Estonia achieves medium overall compliance with international standards and codes, with a score of 54.17 out of 100 in our Standards Compliance Index. Estonia's compliance in the area of macroeconomic fundamentals is high, but in the area of market infrastructure and financial supervision areas, its performance is mixed. Estonia does not follow international standards in accounting or auditing, though it has declared its intent to converge its auditing standards to the International Auditing Standards. Estonia also implemented the Corporate Governance code and amended its bankruptcy law in 2006. Its payment system and anti-money laundering laws are in consonance with EU directives. In the financial sector, Estonia has a sound regulatory framework and a unified supervisor, but there is little information throwing light its compliance with the revised insurance supervision standard.

Macroeconomic Policy and Data Transparency

Estonia subscribed to the International Monetary Fund's (IMF) Special Data Dissemination Standard (SDDS) in September 1998 and posted its metadata on the Dissemination Standard Bulletin Board (DSBB) in January 1999. Estonia meets SDDS specifications for coverage, periodicity, and timeliness for all categories of data, although it has taken a flexibility option in two government data categories. It also conforms to SDDS requirements for dissemination of advance release calendars and satisfies the conditions for access, integrity, and quality of data. The quality of Estonia's data is generally good. The authorities follow an open dissemination policy, and make freely available a wide variety of data and metadata through official publications, press releases, and on the Internet. More »

Based on a 2000 Report on the Observance of Standards and Codes on Estonia by the International Monetary Fund and a 2002 update, Estonia's monetary policy practices exhibit no weaknesses. The 2000 report found transparency practices in the conduct of monetary policy to be "very good," concluding that the Bank of Estonia's (BoE) objectives, institutional framework, and the relationship with the government are clearly defined. The report added that the conduct of monetary policy by the BoE is highly transparent. Balance sheet data are released monthly and annually and financial statements are reported and audited according to international standards. In the IMF's 2007 Article IV Consultation, concerns were raised as to Estonia's ability to meet Maastricht inflation criteria in time to adopt the euro on schedule. More »

The 2001 International Monetary Fund (IMF) Report on the Observance of Standards and Codes (ROSC) and the ROSC update of 2002 praised Estonia for fiscal policies and procedures that are generally consistent with Fund transparency standards. When Estonia acceded to the European Union (EU) in 2004, it harmonized its framework with that of the EU. However, beginning in 2003, concern was expressed in some quarters that Estonia's admirable record regarding fiscal policy transparency was eroding, to some extent. In support of this charge, the 2003 IMF Article IV Consultation singled out an increase in off-budget transfers occurring at both the national and the municipal levels of government. In 2007, in a statement issued prior to the publication of that year's Article IV Consultation, the IMF raised concerns regarding the continued overheating of the Estonian economy, which has led to delays in Estonia's plan to join the Euro zone. Nonetheless, the IMF notes that Estonia's authorities appear to be taking prudent steps to address its current fiscal issues. More »

Institutional and market infrastructure

According to the results of a survey conducted by R. Harmer and N. Cooper for the European Bank for Reconstruction and Development (EBRD) in 2003 (updated in 2004), Estonia's national legislation has a medium overall degree of compliance with the international standards articulated by a number of international organizations, including the World Bank. The EBRD assessment is based on the Bankruptcy Act (2003) of Estonia, which has undergone several changes, in 2004, 2005, and 2006. According to the EBRD's assessment there are a number of positive aspects to bankruptcy procedures in Estonia but at the same time there is room for improvement in several areas, particularly in the rehabilitation processes. The EBRD assessment is based solely on the content of the insolvency law. It has not evaluated or assessed the effectiveness or practical operation and application of those laws, nor has it evaluated institutional capacity to apply the law. The EBRD's subsequent 2006 Law Assessment offers no information as to whether amendments to Estonia's bankruptcy law have had the effect of changing the country's level of compliance with insolvency principles. More »

The 2007 KPMG Investment Guide for Baltic States explains that, pursuant to the 2003 Accounting Act, Estonian companies may choose to apply either Estonian Accounting Standards (RTJs) or International Financial Reporting Standards (IFRSs). KPMG states that RTJs generally require less disclosure than IFRSs and are primarily designed for the application by small and medium sized entities. Therefore, differences between RTJs and IFRSs occur, and some areas are not covered at all. These include accounting for joint ventures, employee benefits, retirement benefit plans, and income taxes. The World Bank, in its 2004 Report on the Observance of Standards and Codes (ROSC) on Accounting and Auditing, adds that Estonian public interest companies, such as credit institutions, financial holding companies, mixed-activity holding companies, insurers, and companies whose shares or other securities are traded on a stock exchange in Estonia or other EU Member State are required to prepare their consolidated and legal entity financial statements pursuant to IFRSs beginning January 1, 2005. Estonia complies with European Commission (EC) Regulation No 1606/2002. However, at the time of the assessment, some public interest entities, including investment and pension funds, were not required to apply IFRSs. Therefore, the World Bank urged the Estonian authorities to require all public interest entities to prepare financial statements according to IFRSs. More »

