Estonia by taoyni


									Estonia                                                                                                                                       October 2006

General Environment

POLITICAL STABILITY                                    CRIME & CORRUPTION                                    INSTITUTIONAL FAILURE

Since regaining independence, Estonia has              Crime and Corruption is very low, though              Institutions in Estonia don't have a long track
had 12 governments with 8 prime ministers; all         favoritism remains a certain problem. Estonia         record and recent adoption of EU regulation
in all, a negative track record of political           is a small country with only 1.4 million              further aggravates the situation. Nevertheless,
stability. On economic issues though, the              inhabitants and business in Estonia shows a           we see this as a temporary issue that will not
present standpoints of serious contenders to           very     local    character      where    personal    lead to further risks of breakdown. The small
power differ little and Estonia's times of political   relationships are crucial. Future developments        size of Estonia and the overall high
instability seem to be over for the time being.        are likely to affect the situation negatively. With   accountability of the bureaucracy are the
Future political influence by the Russian              Russian investments a gradual introduction of         reason for this assesement.
minority is likely as this minority is fueled by       Russian business morale will arise that we
further immigration from Russia while part of          have qualified far less positive than the one of
the Estonian population is tempted to move to          Estonia.
the West. There is a risk of a tipping point in
population structure to be reached, where the
Russian minority will try to achieve political
leadership. The latter will result in significant
frictions within the society.

                                                       TI CPI Score:                            6.0
Risk:                                    7.4%          Risk:                                   3.2%          Risk:                                 0.1%
Opportunity:                             0.0%          Opportunity:                            0.0%          Opportunity:                          0.0%

LABOUR & SOCIAL UNREST                                 RACIAL/XENOPHOBIC UNREST                              RELIGIOUSLY MOTIVATED UNREST

Despite good employment projects and growth,           Estonia has a sizeable Russian minority of            Estonians are Lutherans while the Russian
the weak social net of Estonia in comparison to        close to 30%. While this is in principle worrying,    minority is Russian Orthodox. Both churches
European peers will likely trigger welfare             the overall positive economic situation we            were oppressed during the Soviet era and both
demands by workers in Estonia. Despite the             expect over the forecasting period gives little       have knit ties between each other during that
high threshold for violence demonstrated over          reason to assume violence to appear.                  period. There is no track record of
the last decade, there is a risk that employers        Nevertheless, Estonians have a certain degree         discrimination of the Russian Orthodox church
will be tough on curbing such demands and              of resentment against Russians and its will to        and we do not expect it to appear over the
that they will find support in Estonian politics.      preserve the Estonian character of the nation         forecasting period. Nevertheless, we added a
Moreover, the expected development will                does lead to acts of discrimination against           token risk for the fact that neighbouring Poland
further the divide between the declining               Russians. Futurte racial violence is not likely       does indeed see a significant decline of
industrial North-East of Estonia and the growing       but cannot be discarded. Nationalistic                religious intolerance, an effect that might spill
Tallinn region. Hence, we expect some degree           chauvinism is increasing. This includes also a        over to the Baltic Nations.
of non-violent social unrest to be likely over the     growing rejection of some effects of tourism.
forecasting period.

Risk:                                    3.4%          Risk:                                   3.6%          Risk:                                 0.5%
Opportunity:                             0.1%          Opportunity:                            0.0%          Opportunity:                          0.0%

CIVIL WAR                                              MILITARY COUP                                         INTERSTATE WAR

Despite historically rapid change of political         Formerly occuppied by Soviet troops, Estonia          Though we assume no interstate war risk for
leadership, the change occured democratically          has no significant military and no formal             EU nations we maintain with a token reminder
with no indication of public discontempt               security organization that could take the             that Estonia is often at odds with Russia and
concerning the process. Recent Hungarian               military role of a coup. Estonia is part of the EU    borders to it. A significant turn in Russia and
developments cast a certain shadow on the              and a coup would not be tolerated. Plus, there        significant worsening of EU-Russian relations
picture but we do not consider a repetition of         is absolutly no social basis to assume arising        as well as potential unrest affecting the
the Hungarian situation anywhere likely.               instability for such an intervention.                 sizeable Russian minority in Estonia does not
Nevertheless,      heterogenous     population,                                                              fully exclude Russian intervention in Estonia
growng expected friction and the reach of                                                                    over the forecasting period.
Russia could lead ro a deterioration such that
civil war cannot be excluded further down the

