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Successfully investing in Estonia

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last updated on 16 June 2023 | reading time approx. 7 minutes

 

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How do you assess the current economic situation in Estonia?

The latest economic forecast from Eesti Pank finds that conditions are improving for a recovery in economic growth. GDP will move towards an upward trajectory throughout 2023, but the growth will be built on the back of the downturn that happened in the second half of last year, and so the economy will still be 0.6 percent small­er in size for this year overall than it was in 2022. Growth in the economy will strengthen in the years ahead to around 3 percent. It will be helped in this by recovery in foreign markets, cheaper energy, slower growth in consumer prices, increased purchasing power for consumers, and im-proved confidence among companies and households that will make conditions more favourable for investment.

The Estonian economy was hit early on by the rapid rise in energy prices and suffered from a strong pass-through to other inflation components. Private consumption therefore slowed markedly during 2022. Industrial production turned strongly negative in the last months of 2022, reflecting lower demand for key industry sec­tors (wood and metal industry). The labour market nevertheless remained strong in late 2022 and early 2023, with only a slight uptick in the unemployment rate.

Higher interest rates mean that the growth in borrowing and investment will be slower than it was before the series of crises started, and consequently it will offer less support for the economy. The rise in interest rates is set to heavily affect consumption and construction activity, given the prevalence of flexible interest rates in Estonian loan contracts. GDP, however, is forecast to return to growth in 2023 as the current headwinds, no­tably inflation, weak external demand and low confidence, are expected to gradually subside and fiscal policy turns expansionary. 

There is a lot of uncertainty around the forecast. The uncertainty around supply chains and energy has re­trea­ted, but the future course of the war and geopolitical tensions may well change the outlook for the economy substantially.

The downturn in the economy has not been accompanied by any major increase in unemployment. Shortages of skilled labour have encouraged employers to retain staff in the expectation of a recovery in demand, and this is demonstrated by employment remaining stable so far.

Inflation will continue to slow. Inflation may be expected to fall below 10 percent by the middle of the year, and to be around 4 percent by the end of the year. Inflation is being brought down by the rising reference base from a year earlier, and by cheaper prices for energy and food commodities. A further factor restraining inflation is weaker demand than last year, which will prevent companies raising prices at the same rate as before since con­sump­tion no longer has the support it had earlier from savings built up during the pandemic and money with­drawn from the second pension pillar. The purchasing power of the average wage will continue to recover having fallen at the end of last year, and it will return to where it was before the downturn in 2025. Inflation pass­ing through into wages and collective wage agreements will keep wages growing fast this year. Public sec­tor wages will rise by around 16 percent in 2023, while pressure on private sector wages will come from rises in the minimum wage and the cost of living. 

Further growth in the economy will depend on international competitiveness. Corporate estimates of inter­na­tio­nal competitiveness have fallen to low levels. The Estonian economy has usually recovered from crises through a revival in exports, but this may not happen this time around. The energy crisis and the economic impact of the war have reduced access to several production inputs, and their prices have risen more for Estonian exporters than they have for competitors.

 

How would you describe the investment climate in Estonia? Which sectors offer the largest potential?

Estonia's open and stable economy is characterized by adaptability and innovation. With conservative budget policy, flat-rate income taxation, extensive freedom for foreigners to own land, and 100 percent profit re­pa­tri­ation, Estonia is one of the most business-friendly countries not only in Eastern and Central Europe but in the whole world. Estonia is among the leading countries in Central and Eastern Europe regarding foreign direct in­vest­ments per capita. Estonia is highly developed in the FDI-attractive fields of IT, biotechnologies, and green industries. A balanced budget, a free trade regime, a fully convertible currency, a competitive banking sector, and an investment-favourable environment have all contributed to the success of the country.

Estonia’s investment climate is friendly to foreign investors, with no differentiation being made between do­mes­tic and foreign investors. European structural funds are available to domestic and foreign companies in equal measure. Foreign investments are protected by laws and international treaties, and to ensure investment pro­tec­tion, Estonia has concluded treaties with many countries, including Germany and Switzerland.

Estonia has qualified specialists who boast strong language, finance, and IT skills. Estonians are also known for being committed employees.

FDI by field of activity, share in total (2022):
27% financial and insurance activities
18% real estate activities
13% professional, scientific and technical activities
12% manufacturing
12% wholesale and retail trade
7% information and communication

Origin of FDI (2022):
23% Finnish companies
20% Luxembourgian companies
13% Swedish companies
8% Latvian companies
5% Belgian companies
5% Lithuanian companies


What challenges do German companies face during their business ventures into Estonia?

