new administration. Public investment is to rise from 4.2 percent to 4.9 percent of GDP, especially at the local government level and as EU-funds from the 2014–20 MFF are coming fully on stream. Excise tax hikes finance higher family benefits, a moderate increase of the basic income tax allowance, and higher agricultural subsidies. Previously planned social security contribution rate cuts, diesel excise hikes, and increases in the VAT for accommodation services will not go ahead, which is broadly revenue neutral overall. According to the Ministry of Finance, the fiscal balance will deteriorate to a deficit of 0.6 percent of GDP, corresponding to a structural surplus of 0.2 percent of GDP. However, revenue projections are on the conservative side and higher-than-budgeted revenues in 2016 will carry over into next year. In staff’s view, a headline surplus of 0.3 percent of GDP and a structural surplus of 0.9 percent of GDP are more likely. This corresponds to a small and unproblematic fiscal stimulus, especially as much of the reduction of the structural surplus reflects higher investment, which has a high import content.

23. The new government plans to implement more far-reaching fiscal policy changes from 2018 onward. They comprise a variety of initiatives:

  • Tax policy. Under the corporate income tax firms will have the new option to avail themselves of a reduced rate of 14 percent (instead of 20 percent) if they regularly distribute dividends. Corporate investors will be better off, but any benefit for domestic household investors will be offset by an additional 6 ppts tax on dividend income under the personal income tax. For the personal income tax, the reform plan is to more than double the basic allowance to €500 per month, bringing it to about 45 percent of the average wage in Estonia. At the same time, the allowance will become income dependent, phasing out with rising incomes. These changes to the personal income tax are likely to cost over 1 percent of GDP. There are also plans to introduce an excise on sugared beverages, a motor vehicle registration levy, a yet-to-be-specified small tax on the financial sector, additional excises on alcohol, etc. Funds of 0.1 percent of GDP for sectoral tax cuts to improve competitiveness have also been set aside.

  • Expenditure policy. Investment equivalent to 0.5 percent of GDP will be added to previous plans each year during 2018–20, with some projects already specified. Funds of about 0.4 percent are reserved for yet to be specified measures, including improving social benefits. Additional support for local governments and local transport will cost another 0.1 percent of GDP each.

  • Fiscal framework. Estonia’s current fiscal rule mandates public finances to be at least in structural balance every year. Unforeseen deficits need to be compensated with subsequent surpluses, while unforeseen surpluses are not allowed to be credited against subsequent deficits. The new government intends to remove this asymmetry, subject to a ceiling of 0.5 percent of GDP on structural deficits. Financing deficits by issuing bonds in financial markets is also under consideration, which Estonia has eschewed for over a decade.

These plans imply a considerable fiscal impulse of almost 1 percent of GDP in 2018 and a structural deficit of about 0.2 percent of GDP. On current projections, there is no need for such a large stimulus in 2018 because economic slack is located in sectors where it would not be reached. The stimulus associated with the reform of the personal income tax should be reduced or at least spread out over several years by gradual implementation, while preserving its welcome redistributive properties. Instead, fiscal space should be reserved for measures that strengthen the supply side of the economy without much affecting domestic demand. The following package should be considered: (i) a one percentage point cut in social security contributions; (ii) a 50 percent increase in ALMP spending; (iii) a tripling of outlays for the innovation voucher program; and (iv) a doubling of the Company Development Program. It would cost about 0.6 percent of GDP, which could be accommodated by redesigning the personal income tax reform to make it less costly.

24. More generally, Estonia’s successful fiscal institutions should be preserved. They have served the country well, underwriting one of the strongest public finances in Europe, keeping the tax system simple, low-rate, and predictable, and securing high public investment. There is substantial fiscal space and more of it could be accessed through the welcome envisaged modification of the fiscal rule, while still preserving a high degree of fiscal prudence. But it will be important to ensure that fiscal space is put to good use, i.e. that it strengthens the economy’s supply side and that existing spending programs are efficient.

