Republic of Estonia Investor presentation 1 June 2020 Disclaimer - - PowerPoint PPT Presentation

Republic of Estonia

Investor presentation

1 June 2020

Disclaimer (I/II)

1

The following applies to this document, the oral presentation of the information in this document by the Republic of Estonia (“Estonia”) or any person on behalf

• f Estonia, and any question-and-answer session that follows the oral presentation (collectively, the “Information”).

In accessing the Information, you agree to be bound by the following terms and conditions. This document is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation, nor does it constitute an offer of securities in, the United States, the United Kingdom, Canada, Australia, Japan or any other jurisdiction. In particular this document and the information contained herein do not constitute an offer of securities for sale in the United States and this document may not be disseminated, directly or indirectly, into the United States, its territories or possessions, except pursuant to registration or an exemption from the registration requirements of the U.S. Securities Act of 1933, as amended. Any failure to comply with this restriction may constitute a violation of United States securities law. The Information does not constitute or form part of, and should not be construed as an offer or the solicitation of an offer to subscribe for or purchase the securities referred to herein (the “Securities”), and nothing contained therein shall form the basis of or be relied on in connection with any contract or commitment whatsoever, nor does it constitute a recommendation regarding the Securities. Any decision to purchase the Securities should be made solely on the basis of the information to be contained in the offering circular (or equivalent disclosure document) produced in connection with the offering of the

• Securities. Prospective investors are required to make their own independent investigations and appraisals of the business and financial condition of Estonia

and the nature of the Securities before taking any investment decision with respect to the Securities. The offering circular (or equivalent disclosure document) may contain information different from the Information, and should be read in its entirety. This presentation has been prepared solely by Estonia for information purposes only. It is not to be used for any other purpose. The Information is confidential and is being provided to you solely for your information and may not be retransmitted, further distributed to any other person or published, in whole or in part, by any medium or in any form for any purpose. If this document has been received in error it must be returned immediately to

• Estonia. The opinions presented herein are based on general information gathered at the time of writing and are subject to change without notice. Estonia relies
• n information obtained from sources believed to be reliable but does not guarantee its accuracy or completeness.

This presentation is not intended to be an invitation or inducement to engage in investment activity for the purpose of Section 21 of the Financial Services and Markets Act 2000 of the United Kingdom (the “FSMA”). This announcement is directed only at: (i) persons who are outside the United Kingdom; (ii) persons who are investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) of the United Kingdom; or (iii) any other persons to whom this announcement for the purposes of Section 21 of the FSMA can otherwise lawfully be distributed (all such persons together being referred to as “relevant persons”), and must not be acted on or relied upon by persons other than relevant persons. Any investment or investment activity to which this announcement relates is available only to and will be engaged in only with relevant persons.

Disclaimer (II/II)

2

The Information which relates to countries other than Estonia has not been independently verified and no responsibility is accepted, and no representation, undertaking or warranty is made or given, in either case, expressly or impliedly, by Estonia or any of its officers or advisers as to the accuracy, reliability or completeness of the Information or as to the reasonableness of any assumptions on which any of the same is based or the use of any of the same. Accordingly, no such person will be liable for any direct, indirect or consequential loss or damage suggested by any person resulting from the use of the Information which relates to countries other than Estonia or for any opinions expressed by any such person, or any errors, omissions or misstatements made by any of them. The statements contained in this presentation are made as at the date of this presentation, unless another time is specified in relation to them, and delivery of this presentation shall not give rise to any implication that there has been no change in the facts set forth in this document since that date. Save as otherwise expressly agreed, none of Estonia, its officers or its advisers should be treated as being under any obligation to update or correct any inaccuracy contained herein or be otherwise liable to you or any other person in respect of any such information. Market data used in the Information not attributed to a specific source are estimates of Estonia and have not been independently verified. No reliance may be placed for any purpose whatsoever on the information contained in this document or on its completeness. This presentation may contain statements, statistics and projections that include words such as "intends", "expects", "anticipates", "estimates" and words of similar import. All statements included in this presentation other than statements of historical facts, including, without limitation, those regarding financial position, strategy, plans and objectives of management for future operations (including development plans and objectives) are forward-looking statements. Where forecasts have been included in the presentation, these are on the basis of government budget numbers. There can be no assurance that such forecasted or budgeted numbers will be achieved. If such figures are not achieved, this may have a negative impact on the performance of the economy of

• Estonia. By their nature, such statements involve risk and uncertainty because they relate to events and depend on circumstances that will occur in the future.

No assurances can be given that such expectations will prove to be correct and actual results may differ materially from those projected because such statements are based on assumptions as to future economic performance and are not statements of fact. Estonia expressly disclaims to the fullest extent permitted by law any obligation or undertaking to disseminate any updates to these forecasts, projections or estimates to reflect events or circumstances after the date hereof, nor is there any assurance that the policies, strategies or approaches discussed herein will not change. Nothing in the foregoing is intended to

• r shall exclude any liability for, or remedy in respect of, fraudulent misrepresentation.

