Estonia’s opposition centre-right Reform Party won the most votes in the country’s parliamentary election on Sunday, but not enough to form a government alone. According to the State Electoral Office, Reform won 34 seats in a 101-seat parliament, compared to 26 for the governing centre-left Centre Party. The right-wing populist Conservative People’s Party (EKRE) saw the largest gains, however, increasing its number of seats by 12 to a total of 19.
Following the results, Scope Ratings GmbH, a leading European rating agency, suggests two possible outcomes. First, EKRE’s gains could induce Kaja Kallas, leader of the Reform Party, to form a coalition with the rival Centre Party, both of which have already ruled out a collation with EKRE. Both parties strongly support Estonia’s EU and NATO membership, and are committed to maintaining Estonia’s sound fiscal position.
Second, Reform could also form a coalition with two other parties that passed the 5% threshold, namely, centre-right Pro Patria and the Social Democrats, currently in a coalition with Centre. This three-party alignment would also have a majority of 56 seats.
“We do not expect a significant policy change following the formation of either of two coalition governments. We believe the new government will remain committed to a favorable business environment and to policies addressing labor-market tightness,” says Levon Kameryan, an analyst in the sovereigns team of Scope Ratings.
Estonia benefits from strong public finances underpinned by low public debt (an estimated 8% of GDP in 2018, the lowest among EU members), and small fiscal deficits. The fiscal position is further bolstered by sizable government assets comfortably covering gross debt. The rating is supported by Estonia’s euro area membership giving access to a large common market, a strong reserve currency, and an independent European Central Bank.
Furthermore, Estonia is eligible to receive European Structural and Investment Funds of up to EUR 4.4bln during the period 2014-20, which is equivalent to 2.7% of GDP annually over the 2014-18 period. Scope notes economy’s vulnerability to developments in the external sector, including potential spill-over risks from Nordic parent banks. In addition, unsustainable wage increases could affect the competitiveness of domestic producers.