Views of the Authorities

25. The government underscored its commitment to fiscal policies in support of broadly-shared growth, but the Bank of Estonia also saw risks of counterproductive fiscal stimulus and weakening fiscal discipline. There was agreement that fiscal policy should help promote productivity growth and investment. Corporate income tax reform and better conditions for smaller firms and startups are important in this regard. Making the personal income tax more progressive while preserving the standard flat rate of 20 percent takes precedence over social security contribution cuts. The Ministry of Finance saw the associated demand stimulus as an additional boon, but the Bank of Estonia expressed concern about untimely fiscal stimulus, further fueling already high wage and consumption growth. In addition, the envisaged modification of the fiscal rule could lead to persistent fiscal deficits given the practical difficulties of estimating structural fiscal deficits in real time, thereby risking to undermine fiscal discipline.

C. Further Bolstering Financial Sector Resilience

26. Efforts to address potential spillovers from vulnerabilities in Nordic parent banks should be stepped up further. Subsidiaries are strongly capitalized and liquidity coverage is high thanks to both sizable central bank deposits and parent bank funding at reasonably long maturities. In addition to these formidable lines of defense, cross-border crisis preparedness and management should be further strengthened in a revamped Nordic-Baltic Stability Group that also comprises ECB supervisors. MoUs should be concluded by all involved agencies on pertinent issues in areas of their respective mandates. Conducting cross-border crisis simulation exercises would also be helpful. Recovery and resolution plans that recognize the systemic importance of the subsidiaries in Estonia should be finalized expeditiously.

27. Locally owned banks are losing established correspondent banking relationships, but alternative providers have already been lined up. The one remaining western correspondent bank is retreating from Estonia, putting locally-owned banks at risk of losing access to dollar clearing. Alternative providers based in China and Russia have been lined up, but it will be important that these new relationships are stable and that strict AML/CTF standards are in place.

28. The planned establishment of a pan-Baltic bank requires vigilance. Earlier this year, DNB and Nordea announced their intention to merge their Baltic businesses in a joint venture. The new bank would be domiciled in Estonia and operate branches in Latvia and Lithuania. It would be the largest bank in Estonia—and as such fall under direct ECB supervision—and increase the size of the banking system by about one third. While the establishment of the new entity will take time, relevant permissions and approvals are being sought in the nearer term. In this context it will be important to ensure that the new entity will be comfortably capitalized and that existing parent bank funding is either retained or replaced by other equally reliable arrangements.

Views of the Authorities

29. The authorities assess the near-term risks to the financial sector in Estonia as small. They put risks associated with Nordic parent banks at a 4 on a 1-to-6 scale and concur that solid capitalization, high liquidity, and home-host cooperation are key to reducing spillovers. They look forward to the revitalization of the Nordic-Baltic Stability Group to be kicked off at the forthcoming meeting under Swedish chairmanship, including progress on a new MoU. Regarding correspondent banking relationships, the authorities noted that the issue was less critical than in many other small jurisdictions, because subsidiaries have access to dollar clearing through their parents and all banks have access to euro clearing. But they agreed that stability in the new relations is important and noted that all new correspondents were top-tier banks. As far as the DNB-Nordea joint venture is concerned, the authorities were confident that parent funding would continue. They also noted that Estonia’s Deposit Guarantee Fund is adequately positioned to take over coverage of the additional deposits. The authorities are keen to see bank recovery and resolution plans with due attention to the Estonian subsidiaries finalized expeditiously.

Staff Appraisal

30. Strong institutions and determined reforms have delivered solid growth over the long run, but more recent performance has disappointed. Gains in living standards have been among the largest in the region over the past two decades on the back of a business friendly environment, steady policies, and prudent macroeconomic management. However, since mid-2013 GDP has expanded by only 1.8 percent annually and labor productivity has stagnated. While negative shocks played a role, these developments also speak to weaker underlying dynamics. As the external environment improves and existing pro-growth policies come to fruition, growth should pick up from 1.3 percent this year to 2.3 percent in 2017 and around 3 percent in the medium term, but this acceleration cannot be taken for granted and downside risks dominate.

31. Rapid wage growth in an environment of stagnant labor productivity adds another layer of concern. Wage growth keeps increasing, reaching 7.6 percent so far this year. The diverging paths of wages and labor productivity are unsustainable and are already denting competitiveness. Profit rates are falling and are below their long-term average. Export market shares have started to slip.

32. A three-pronged policy approach is needed to address these challenges.

  • Making pro-growth programs more effective. A commendable set of programs is already in place, but outcomes could be improved by establishing a dedicated productivity unit in the Prime Ministry for coherent and comprehensive guidance and oversight. There is also scope to scale up certain programs, such as ALMPs and the Company Development Program, and improve the take-up of innovation promotion and educational programs by better matching them to companies’ needs and by providing additional financial incentives.