Risk:                                    1.8%          Risk:                                   0.0%          Risk:                                 1.0%
Opportunity:                             0.0%          Opportunity:                            0.0%          Opportunity:                          0.0%

EXPORT SANCTION RISK                                   IMPORT SANCTION RISK

Risk:                                    0.0%          Risk:                                   0.4%
Opportunity:                             1.8%          Opportunity:                            1.8%
Estonia                                                                                                                                   October 2006

Business Perspectives

DOMESTIC GROWTH - TREND                             INFLATION - TREND                                    PUBLIC EXPENDITURE & DEBT

The Estonian economy has little track record as     The Estonian economy has little track record         The Estonian constitution requires a balanced
such and Estonia is in full swing of                as such and Estonia is in full swing of              budget. Despite this potentially limiting factor,
transformation.      The     overall  economic      transformation as well as in a high inflationary     Estonia's economic growth and healthy
development is considerable and all factors add     band. The overall inflationary development           financial situation will not materialize any
up to a considerable economic projection risk.      leaves ample room for both upward mid-term           limitations over the next decade. All on the
This risk is not predominantly tied to specific     swings as well as downturn swings. Overall,          contrary, infrastructure spending will remain
alternative global economy risks though as the      both the Estonian central bank as well as the        both stable and sustained. Estonia is virtually
Estonian economy apears to be shock resistant       ECB are trying to lower inflation in concerted       debt free and will be so within two years. We
to all scenarios we considered. Contagion, both     action and a low oil price scenario would bring      have discarded any opportunities as future
positive and negative is important as Estonia is    down inflation significantly faster than our base    windfall will likely be used for developing the
fairly small and closely linked to economies of     case suggests.                                       welfare system, not infrastructure spending.
high regional risk projection.

                                                                                                         Government Debt/GDP                     5%
Risk:                                 5.4%          Risk:                                  5.7%          Risk:                                  0.0%
Opportunity:                          5.4%          Opportunity:                           6.3%          Opportunity:                           0.0%

CROWDING OUT                                        ENERGY PRICES                                        REAL WAGES

We expect Estonia to post public finance            Estonia is energy independent in electricity         Estonia is very successful in its recent
surplusses over the entire forecasting period       generation and imports gasoline both from            economic development and will likely see first
and foreign investment to be steady and             Russia and World markets. The national               impasses on its labour market within the next
exceeding national needs. Inflation will            energy infrastructure us reasonably modern           five years. Despite its attractiveness, Estonia is
decrease over time without the requirement of       but will have to adapt to rapid changes in           not a preferred location for skilled immigrants
considerable interest rate adjustments. Hence,      regional demand structures. Moreover, EU             due to an undeniable language barrier that still
we consider crowding out to be irrelevant as a      energy policy will promote alternative energy of     affects Estonian business. Hence, we believe
risk.                                               which there is significant potential along the       that upward pressures on labour compensation
                                                    Baltic coast. The domestic structure of energy       will soon materialize. This is further aggravated
                                                    generation grants Estonia an opportunity             by soon to be expected welfare demands by
                                                    compared to peer nations that would                  the local workforce.
                                                    materialize in a high oil price scenario.

Risk:                                 0.0%          Risk:                                  0.3%          Risk:                                 12.5%
Opportunity:                          0.0%          Opportunity:                           1.0%          Opportunity:                           1.3%


Regulations in Estonia are transparent and          Estonia has one of the lowest tax rates in
evenly applied. EU regulations, both general        Europe. This bears a risk as EU pressures on
and environmental have been introduced and          unifying tax regimes will likely target Estonia in
we expect little change on the overall regulatory   particular. Such a scenario will not materialize
environment. In line with our overall EU            in the short term and might not even
assumption, we believe regultaions on average       materialize over the length of the forecasting
to decline with the exception of environmental      period. On the other hand, permanent
issues in the context of Kyoto. There, Estonia is   government surplusses open room for further
in a favourable position due to its considerable    tax reductions, not in terms of income tax but in
alternative energy potential.                       terms of other taxes, fees and priviledges
                                                    especially for the declining industrial sector.

