IMF: Estonia's outlook positive, but risks remain

13.12.2010, 16:00

The outlook for Estonia remains positive, although risks to the economy remain, the International Monetary Fund said today in statement at the end of the yearly Article IV review of the country's economy.

Specifically, higher global prices, a faltering recovery in its trading partners and budget spending pressure remain risks for the country, the IMF said.

"Inflation is projected to increase further in 2011 as the full-year impact of global food and fuel prices will be felt even though the impact of administered price increases will wane," said the report, commenting Estonia's inflation hit 5 percent year-on-year in October as higher global prices for food and energy impacted on the small open economy.

"While recent wage increases have so far not hurt profitability, they nonetheless warrant close monitoring given losses in price and cost competitiveness in the boom, the slack in the economy, and high unemployment, it added.

During an economic boom in 2007 Estonia saw prices rise by double digits, but price growth stopped when the economy fell into a 13.9 percent recession in 2009.

The fund noted that a faltering recovery in the country could impact on parent banks of Estonian subsidiaries and increase the percent of bad loans in the economy.

"Besides direct trade-related effects, a faltering recovery or if unemployment otherwise becomes entrenched could result in new nonperforming loans (NPLs) weighing on banks' willingness to lend and support the recovery.

'Estonia managed to hold its budget deficit below 3 percent of GDP in 2009 to meet the economic criteria for euro zone entry.