Estonia is open for business and takes governance seriously. International credit agency Moody’s has reaffirmed Estonia’s A1 sovereign credit rating with a stable outlook, citing the country’s exceptionally clean public finances and strong institutions — even as defence spending is on the rise in the coming years.
Moody’s rating affirmation, published on 17 February 2026, puts Estonia in a comfortable position among European peers. Its public debt stands at just 23.5% of GDP — the lowest in the European Union and among the lowest anywhere in the world. For context, the EU average hovers around 80%, and many Western European governments are grappling with debt burdens two or even three times Estonia’s size.
A compact country with solid fundamentals
Moody’s highlighted three core strengths underpinning Estonia’s rating: prudent fiscal management, strong institutions, and an increasingly sophisticated economy. Estonia has built a reputation as one of Europe’s most digitally advanced and reform-minded small states, and that translates directly into its creditworthiness.
The country’s export mix has shifted meaningfully toward high-value services — particularly information and communication technologies — which Moody’s views as a structural positive. Hourly labour costs in Estonia’s private sector remain lower than the euro area average, offering a competitive edge, though wages have been rising fast.
Estonia went through a rougher period between 2022 and 2024. The culprits were a sluggish recovery in key Scandinavian export markets, and weaker household spending. That period appears to be ending.
Moody’s forecasts GDP growth of 2.8% in 2026 and 2.5% in 2027, driven by recovering domestic demand and improving export conditions. A tax reform kicking in this year — which sets a monthly income tax-free threshold of €700 — is expected to put more money in households’ pockets and support consumer spending. External demand from the Nordics and Germany, Estonia’s largest trading partners, is also picking up.
The defence spending question
The most significant development shaping Estonia’s fiscal outlook is a sharp increase in defence spending.
The government has committed to allocating more than 5% of GDP to defence from 2026 onwards — an extraordinary figure by any European standard, and a direct response to the security environment. This will widen the deficit and raise mid-term debt figures, which, even by 2035, is still expected to be modest by European standards.
A useful buffer is coming from the EU: Estonia has been allocated €2.3 billion under the bloc’s new SAFE defence lending instrument (roughly 5.2% of GDP), with the European Commission having approved the funding in January. First payments are expected as early as March 2026.
Moody’s assigned Estonia a “ba” score on susceptibility to event risk. The agency is clear that its baseline scenario does not include a military confrontation between NATO and Russia. Estonia’s NATO membership since 2004, and the permanently rotating multinational battle group stationed on its soil — led by the UK, with France and Denmark as contributing nations — are treated as meaningful risk litigants.
Read the full report here.
