Successfully investing in Estonia

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last updated on 27 May 2020 | reading time approx. 6 minutes

 

 

How do you assess the current economic situation in Estonia?

Compared to the German economy, Estonia's economy is small but open and flexible. It also continues to stand out in terms of the economic development indicators. Like Germany, Estonia is a market primarily shaped by small and medium-sized enterprises. International organisations, such as e.g. the World Bank, have recognised the heterogeneous Estonian economy as very open and competitive. The industry, transport, and trade as well as diverse segments of the service sector are likewise important. Thanks to the abundance of natural resources, the Estonian economy relies primarily on forest-based industries. Estonia's energy sector is based on oil shale, which is quite a scarce resource in other parts of the world. About 70 per cent of Estonia's GDP is generated by the service sector; the industrial sector contributes more than 27 per cent, while the main branches of the economy (incl. agriculture) represent about 3 per cent of the total output.
 
In 2019, Estonia's GDP increased by 4.3 per cent in the fourth quarter compared to the fourth quarter of the previous year. The GDP has increased mainly thanks to ICT, wholesale and retail, as well as professional, scientific and technical activities. In mid-2019, the manufacturing industry also made a significant contribution to the economic growth. In the second half of the year, the agricultural sector, which previously had modest results, was also doing well.

 

The consumer price index was mainly influenced by the food price. The index changed by 2.0 per cent in 2020 compared to February 2019. In January 2020, goods were 2.0 per cent more expensive and services were 1.8 per cent more expensive than in January 2019. In 2019, the unemployment rate was 4.4 per cent, the employment rate 68.4 per cent and the labour force participation rate 71.6 percent. The number of long-term unemployed is the lowest in the past 20 years.

 

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

  • Standard & Poor: AA- with positive 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 where the economic policy is liberal, the tax regime investment-friendly, and legislation 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 60 countries, which enables efficient transactions and long-term business planning.

 

In 2019, with 74 points according to the Corruption Perceptions Index, Estonia is one of the 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 and, as in the previous year, took the 18th place out of 180 places (2019 – Transparency International). With a budget surplus and inconsiderable public debt, Estonia's budgetary situation remains strong. It’s public debt is below 10 per cent of the GDP and is still the lowest in the EU.

 

Estonia's investment climate is friendly to foreign investors. No differentiation is 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. 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 efficient and compatible infrastructure. It is a perfect country to test and implement your ideas. For projects involving new technological solutions, the small Estonian society is an excellent testing ground to quickly obtain direct feedback. As regards new technologies, Estonian people are very adjustable and very keen on using them.

 

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

 

Large potential is to be found in the following industries:

  • ICT;
  • Shared Services;
  • Electronics;
  • Mechanical engineering;
  • Small hydrogen vehicles;
  • Smart mobility;
  • Logistics;
  • Wood industry;
  • Gambling.

 

Estonia's main exports include:

  • Metals and chemicals;
  • Foodstuffs;
  • Textiles;
  • Wood and paper;
  • Machinery and equipment;
  • Furniture.
      

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

In Estonia, English is the main language of business. Therefore, it can be difficult to find a German-speaking workforce. The majority of 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 handling matters in the Estonian (or e-Estonian) digital environment, the e-resident number granted as part of the e-Residency platform offers also 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.
 

How advanced is the digital revolution in Estonia?

Estonia has long been known for its leading role in digitisation. The country offers its citizens and companies hundreds of e-services. Handling as many matters as possible online using IT solutions is commonplace. The internet in Estonia has a high penetration rate and is free; the country also boasts widespread e-commerce and e-government services, including e-Residency, and is thus indeed one of the leading nations in the world in this respect.

 

Internet access is regarded as the fundamental human right. Thanks to e-services, you 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 digital signing of documents are commonplace in the daily business life. In 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; since 2011, it has been possible to register a company online. The e-Residency programme offers also 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 is an alternative to the traditional voting system, whereas you do not have to get out of the house to vote. If an Estonian needs medication, he or she goes to the pharmacy, shows 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 participate in the e-School programme. Parents have online access to their children's grades and homework as well as teacher comments; also a lot of learning materials can be accessed online. E-solutions are proving to be practical, especially in a state of emergency because of the coronavirus pandemic, where all schools and universities are closed. Even companies in which it is possible to work from home – and which is currently considered more of a necessity than a choice – are very actively using the various possibilities of the digital society – e-mails, Skype, various databases, clouds, remote desktops are a part of everyday work.

 

In Estonia, many people order their groceries from the online supermarket and have them delivered to their home. This option was used very actively during the state of emergency and due to the restrictions on freedom of movement due to coronavirus, so that many supermarkets had to consider expanding their capacities.

 

In your opinion, how will Estonia develop?

The business environment in Estonia has always been strong and Estonia would continue to report stable growth rates. However, the effects of the coronavirus pandemic must now be considered. On 12 March 2020, Estonia declared a state of emergency, which lasted until 17 May  2020. It is not possible to accurately predict the ultimate economic damage caused by the coronavirus pandemic, but rough estimates can be made. How much the economy will shrink depends primarily on how long restrictions remain in Estonia and elsewhere in effect and how well one survives the crisis. It was assumed, that if the situation eases at the beginning of May, the Estonian economy could shrink by 6 per cent. If, however, only in early August, the Estonian economy could shrink by 14 per cent.

 

Already in March and April 2020, the economic crisis had hit service companies and the tourism and transport sector the hardest. In order to cushion the economic downturn, in April a draft supplementary budget for 2020 was adopted by the Estonian Parliament “Riigikogu”. The supplementary budget and the measures contained therein were designed to support those currently most affected by the difficulties. The aim is to revive the economy as quickly as possible, to support Estonian employees and companies, and to make a direct contribution to solving the health crisis. As Estonia's national debt has always been very low, this offers enough space to boost the economy.

 

The flexibility of Estonian companies and the adaptability of the economy give reason to hope that the Estonian economy can quickly recover from the recession caused by the coronavirus after the restrictions have ended.

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