English is the main language of business in Estonia. As a result, it can be challenging to find a German-spea­king workforce. Most official proceedings are conducted electronically in Estonia. If you do not hold an Es­to­nian ID number or card, you will not be able to sign documents digitally. For the handling of matters in the Esto­nian (or e-Estonian) digital environment, the e-resident number granted as part of the e-Residency platform also offers foreigners who do not live in Estonia equal access to Estonian services. Thus, to be able to do busi­ness in Estonia, you do not have to live in Estonia – digital residency will suffice. As a small country, Estonia is not suitable for labour-intensive ventures.
 

Estonia has a pioneering role in the Baltic States in terms of digitisation. How does this affect the economy?

Estonia has long been known for the leading role it is playing in digitisation. The country offers its citizens and companies hundreds of e-services. The handling of a wide range of services online using IT solutions is commonplace. The internet in Estonia has a high penetration rate and is free, and the country also boasts wide­spread e-commerce and e-government services, including e-Residency, making it one of the leading nations in the world in this respect.

Internet access is regarded as a fundamental human right. Thanks to e-services, you can save time, money, and energy. You only need the Estonian ID card, a card reader and Internet access. The Estonian ID card offers ac­cess to all national e-applications. At the same time, it is a valid travel document in Europe. E-mail corres­pon­dence and the digital signing of documents are commonplace in daily business life. In such a paperless society, many transactions can be handled quickly. Estonia is famous for being a country with one of the largest num­ber of start-ups per capita. A company can be formed and entered in the e-register in 10 minutes, and since 2011 it has been possible to register a company online. The e-Residency programme also offers non-residents access to the register and the digital services.

In addition, Estonia offers e-government, e-health, e-school, e-election, and many other services. E-Tax is an electronic filing system through which 95 percent of all tax returns are filed. The Estonian banking system is based on IT solutions and is quick and flexible. In Estonia, 99 percent of banking transactions are handled electronically. Voting online offers an alternative to the traditional voting system, giving voters the opportunity to exercise their democratic duty without having to leave the house. If an Estonian needs medication, they go to the pharmacy, show there their ID card, and the pharmacist hands out the medication based on a digital pres­cription added by the GP to the database directly through the internet.

Furthermore, well over 80 percent of schools are currently participating in the e-School programme. Parents have online access to their children's grades and homework as well as their teacher comments; additionally, a lot of learning materials can be accessed online. E-solutions are proving to be practical, especially in times of Covid-19. Even those companies that already offer the ability to work from home are more intensively exploring the potential of the digital society, with e-mails, Skype, various databases, clouds, and remote desktops now becoming a central part of everyday work.

Ordering groceries and consumer goods at home and in the office has become a new consumer norm. Online sale offers companies, among others e.g. hardware stores, consumer goods suppliers or other entrepreneurs, an opportunity to generate turnover. During the Covid-19 period, e-commerce has more than doubled. In a year, more than 40,000 mobile workers have been added. Not to mention the pack stations, which are experiencing 70 percent more use than before the pandemic. It can be said that selling online has become the new normal for business. In some cases, not having an e-shop can even seriously hamper a business’s potential for profit and growth. However, it is also worth drawing attention to the fact that the more entrepreneurs do business in e-channels, the greater the competition will be. It is important to be aware of changes in the market and to continuously develop existing solutions to keep up with such trends.

 

In your opinion, how will Estonia develop?

Estonia has been one of the fastest-growing economies in the European Union, with a strong focus on tech­no­logy and innovation. The country has a highly skilled workforce, a favourable business environment, and a rela­tively low level of debt. Estonia has also been successful in attracting foreign investment, particularly in the tech sector.

Looking ahead, Estonia faces several challenges, including an aging population, a relatively small domestic market, and a dependence on exports. However, the country has several opportunities to continue its economic development, such as further investment in digitalization, innovation, and education. The Estonian government has also launched several initiatives to address these challenges and promote sustainable economic growth, such as promoting entrepreneurship, increasing investment in research and development, and improving infra­structure.

Overall, Estonia has the potential to continue its economic development and remain a competitive and in­no­va­tive country in the global economy, but this will depend on various factors such as effective governance, con­tin­ued investment in technology and innovation, and the ability to adapt to changing global economic conditions.

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