In its 2004 Corporate Governance Sector Assessment, the European Bank for Reconstruction and Development (EBRD) concluded that Estonian corporate governance legislation is in medium compliance with the Organization for Economic Cooperation and Development Principles of Corporate Governance. According to a 2006 EBRD Commercial Law Assessment, the institutional environment in Estonia is considered sound, with an impartial and generally experienced and competent court system. Legal procedures and measures are generally clear and enforceable, although it is considered easy for a defendant to delay proceedings. Furthermore, corporate information is reliable and statutory auditors are fairly independent from shareholders. However, shortcomings exist in terms of redress and disclosure of information, as well as in the definition of responsibilities for the management board. Procedures for obtaining disclosure are usually lengthy and complex, and the enforceability of disclosure is weak. Per a 2006 EBRD Assessment, the Commercial Code represents the primary legislation for corporate governance. It was last amended in January 2007. The Corporate Governance Code entered into force on January 1, 2006, and aimed to enhance corporate governance and transparency. According to the Tallinn Stock Exchange website regarding corporate governance, the Code provides recommendations notably as to the composition and responsibilities of management boards, the role of stakeholders, and the disclosure of information in order to ensure fair treatment and equal access to information for all shareholders. More »

According to the 2004 World Bank Report on the Observance of Standards and Codes on Accounting and Auditing, Estonian public interest companies are required to be audited in accordance with International Standards on Auditing (ISAs). The audits of all other companies must be carried out pursuant to Estonian Auditing Guidelines, which are based on ISAs. The World Bank pointed out, however, that the Guidelines were seriously deficient for any regulatory role. Some additional auditing requirements apply to banks, insurance, listed, and investment companies. Since Estonia is a member of the European Union, it must implement European Commission (EC) Directive 2006/43, which requires all statutory audits to be carried out on the basis of ISAs as adopted by the EC by June 29, 2008. More »

According to a 2002 Financial Supervision Authority (FSA) assessment, which is based on the Financial Action Task Force's (FATF) old (2002) methodology, Estonia is obliged to implement the FATF's 40 recommendations on money laundering, as a new member of the European Union. Estonia has been active in revising its regulatory framework and establishing agencies in order to strengthen its anti-money laundering (AML) regime, as stated in the 2005 U.S. Department of State (DoS) International Narcotics Control Strategy report. Nonetheless, there is insufficient information publicly available that explicitly addresses Estonia's compliance with the new (2004) FATF methodology on AML/CFT requirements. According to the 2005 U.S. DoS report, the FSA approved a new guideline "On Additional Measures to Prevent Money Laundering in the Credit and Financial Institutions" in June 2002. In the same report, however, the U.S. DoS notes that there are still important gaps in the criminalization of terrorist financing. In this regard, the 1999 Money Laundering and Terrorism Financing Prevention Act was amended in 2004 to extend the authority of the Financial Intelligence Unit (FIU). Another major event was the adoption of the third European Parliament and Council directive for the prevention of money laundering in 2005, as noted in the 2006 FSA Annual Report. As of January 1, 2002, the FSA became the financial supervisory body, replacing the three previous supervisory authorities, namely the Bank of Estonia, the Securities Inspectorate, and the Insurance Supervisory Agency. In 2004, the FIU ceased to be administered by the Police Board in Estonia and become an independent unit within the Economic Crime Department of the Central Criminal Police. The FIU is a member of the Egmont Group. Its authority includes investigating money laundering cases and supervising reporting entities that are not covered by the FSA. More »

In 2000, the International Monetary Fund (IMF) released a Report on the Observance of Standards and codes (ROSC) addressing the compliance of Estonia's payment systems with the Committee on Payment and Settlement Systems' Core Principles for Systemically Important Payment Systems (CPSIPS). At the time of the IMF report, Estonia's payment system was being overhauled and the Interbank Payment System (IBPS) was being established. According to the IMF 2000 ROSC, the IBPS was expected to fully observe international standards. A 2002 IMF report noted that the IBPS comprised the Real-Time-Gross-Settlement (RTGS) system and the Designated Time Net Settlement System, ESTA - both of which were designated as systemically important. According to a 2007 HSBC publication on payment and cash management in Estonia, both systems are owned and operated by the Bank of Estonia (BoE) and have about 13 direct participants. The RTGS settles high-value (above 1 million EUR) and urgent interbank transactions in real time. The ESTA settles large amount retail and non-urgent transaction (below 1 million EUR). According to a 2007 European Central Bank (ECB) publication, the 1993 Law on the Bank of Estonia, the 2001 Law of Obligations Act, the 1999 Credit Institutions Act, and related Governor's decrees govern payment and settlement systems in Estonia. The ECB states that the legal framework complies with EU Directive 98/26/EC on Settlement Finality in Payment and Securities Settlement Systems and EU Directive 97/5/EC on Cross-Border Credit Transfer. On November 20, 2006, the BoE was connected to the Trans-European Automated Real-Time Gross Settlement Express Transfers (TARGET) system. More »

