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BNS - The international ratings agency Standard & Poor's (S&P) said on Thursday it had raised its long-term foreign and local currency sovereign credit ratings on Estonia to A from A-.
The short-term local and foreign currency sovereign credit ratings on Estonia were raised to A-1 from A-2.
The outlook is stable, S&P said in a statement.
The country's euro accession "should reduce exchange rate risk and improve Estonia's access to European capital markets," S&P said in the statement.
The stable outlook reflects S&P's view of Estonia's economic flexibility and improving competitiveness against the challenges inherent in adapting the economy to lessen its reliance on external funds.
S&P said the ratings reflect its view "of the clear commitment of Estonia's political parties to support and implement budgetary and structural policies to address the effects of severe economic recession, anchor the currency board arrangement, and safeguard public finances.
S&P expects Estonia's economy to expand 1 percent in 2010.
The Estonian government has taken a series of aggressive consolidation measures, both on the expenditure and the revenue sides. As a result, the government managed to increase revenues relative to GDP, and the general government deficit declined to 1.7 percent of GDP in 2009 from 2.8 percent in 2008, despite the strong economic contraction, S&P said.
The agency said it expects the deficit to increase slightly to 2.4 percent of GDP in 2010 and to gradually return to balance by 2013. Consequently, S&P expects Estonia's low general government gross debt to rise to about 11 percent of GDP by 2013 from 5 percent in 2008.
Estonia's per capita income, which is comparatively low compared with the 'A' median, reduces Estonia's ability to adjust to shocks -- all other things being equal, S&P said.
Domestic and external leverage in the private sector is sizable, particularly in the financial sector, and the continued reduction of leverage could hamper economic growth. The direct risk posed by the financial sector's contingent liabilities is mitigated, in S&P's view, by the almost exclusive dominance of supportive Nordic parent banks.
Sustained progress in moving the economy to a growth model less dependent on the inflow of external funds could result in a positive rating action, S&P said.
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