THIS DOCUMENT DOES NOT DISCLOSE ALL THE RISKS AND OTHER SIGNIFICANT ISSUES RELATED TO AN INVESTMENT IN THE SECURITIES/TRANSACTION. PRIOR TO TRANSACTING, POTENTIAL INVESTORS SHOULD ENSURE THAT THEY FULLY UNDERSTAND THE TERMS OF THE SECURITIES/TRANSACTION AND ANY APPLICABLE RISKS. THIS DOCUMENT IS NOT A PROSPECTUS OR OFFERING CIRCULAR FOR ANY SECURITIES.

Table of contents

3

I II III IV V VI VII VIII

Introduction

• p. 2

Economic Developments

• p. 8

Banking Sector

• p. 20

Fiscal Discipline

• p. 24

Educated and Competitive Estonia

• p. 30

COVID-19 Response

• p. 34

Debt Management

• p. 38

Contemplated Transaction

• p. 41

Introduction

4

Republic of Estonia in a nutshell

5

Estonia

Estonia

Tartu Tallinn Narva Pärnu

Republic of Estonia

Population (1) 1,328,976 Territory 45,227 km2 Capital Tallinn Currency Euro Nominal GDP (2) EUR 28,037 million GDP per capita (2) EUR 21,163 GDP growth in 2019 (2) 4.3% Unemployment rate 2019 (2) 4.4% Credit ratings S&P: AA- positive Moody's: A1(u) stable Fitch: AA-(u) stable Largest export destinations (2) Finland: 16.30% Sweden 10.50% Latvia: 9.09% USA: 6.78% Germany: 6.30% Euro area membership 1 January 2011 OECD membership 9 December 2010 EU membership 1 May 2004 NATO membership 29 March 2004 UN membership 17 September 1991 Independence restored 20 August 1991 Declaration of independence 24 February 1918

(1) Statistics Estonia, as of 1.1.2020 (2) Statistics Estonia, 2019 full year

Small, fast-growing and dynamic Northern European country

1991 1999 2004 2010 2011 2017 2019

Regains Independence EU membership Joins the WTO UN membership In 1993 first local bond issued, 300m Estonian kroons (EUR 19.2m) In 2002 first Eurobond issued, EUR 100m Joins NATO Joins EMU, and adopts Euro currency OECD membership EU presidency Latest parliamentary elections

2020

Non-permanent member of UN Security Council

Estonia’s credit rating on a positive track

6

Estonia is firmly in the AA category of European countries with low debt-to-GDP ratio

1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 S & P Fitch Moody's

A1 AA- Estonia became a member of the EU Estonia joined the euro area AA-

AAA/Aaa AA+/Aa1 AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3

Estonia’s credit rating development Credit rating comparison

Source: Standard & Poor’s, Fitch Ratings, Moody’s, all as of 15 May 2020

Development of general government gross debt as % of GDP

• Estonia has been able to improve its credit rating

firmly into the AA category over the years, and the trajectory is still upwards

• As the latest development, S&P assigned a

positive outlook to Estonia’s AA- rating at the end

• f February 2020
• Estonia credit rating is approaching (and

sometimes above) that of its western European peers

• General government debt has remained extremely

low even in times of economic distress during the financial crisis and the euro crisis

• Estonia has been able to improve its credit rating

firmly into the AA category over the years, and the trajectory is still upwards

• As the latest development, S&P assigned a

positive outlook to Estonia’s AA- rating at the end

• f February 2020
• Estonia credit rating is approaching (and

sometimes above) that of its western European peers

• General government debt has remained extremely

low even in times of economic distress during the financial crisis and the euro crisis

Country S & P Outlook Moody's Outlook Fitch Outlook Estonia AA- positive A1 stable AA- stable Austria AA+ stable Aa1 stable AA+ positive Finland AA+ stable Aa1 stable AA+ stable France AA stable Aa2 stable AA negative Belgium AA stable Aa3 stable AA- negative Ireland AA- stable A2 stable A+ stable Lithuania A+ stable A3 positive A stable Latvia A+ stable A3 stable A- negative

0% 20% 40% 60% 80% 100% 120% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Estonia Ireland Finland Germany Austria Euro area France Belgium

Source: Eurostat Source: Standard & Poor’s, Fitch Ratings, Moody’s, as of 15 May 2020

Key credit highlights of Estonia

7 Strong growth and dynamic economy

• Estonia has a robustly growing economy with annual GDP growth averaging 4.9% from 2017 to 2019(1)
• With a flexible, dynamic and diversified economy, Estonia has a history of recovering swiftly from economic downturns

Strong external performance

• Estonia is a small open economy, and the export sector represented 72.6% of GDP in 2019(1)
• The export base has expanded significantly with growth driven by high value-added Information, Communications and Technology and

professional services sectors and the country has competitive and large electronics manufacturing sector Fiscal prudence