  • Re-anchoring wage growth in fundamentals. Policies can contribute to this goal by ensuring that increases in public wages and in the minimum wage do not consistently outpace private sector wage raises. Leaning against the demographic decline of labor supply by releasing labor resources from the relatively large government sector faster, allowing more immigration, and boosting female participation rates would also be helpful.

  • Alleviating pressures on competitiveness. Previous plans to cut social security contributions should be retained and accelerated to provide valuable breathing space for profits that are under pressure from rapidly rising wage costs. Over time, these benefits would be shared by labor and firms as wages adjust.

33. Public finances are in excellent shape with room to support the three-pronged policy approach while preserving Estonia’s strong fiscal institutions. Net of liquid reserves, government debt is close to zero and the budget has been in structural surplus since 2009. There is no convincing case for general demand stimulus because economic slack is mainly in the export and energy sectors, which are beyond the reach of conventional fiscal policy. Instead, fiscal space should be used judiciously to strengthen the economy’s supply side and finance the measures under the three-pronged approach, subject to the private sector’s ability to usefully absorb them and the public sector’s ability to efficiently provide them. Public investment should also be lifted while ensuring high rates of return. Steps to tackle Estonia’s high degree of income inequality are welcome but should be redesigned so as to achieve distributional objectives at lower costs.

34. Estonia’s financial sector is strong and supports the economy, but spillover risks from Nordic parent banks could be further mitigated. Indicators of capitalization, liquidity, asset quality, and profitability are all impressive. The return to measured credit growth of some 6 percent currently is welcome. The financial sector remains subject to spillover risks from vulnerabilities in Nordic parent banks. Those could be further mitigated by strengthening cooperation with home-country and European authorities in the Nordic-Baltic Stability Group and expeditiously finalizing recovery and resolution plans for cross-border banking groups that fully recognize the systemic nature of their Estonian subsidiaries.

35. It is recommended that Estonia remain on the 12-month consultation cycle, with the next Article IV consultation anticipated to be held in early 2018, after Estonia’s EU presidency in the second half of 2017.

Figure 1.
Figure 1.

Estonia: Real Sector Developments, 2009–16

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Haver; and national authorities.1/ Balance equals percent of respondents reporting an increase minus the percent of respondents reporting a decrease.
Figure 2.
Figure 2.

Estonia: External Developments, 2004–15

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Haver; Statistics Estonia; and IMF staff calculations.1/ Other is defined as the sum of financial derivatives, and other investments.
Figure 3.
Figure 3.

Estonia: External Competitiveness, 2008–16

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: DOTS; Haver; WEO; and EU Commission.
Figure 4.
Figure 4.

Estonia: Fiscal Developments and Structure, 2003–15

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: WEO; Eurostat; and OECD.1/ Data is from 2014.
Figure 5.
Figure 5.

Estonia: financial Sector Developments

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Sources: Haver; national authorities; and IMF staff calculations.1/ In Lithuania, NPLs include impaired loans and loans past due by 60 days but not impaired; in Latvia, NPLs are loans overdue by more than 90 days; in Estonia, they are loans overdue by more than 60 days.
Figure 6.
Figure 6.

Estonia: Public Sector Debt Sustainability Analysis (DSA)–Baseline Scenario

(in percent of GDP unless otherwise indicated)

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Source: IMF staff.1/ Public sector is defined as general government.2/ Based on available data.3/ Long-term bond spread over German bonds.4/ Defined as interest payments divided by debt stock (excluding guarantees) at the end of previous year.5/ Derived as [(r - π(1+g) - g + ae(1 + r)]/(1+g+π+gπ)) times previous period debt ratio, with r = interest rate; π = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar).6/ The real interest rate contribution is derived from the numerator in footnote 5 as r - π (1+g) and the real growth contribution as -g.7/ The exchange rate contribution is derived from the numerator in footnote 5 as ae(1+r).8/ Includes asset changes and interest revenues (if any). For projections, includes exchange rate changes during the projection period.9/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year.
Figure 7.
Figure 7.