HF IEF                                 1.65
Environmental Risk:                   0.6%
Environmental Opportunity:            1.1%          Corporate Tax Rate:                   20.0%
General Risk:                         3.3%          Risk:                                  1.3%
General Opportunity:                  4.3%          Opportunity:                           4.4%

Risk:                                 3.6%          Risk:                                  3.0%
Opportunity:                          0.9%          Opportunity:                           0.2%
Estonia                                                                                                                                      October 2006

Financial Perspectives

CURRENCY TREND                                        CURRENCY VOLATILITY                                 TRANSFERABILITY

The Estonian Crown (Kroon) is closely linked to       Considering the high overall volumes that the       Transferability of funds is secured in Estonia.
the Euro and this link is actively supported by       Estonian financial market will have to handle       Residents and non-residents may hold foreign
the ECB. Estonia is small relative to the             over the next years, temporary disturbances         exchange accounts, and payments, transfers,
Eurozone and will gather fund outflow from the        cannot be ruled out. These will be shortlived       and most capital transactions are not subject to
EU as a financial hub function. Hence, there is       though in relationship to the Euro leaving the      controls. Foreign direct investment rules
little reason to doubt that Estonia will see the      Estonian risk basically according to the Euro       regarding real estate, aviation, maritime
Euro introduced no later than 2010 leaving            volatility towards the US$.                         transport, and security service enterprises were
Estonia with the Euro volatility towards the US$                                                          harmonized with European Union regulations in
as only significant risk on currency trend.                                                               2003 and 2004. We have introduced a
                                                                                                          reminder position for the remote likelyhood of
                                                                                                          major frictions with Russia spilling over on
                                                                                                          transferability issues.

Downside Risk to Euro:                  0.0%          Downside Risk to Euro:                0.3%
Upside Risk to Euro:                    0.0%          Upside Risk to Euro:                  0.0%          Foreign Reserves/CA deficit              18%
Downside Risk to US$:                   1.3%          Downside Risk to US$:                 0.5%          Risk:                                   0.1%
Upside Risk to US$:                     5.0%          Upside Risk to US$:                   1.5%          Opportunity:                            0.0%

LIQUIDITY                                             CONTAGION

We discard fundamental liquidity problems for         The linkage of the Estonian economy to the
the Estonian financial system in the light of the     one of Russia bears a significant contagion risk
extraordinarily open financial system. Estonia        in the short term, especially in a case of a
does and will find international backing for its      significant decline of Russian relations to other
financial market transactions that cover the          former satellite states. Moreover, the fast
relatively small Estonian market with ease.           development of real estate markets in Eastern
Nevertheless, in the light of overall high transfer   Europe bear a risk of real estate crisis that
sums and the relatively short track record of the     might lead to a reassessment of Estonia as an
national system, shortlived impasses might            investment location. Within the next years,
arise on an exceptional basis.                        Estonia will become a net capital exprter
                                                      though and contagion risk will diminish to very
                                                      low levels creating significant stability.

Risk:                                   0.8%          Risk:                                 2.7%
Opportunity:                            0.0%          Opportunity:                          6.8%

Investment Failure

INFRASTRUCTURE FAILURE                                PHYSICAL DESTRUCTION                                POLITICAL/ECONOMIC BREAKDOWN

Estonia's infrastructure is to a large extend         Natural hazards exist in the form of                Considering excellent economic prospects,
government held but generally in good                 infrastructure disrupture due to extreme cold       high political accountability, balanced finances,
condition. Transport and logistics correspond to      weather in winter affecting road transport and      recent spread of wealth and reduction of
Western European standard with few                    the port. Those are short-lived interruptions       unemployment, low taxes and a high social
exceptions. In practice, black-outs are rare and      though and they have little effect on the overall   coherence, we see no basis for concern on
water shortages are no problem. A token risk          economy. We introduced three token risks: For       political stability in the short term. Nevertheless,
has to be introduced though for the significant       a relevant risk of civil war, a relevant risk of    for significant risks arising from Estonia's
increase in energy demand over the                    interstate war and a relevant risk of crime and     demographic and foreign affairs problems, we
forecasting period and the potential of               corruption arising as part of the growing           a have introduced a token risk.
disrupture of access to the baltic sea through a      interlink with Russia.
Danish straight with extraordinary dense traffic.

Risk:                                   1.5%          Risk:                                 0.3%          Risk:                                   1.0%

To top