According to the report published by Fitch Ratings today, 20 March, the rating agency has decided to leave Estonia's sovereign ratings and rating outlooks unchanged. The report was the result of the rating agency's February mission to Estonia.

According to the report, Estonia's ratings are supported by consistent budget surpluses and very low public debt levels, as well as by strong economic growth rates that are driving the per capita income levels more and more towards the EU average.

At the same time, the report stresses that Estonia's rating dynamics are weakened by a large current account deficit, rising inflation, a tightening labour market and fast credit growth. Therefore, Fitch considers the Estonian economy to be more vulnerable to a sudden stop to capital and financial flows, a sharp slowdown in economic growth and a halt in the convergence process.

Although the inflation is continuing to increase, the rating agency observes clear signs of an adjustment to a more sustainable growth rate. Both consumption and investment growth have slowed and credit growth to the private sector has declined as well.

Even though Estonia's economic growth has started to slow, it is still too early to be confident that the soft landing scenario is going to materialise. Fitch says that further evidence that Estonia is certain to attain a soft landing is likely to result in revising the outlook back to Stable.

The last time Fitch provided its assessment to Estonia's sovereign rating was in January 2008, when Fitch Ratings affirmed the Republic of Estonia's Foreign Currency and Local Currency Issuer Default Ratings at A and A+, respectively. At the same time, the agency revised Estonia's Long-Term Issuer Default Ratings to Negative from Stable.

On 22 January 2007, the rating agency Standard & Poor's affirmed Estonia's sovereign rating at level A, leaving the outlook negative. In July 2007, Moody's affirmed our sovereign rating at A, revising the outlook to stable form positive.

The full report is available here.