Estonia: Public Sector DSA–Composition of Public Debt and Alternative Scenarios

Citation: IMF Staff Country Reports 2017, 009; 10.5089/9781475565881.002.A001

Source: IMF staff calculations.
Table 1.

Estonia: Selected Macroeconomic and Social Indicators, 2013–18

(Units as indicated)

article image
Sources: Estonian authorities; Eurostat; and IMF staff estimates and projections.

Includes trade credits.

Net of portfolio assets (including money market instruments, financial derivative assets, other investment assets, and reserve assets held by Estonian residents.

Includes the Stabilization Reserve Fund (SRF).

Loans and leases to households and non-financial corporations. For 2016, based on data at end-September 2016

Table 2.

Estonia: Summary of General Government Operations, 2012–18

(In percent of GDP)

article image
Sources: Estonian authorities; and IMF staff projections.
Table 3.

Estonia: General Government Financial Assets and Liabilities, 2010–2016:Q2

(In millions of euros)

article image
Source: Statistics Estonia.

Including commitments under the European Financial Stability Fund.

Table 4.

Estonia: Summary Balance of Payments, 2010–18

article image
Sources: Bank of Estonia; and IMF staff estimates and projections.

Excluding interest payments and reinvested earnings.

Includes operations in debt securities.

Starting in 2000, the definition of external debt was widened to include money market instruments and financial derivatives.

Net of portfolio assets (including money market instruments), financial derivative assets, other investment assets, and reserve assets, other investment assets, and reserve assets held by Estonian residents.

Includes government guaranteed debt.

Table 5.

Estonia: Macroeconomic Framework, 2010–21

(Percent of GDP, unless otherwise indicated)

article image
Sources: Estonian authorities; and IMF staff estimates and projections.

Public savings minus public investment differs from the fiscal balance by the amount of capital transfers received from abroad.

Mainly EU capital grants, all of which are channelled through the budget.

Table 6.

Estonia: Indicators of External Vulnerability, 2010–15

(Percent of GDP, unless otherwise indicated)

article image
Sources: Estonian authorities; Bloomberg; Standard & Poor’s; and IMF staff estimates.

Total general government and government-guaranteed debt excluding government assets held abroad.

Loans and leases to households and non-financial corporations.

External debt includes money market instruments and financial derivatives.

Net of portfolio assets (including money market instruments), financial derivative assets, other investment assets, and reserve assets held by residents.

For 2008-10, EEKs per US$; starting in 2011, Euros per US$.

Tallinn stock exchange index (OMX Tallinn), end of period.

Standard & Poor’s long-term foreign exchange sovereign rating.

Table 7.

Estonia: Households, Financial Assets and Liabilities, 2010–15

(In millions of euros)

article image
Source: Statistics Estonia.
Table 8.

Estonia: Financial Soundness Indicators, 2009–2016Q2

(Percent)

article image
Sources: Eesti Pank; and Financial Supervisory Authority.
1

Since 2013:Q2, trading partner import growth has averaged only 1.2 percent per year, compared to 3.2 percent for the euro area. The gap has been even larger since 2015:Q1 with 0.1 percent against 3.0 percent.

2

The oil shale sector accounted for some 3 percent of GDP in 2014, through mining, electricity generation, and crude oil production. Its contraction reduced annual growth by an estimated 0.5 ppts during 2015:Q1–2016:Q2. However, during 2013:Q3–2016:Q2 the sector performed in line with the rest of the economy, neither subtracting nor adding to overall growth.

3

The projections and government policies of this staff report reflect the policy intentions of the new government as of mid-December 2016 to the extent that they have been articulated.

4

Estonia is the highest ranked country in Central and Eastern Europe in the World Bank’s Doing Business Report (rank 16 out of 189 countries) and the World Economic Forum’s Global Competitiveness Index (rank 30 out of 140 countries). Areas for further optimization include: (i) shortening bankruptcy procedures and increasing recoveries; (ii) strengthening the position of minority shareholders; (iii) reducing exclusive rights for accountants and engineers; (iv) allowing non-residents to invest in law firms and registering ships; (v) updating the Labor Code to allow modern forms of employment, such a job sharing; (vi) better connecting transportation modes; (vii) raising weight limits for timber trucks; and (viii) streamlining environmental inspections.

