Moodys on Estonia

From Bloomberg today:

Estonian economic growth could slow more than expected as banks tighten lending and borrowers become more cautious as they worry about the future, Moody's Investors Service said.

A tighter labor supply prevented firms from expanding production in the first quarter, contributing to a slowdown in growth during the period to 9.8 percent, while the Baltic economy could be further hit by a decline in business and consumer confidence, Moody's said in a report today.

``There is a real risk that both banks and borrowers could become much more cautious as economic growth slows, potentially causing a sharper slowdown than expected over the next 18 months,'' Moody's said. ``Although the resulting economic slump could last several years, Moody's would expect growth to gradually return to the long-term potential rate, given the economy's inherent dynamism.''

Estonia's growth, the second-fastest in the European Union at 11.4 percent in 2006, stoked inflation and widened the current account deficit, increasing worries among foreign investors this year that the $15.1 billion economy may overheat and trigger a sharp decline in the growth rate.

The Estonian central bank said last week that soaring real estate prices and ``tension'' about wage increases were boosting the likelihood of a ``hard landing.'' It had forecast in April the economy will grow 8.4 percent this year, and slow to 6.5 percent in 2008.

Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate. Prime Minister Andrus Ansip said last month in an interview that he expects the country to fulfill the inflation criterion in 2010 and switch to Europe's common currency in 2011.

The credit agency said it believes that adopting the euro in 2011 ``is possible but not likely.'' Such a delay should not ``pose any serious problems or threaten the government's creditworthiness'', it added.

Moody's has an Aa1/P-1 foreign currency ceiling for Estonian bonds and rates government bonds at A1 with a positive outlook.