Financial Regulation and Supervision

In 2000 the International Monetary Fund (IMF) published a report based on an assessment of banking supervision in Estonia, in which it concluded that the country was either "compliant" or "largely compliant" with most of the Basel Core Principles (BCPs). It was found lacking in only three principles. For the principles covering asset quality and connected lending, the 2000 report rated Estonia as materially non-compliant, and on legal protection for supervisors, Estonia was rated as non compliant. A 2002 update by the IMF on its 2000 assessment notes that improvements were made to bring Estonia more in line with the BCPs. However, the financial supervisory body changed from the Bank of Estonia (BoE) to the Financial Supervision Authority (FSA) in 2002. The FSA is an independent agency which is responsible for banking, insurance, and securities market supervision in order to enhance the stability, reliability, transparency, and efficiency of the financial sector. Furthermore, a 2005 European Bank for Reconstruction and Development (EBRD) report indicated that Estonia's banking legislative framework is generally sound, with few shortcomings. The IMF's 2007 Article IV Consultation report on Estonia indicates that the country has strong banking sector indicators, with well capitalized and highly profitable banks and negligible amounts of non-performing loans. Apart from the EBRD assessment, which only assesses the legislative framework for banking supervision in Estonia, there is little information publicly available as to Estonia's actual implementation of the BCPs after the shift in supervisors. More »

In 2000, the International Monetary Fund (IMF) released its Report on the Observance of Standards and Codes (ROSC) on Estonia's compliance with the International Organization of Securities Commissions (IOSCO) Objectives and Principles of Securities Regulation. The report showed that Estonia either "broadly" or "fully" observed 20 of the 30 principles, and did not observe 10 principles. Many of the shortcomings revealed by the IMF were related to the former securities regulator, the Securities Inspectorate. However, according to the IMF's 2002 update to the ROSC, with the establishment of the unified Estonian Financial Supervision Authority on January 1, 2002, some of the weaknesses identified in the 2000 report had been remedied. In its 2004 Securities Markets Legislation Assessment, the European Bank for Reconstruction and Development (EBRD) found Estonia to be in high compliance with the IOSCO Objectives and Principles of Securities Regulation. In the subsequent 2005 update of the EBRD assessment, Estonia again achieved a high-compliance rating, and almost achieved very high compliance. More »

In 2000, the International Monetary Fund (IMF) published an assessment of insurance supervision in Estonia, in which it concluded that the country either 'broadly' or 'fully' observed 13 of the 14 assessed Insurance Supervisory Principles (ISPs), but did not observe the "Changes in Control" principle. According to the report, the major shortcomings were expected to be resolved by the enactment of the new Insurance Activities Act, which entered into force shortly after the assessment had been completed. The IMF's 2002 update on its 2000 ROSC noted that improvements were made to bring Estonia more in line with the ISPs. However, in 2003 the ISPs were revised and renamed as Insurance Core Principles (ICPs). Moreover, in 2002 the Estonian insurance supervisory body changed from the Insurance Supervisory Authority to the Financial Supervision Authority (FSA). There is insufficient information publicly available regarding compliance of Estonia's new supervisory regime with ICPs as revised in 2003. Although the 2006 European Bank for Reconstruction and Development (EBRD) report entitled "Strategy for Estonia" noted that insurance legislation and regulation in Estonia are compliant with the IAIS standards, there is no further information supporting EBRD's statement. Per a 2006 FSA Annual Report, the FSA shifted to a risk-based analysis of insurance activities in 2006 by focusing primarily on insurance- and market-risk analysis, and developing a stress tests methodology. According to the same report, although the life insurance sector has been growing rapidly and competition in the non-life insurance sector has intensified in recent years, Estonia has undergone a slight slowdown in insurance market growth during 2006. More »

Legend:

Credit Ratings

Moody's A1/Stable

Fitch A-/Negative

Standard & Poor's A/Negative

Macroeconomic Data

2007 GDP (Current Prices): 21.3 billion USD (IMF)

2007 GDP (Per Capita): 15,851 USD (IMF)

2008 GDP (Growth Forecast): 3% (IMF)

2008 Inflation (CPI): 9.8% (IMF)

2007 Unemployment: 5.2% (CIA)

2006 Foreign Direct Investment

FDI (Inward): 1.7 billion USD (UNCTAD)

FDI (Outward): 1.1 billion USD (UNCTAD)

2006 Official Development Assistance

ODA (Received): N/A million USD (OECD)

ODA (Disbursed): N/A million USD (OECD)