5

Estonia scores only 23rd out of 28 European countries on “Integration of Digital Technology,” despite being a leader in e-government services, according to the European Commission’s Digital Economy and Society Index.

6

These sectors comprise public administration, defense, compulsory social security, social works, health, and education.

7

The government has pledged to keep government employment in full-time equivalent terms pegged at 12 percent of the population aged 15–74 years.

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Cover IMF Staff Country Reports
Republic of Estonia: 2016 Article IV Consultation-Press Release; Staff Report; and Statement by the Executive Director for the Republic of Estonia
Author:
International Monetary Fund. European Dept.
Volume/Issue:
Volume 2017: Issue 009
Publisher:
International Monetary Fund
ISBN:
9781475565881
ISSN:
1934-7685
Pages:
48
DOI:
https://doi.org/10.5089/9781475565881.002
  • View in gallery

    Labor Productivity Growth - All Activities

    (Percent)

  • View in gallery

    Profit-to-Turnover in Manufacturing, 2003-16

    (Percent)

  • View in gallery

    Export Market Shares: Goods and Services

    (2003 = 100)

  • View in gallery

    Initial Productivity and Firm Age

    (Percent of average firm productivity)

  • View in gallery

    Employment Change

    (Percent of average indicator level)

  • View in gallery

    Nominal Unit Labor Costs, 2003-2016:Q2

    (Four-quarter moving average, in euros, 2002=100)

  • View in gallery

    Nominal Unit Labor Costs, 2013:Q2-2016:Q2

    (Four-quarter moving average, in euros, 2013:Q2=100)

  • View in gallery

    Real Unit Labor Costs, 2003-2016:Q2

    (Four-quarter moving average, 2002=100)

  • View in gallery

    Real Unit Labor Costs, 2013:Q2-2016:Q2

    (Four-quarter moving average, 2013:Q2=100)

  • View in gallery

    Employment in Public Administration, Defence, Education, Humand Health, and Social Works Activities, 2013

    (Percent of total employment)

  • Figure 1.
    View in gallery
    Figure 1.

    Estonia: Real Sector Developments, 2009–16

  • Figure 2.
    View in gallery
    Figure 2.

    Estonia: External Developments, 2004–15

  • Figure 3.
    View in gallery
    Figure 3.

    Estonia: External Competitiveness, 2008–16

  • Figure 4.
    View in gallery
    Figure 4.

    Estonia: Fiscal Developments and Structure, 2003–15

  • Figure 5.
    View in gallery
    Figure 5.

    Estonia: financial Sector Developments

  • Figure 6.
    View in gallery
    Figure 6.

    Estonia: Public Sector Debt Sustainability Analysis (DSA)–Baseline Scenario

    (in percent of GDP unless otherwise indicated)

  • Figure 7.
    View in gallery
    Figure 7.

    Estonia: Public Sector DSA–Composition of Public Debt and Alternative Scenarios

Labor Productivity Growth - All Activities

(Percent)

Profit-to-Turnover in Manufacturing, 2003-16

(Percent)

Export Market Shares: Goods and Services

(2003 = 100)

Initial Productivity and Firm Age

(Percent of average firm productivity)

Employment Change

(Percent of average indicator level)

Nominal Unit Labor Costs, 2003-2016:Q2

(Four-quarter moving average, in euros, 2002=100)

Nominal Unit Labor Costs, 2013:Q2-2016:Q2

(Four-quarter moving average, in euros, 2013:Q2=100)

Real Unit Labor Costs, 2003-2016:Q2

(Four-quarter moving average, 2002=100)

Real Unit Labor Costs, 2013:Q2-2016:Q2

(Four-quarter moving average, 2013:Q2=100)

Employment in Public Administration, Defence, Education, Humand Health, and Social Works Activities, 2013

(Percent of total employment)
Figure 1.

Estonia: Real Sector Developments, 2009–16
Figure 2.

Estonia: External Developments, 2004–15
Figure 3.

Estonia: External Competitiveness, 2008–16
Figure 4.

Estonia: Fiscal Developments and Structure, 2003–15
Figure 5.

Estonia: financial Sector Developments
Figure 6.

Estonia: Public Sector Debt Sustainability Analysis (DSA)–Baseline Scenario

(in percent of GDP unless otherwise indicated)
Figure 7.

Estonia: Public Sector DSA–Composition of Public Debt and Alternative Scenarios