Preliminary information
The paper will carry out a country analysis for Estonia. The nation is located in Northern Europe. It lies in the Baltic region. The countries that boarders Estonia are Russia and Lake Peipus (east), Latvia (south), Gulf of Finland (north), and Baltic Sea (west). The country covers a total area of 45,227 square kilometers. The population of Estonia is 1.340 million. The country has not experienced growth in population since 2009. The capital city of Estonia is Tallinn while the dominant national language is Estonian. The major ethnic groups are Estonians (69.1%) followed by Russians (24.8%), and Ukrianian (1.7%). Currently, the currency in use is the Euro (€).
Strength of the economy
Estonia is considered to be one of the most vibrant, high-income, and developed economies in the world. Besides, it has a high value of human development index. The table presented below shows the data of various economic variables. The data cover a period of 11 years.
Continuation
The country reported tremendous growth in the value of GDP over the years. GDP increased from €9.66 billion in 2003 to €12.76 billion (International Monetary Fund 1). The change is equivalent to 32.09%. However, there was a negative GDP growth during the global financial crisis. This occurred in 2009 when GDP dropped from €12.747 billion in 2008 to €10.93 billion in 2009 (International Monetary Fund 1). Further, the GDP per capita rose from €7,123.36 in 2003 to €9,524.562 in 2013 (International Monetary Fund 1). However, during the global crisis the GDP per capita declined. An overall increase in the GDP per capita implies that the living standard of the citizens improved over the period. Estonia was one of the few countries in the Eurozone that recovered at a faster rate from the crisis. This shows that the economy is capable of self adjusting. The inflation rate, as measured by the GDP deflator index, rose from 90.262 in 2003 to 139.198 in 2013 (International Monetary Fund 1). Also, the average consumer price index rose from 176.846 in 2003 to 270.942 in 2013 (International Monetary Fund 1). The total percentage increase in inflation using the GDP deflator is 54.22% and when using average consumer prices the increase is 53.46%. The unemployment rate dropped from 10.025% in 2003 to 5.519% in 2008 (International Monetary Fund 1). However, the global financial crisis resulted in loss of jobs. This led to an increase of the unemployment rate to 13.762% in 2009. The value further rose to 17.256% in 2010. However, with the implementation of expansionary policies, the unemployment rate dropped to 9.068% in 2013 (International Monetary Fund 1). The total investment deteriorated over the years while the gross national savings improved. The government debt rose from €0.203 billion in 2003 to €0.914 million in 2013 (International Monetary Fund 1). Finally, there was a general decline in the current account balance especially after the global financial crisis. Thus, it can be concluded that the economic position of the country has improved over the years (Mankiw 76).
Financial markets
The Estonian financial markets are robust and sound. The financial markets are heavily dominated by commercial banks. The banking sector plays a significant role in the provision of growth and development of the entire economy. The sector achieves this by ensuring rapid growth of deposits. The financial market is heavily supported by the large number of SMEs. Further, the domestic capital markets have played a significant role in allocating savings. Also, the enterprises owned by foreign companies provide alternative ways of raising additional capital from external sources. The financial markets in the country do not have a well-established capital external demand. Basically, the financial market in Estonia is supported by the vibrant economic activities in the country. The financial standing of households and businesses has improved as a result of growth of the capital market. The financial assets have also increased and indebtedness has declined over the years. This has enabled the economy to be more stable and able to withstand external disturbances.
Government involvement
Estonia is considered to be one the Europe’s trade friendly economies. However, despite being friendly to investors, there is a lot of government intervention. Further, there is a number of government owned organizations. Besides, the government has carried out a number of privatization programs. An example of such a program is the sale of shares in Tallinna Vesi in 2001. It is a water utility company. Another example of privatization is U.S. and British-backed Baltic Rail Services in 2000 (Kramer 1). The central bank of Estonia is independent of the operation of other government organizations. Further, it cannot be held liable for the financial obligations of the government. However, it can provide advice to the government (Eesti Pank 1).
International trade treaties
The treaties that have been approved by the government of Estonia are Polish-Lithuanian Commonwealth, European Union, Military alliances, and peace treaties. These treaties have improved the trade relation between Estonia and the rest of the world. The treaties with the European Union were a major treaty that had a significant impact on the economy. The country changed its currency to the Euro. Further, this treaty improved business and investor confidence, and the standard of living.
Economic History
Estonia has developed at a faster rate since independence than all the other economies in the EU. Also, it has the lowest ratio of government debt to gross domestic product when compared to other members of the EU. Another economic milestone that has been achieved by the country is the generation of approximately 75% of electricity consumption. Also, it has a flat rate income tax and free trade system among other achievements. Further, the growth rate of real GDP (8.0%) is about 5 times the average of the EU.
Country risk and political risk
Estonia has grown rapidly, especially after independence. The country has not experienced any political volatility since 1991. Therefore, there has been political stability. This has created a favorable business environment for carrying out business. Further, it can be pointed out that Estonia handled financial crisis effectively. Adverse measures were put in place to restore the economy and mitigate the impact of the crisis. Specifically, the government used stringent fiscal policies to restore the economy. The country has a number of economic strengths. Examples are educated workforce, lower cost of labor as compared to other members of the EU, strategic location, and the ability to embrace new technology easily. Further, the country does not have problems that relate to human rights. Besides, the corruption level is low. The threat of terrorism is quite low in the country. However, it is exposed to the risk of unselective attacks just like all countries other across the globe. Therefore, the risk that an investor business will be exposed to by investing in Estonia is quite low.
Currency and translation risks
The currency and translation risks are minimized because Estonia joined the Eurozone. The use of one currency in the Zone reduces the risk of adverse fluctuations of exchange rates.
Recommendation
The analysis above shows that the country had a tremendous economic performance. Besides, the speed at which the country recovered from the global financial crisis shows that a potential investor cannot lose when there is a shock in the economy. Estonia is a vibrant and high income country with a relatively low risk in major aspects of the economy. Besides, it will have a high potential of growth and more development in the future. Therefore, an investor can either invest in the country, through buying portfolio investment or foreign direct investment. Buying a portfolio will be more appropriate because the country is keen on raising capital from external sources. The use of FDI may be bureaucratic because of heavy government intervention.
Works Cited
Eesti Pank. Bank of Estonia (Eesti Pank) Act. Web. 2014.
International Monetary Fund. Data and statistics. 2014. Web.
Kramer, Hillary. Moral hazard, government style in Estonia. 2011. Web.
Mankiw, Gregory. Principles of economics. USA: Cengage Learning, 2011. Print.