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Successfully investing in Estonia

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last updated on 19 May 2021 | reading time approx. 6 minutes

 

 

How do you assess the current economic situation in Estonia?

The spread of Covid-19 has once more been on the increase in 2021 in many places, leading to further restrictions on the economic activity of companies. So, as a consequence of these new outbreaks and the resulting imposition of restrictions, the economic crisis in Estonia is now expected to last longer than previously forecast.

In 2020, Estonian GDP fell by 1.2 per cent compared to the fourth quarter of the previous year. The economy shrank by 2.9 per cent in total in 2020. This drop was caused mainly by fourth quarter downturns in the agriculture, forestry and fishing, accommodation, and food service sectors, as well as the administrative and support service sectors. Manufacturing also impacted GDP negatively, but the situation improved, and it has since reached its pre-crisis level. Rapid declines also slowed down in the transportation and storage sector. Moreover, information and communication and the financial sector made a positive contribution to the recovery of the economy.

Although the impact of Covid-19 restrictions on the economy was modest in the fourth quarter, the Estonian Bank’s economists have noted that many of the more severe restrictions only came into force in December 2020. Thus, their impact on GDP will not have been so significant. Moreover, these restrictions mainly affect low-wage and lower-productivity sectors, so their visible economic impact is smaller than their social impact.

According to the Estonian Bank’s economists, retail sales in Estonia at the end of 2020 were significantly higher than in other EU countries. The success of the internal market sector depends to a large extent on its own restrictions. Business expectations are also more optimistic in Estonia than elsewhere in Europe. The well-being of the export sector, however, is more reliant on the restrictions of other countries. Despite the restrictions placed on international transport, foreign trade fared well. Although the low level of travel services continued to limit the export and import of services, trade in goods reached a historically high level. The volume of both the import and export of goods grew due to increases in the trade in electronic goods and chemical products, which rose by 14.4 and 8.7 per cent respectively. Exports were supported by the export of wood products, while imports were boosted by the import of various machinery and equipment.

The consumer price index was mainly influenced by an increase in the price of electricity for private households and a decrease in fuel prices, with the index showing a 0.6 per cent rise between February 2020 and February 2021. Meanwhile, goods became 0.6 per cent cheaper and services 2.7 per cent more expensive within the same time frame.

In 2020, the unemployment rate was 6.8 per cent (previous year: 4.4 percent), the employment rate 66.7 per cent (previous year: 68.4%) and the labour force participation rate 71.6 per cent (previous year: the same).

Furthermore Estonia boasts one of the highest international credit ratings of all the countries in the region:

  • Standard & Poor: AA- with stable outlook;
  • Moody: A1 with stable outlook;
  • Fitch IBCA: AA- with stable outlook.


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

Estonia is a country whose economic policy is liberal, whose tax regime is investment-friendly, and whose legislation is transparent, well-functioning and harmonised with the EU laws. No tax is levied on retained profits, interest or dividends, and Estonia has a double taxation agreement with 61 countries, which facilitates efficient transactions and enables long-term business planning.

With 75 points according to the Corruption Perceptions Index in 2020, Estonia is one of only 20 countries in the world whose total points have statistically improved significantly since 2012. Compared to the previous year, Estonia improved its result by 1 point, now sharing 17th place out of 180 places with Iceland (2020 – Transparency International). Estonia’s national debt rose by 9.5 per cent in 2020 compared to the third quarter of 2019 but remained at the same level if we compare quarter to quarter. At the end of the third quarter of 2020, Estonia’s national debt accounted for 18.5 per cent of its GDP, which is still the lowest in the EU.

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.

In addition, Estonia offers a very progressive business environment with an efficient and compatible infrastructure. It is a perfect country for companies to test and implement their ideas. For projects involving new technological solutions, the small Estonian society is an excellent testing ground for innovative businesses who need to quickly obtain direct feedback. As regards new technologies, Estonian people are very flexible, and keen to adopt new solutions.

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

Sectors with a favourable outlook:

  • ICT;
  • Wood and paper industries;
  • Financial and insurance;
  • Start-ups;
  • Manufacture of electronic and electrical equipment.


Estonia's main exports include:

  • Machinery and equipment;
  • Mineral products;
  • Wood and wood products;
  • Furniture, wooden houses etc.;
  • Metals and metal products;
  • Means of transportation.


Estonia's main imports include:

  • Machinery and equipment;
  • Mineral products;
  • Means of transportation;
  • Metals and metal products;
  • Chemical products;
  • Foodstuffs and beverages.


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 20 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 per cent of all tax returns are filed. The Estonian banking system is based on IT solutions and is quick and flexible. In Estonia, 99 per cent 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 per cent 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 packstations, which are experiencing 70 per cent 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?

Restrictions imposed in spring 2021 to prevent the spread of Covid-19 will temporarily affect growth, but it is possible that the Estonian economy will start to recover rapidly from mid-2021. According to the assessment of the Estonian Bank, the optimistic scenario assumes that the restrictions on economic activity will last until the end of April and that a large part of the population will be vaccinated by autumn, so the Covid-19 situation will not cause as many economic setbacks as it has before. Experience from the last year clearly showed that a large part of the economy can quickly get back on its feet once Covid-19 restrictions have been lifted.

However, if the restrictions last until June, this will affect various service sectors the hardest. Above all, this will have an impact on tourism and other related areas of activity, as without the opportunity to recover from the crisis in the tourist season, businesses will have little room to breathe. Company closures will become more frequent in this case and, as a result, unemployment will rise. However, overall economic activity will suffer less as the industrial sector has the potential to increase production. In this negative scenario, a widespread wave of bankruptcies may cause permanent damage to the potential of the economy as most of the rising unemployment would be primarily structural.

The Covid-19 crisis has accelerated several trends in the economy. It has tightened the development schedules of companies – several months of development work has to be done in a matter of months in order to make value chains and work processes more risk-proof. The digitisation and automation of work and business processes has become central to survival. Teleworking and virtual channels are being used more widely, where possible. Larger and stronger companies are able to manage these changes on their own, while small companies and large companies that are in a worse position, are left struggling. The labour market is polarising faster than expected. On the one hand, the shortage of top specialists is worsening, but at the same time there is a surplus of medium- and lower-skilled labour force. There is a need to involve top specialists from abroad.

The crisis has led to a redistribution of markets around the world, with supply chains being shortened and diversified. Europe and Estonia have a lot to gain from this if they act wisely.

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