• Estonia has the lowest general government debt level of any EU country at 8.4% of GDP in 2019(1)
• Fiscal prudence has been tight over the economic cycles, and the government does not seek to diverge from the established track record
• Taxes are low, providing competitiveness and a buffer for fiscal balancing, and tax structure is growth-boosting with low deadweight losses

Sustainable economic policies

• Estonia’s economic policies have supported future growth and competitiveness by investing in education and research and development
• Estonia’s investments in education have resulted in the best scores of any western country in latest PISA student assessments – evidence that

the country is nurturing a future generation of experts and increased competitiveness Strong institutions and governance

• Stable and strong institutional and governance landscape characterise Estonia with continuity in key policies and high ranking in Worldwide

Governance Indicators

• Estonia is a free society with open debate of policy issues, freedom of information and low corruption

Dynamic labour market

• Unemployment rate in Estonia was only 4.4% in 2019(1) and the country has the second-highest employment rate in the EU at 68.7% in 2019(1)
• Competitiveness has remained strong despite substantial wage increases due to robust productivity growth, and Estonia has a proven track

record of being able to adjust wages in an economic downturn Stability from international cooperation

• International cooperation is the base for sustained stability for Estonia, with the country having joined both the EU and NATO in 2004
• Estonia joined the EMU and eurozone in 2011, and has benefited from the ECB’s proven track record of clear policy goals, monetary policy

independence and a wide arsenal of monetary policy tools at its disposal Stability of the banking sector

• Estonian banks have on average the highest CET1 ratios in the EU(2), and one of the lowest NPL ratios in the EU at 0.4% at the end of Q1 2020(3)
• Deposits have grown by nearly twice as much as private sector credit, and banks have expanded their funding mix by starting to issue bonds
• The banking sector is dominated by Nordic-owned banks, whose parent companies have historically supported their subsidiaries, but also the

local banking sector is growing Timely COVID-19 response

• Estonia was quick to react to the COVID-19 pandemic, declaring emergency on 12 March 2020 and implementing various restrictions
• EUR 2.8 billion Supplementary Budget (10.8% of GDP) has been approved to support businesses, individuals and the healthcare sector
• COVID-19 will lead to a substantial government budget deficit, and Estonia expects its total funding requirement for 2020 to be EUR 3.78 billion,

with additional EUR 1.2 billion needed in 2021(4)

Estonia‘s strengths range from its dynamic economy to its strong institutions

Source: (1) Eurostat; (2) ECB; (3) Bank of Estonia; (4) Ministry of Finance

Estonian Centre Party, 25 seats Conservative People's Party

• f Estonia, 19 seats

Isamaa ("Fatherland"), 12 seats Estonian Reform Party, 34 seats Social Democratic Party, 10 seats Unaffiliated MPs, 1 seat Government 56 seats Opposition 45 seats 101

Estonia has a stable government

8

Estonia is renowned for good governance and effective political system

Current Estonian Parliament composition – strong government

8,3 10,0 16,7 16,7 16,7 20,0 20,0 21,4 21,4 25,0 25,0 25,0 28,6 30,0 31,3 31,4 40,0 40,0 40,0 41,7 41,7 41,7 41,7 41,7 42,9 50,0 50,0 58,3 10 20 30 40 50 60 SVK ISL AUS BEL PRT EU FIN ITA GBR ESP CHE SVN LUX HUN NLD OECD CZE DNK NOR AUT DEU IRL POL SWE LVA FRA GRC EST 2017-2018 Responsiveness Rate Indicator

Estonia is an agile country in making reforms – top performer as measured by OECD’s reform responsiveness rate indicator

• Governance in Estonia is renowned for its efficiency
• OECD assigned Estonia the highest score in its reform

responsiveness rate indicator in its 2019 study

• Estonia has a strong majority government made of a centre-right

coalition

• The latest parliamentary election was conducted in March 2019

and the parliament has a 4-year term

• Record number of women were elected to the parliament in

the election, and Estonia has a female president

• The state budget strategy for the years 2020-2023 has five

priorities: 1) family-friendly Estonia; 2) cohesive society; 3) knowledge-based economy; 4) efficient governance; 5) free and protected state

• Governance in Estonia is renowned for its efficiency
• OECD assigned Estonia the highest score in its reform

responsiveness rate indicator in its 2019 study

• Estonia has a strong majority government made of a centre-right

coalition

• The latest parliamentary election was conducted in March 2019

and the parliament has a 4-year term

• Record number of women were elected to the parliament in

the election, and Estonia has a female president

• The state budget strategy for the years 2020-2023 has five

priorities: 1) family-friendly Estonia; 2) cohesive society; 3) knowledge-based economy; 4) efficient governance; 5) free and protected state

Source: Economic Policy Reforms 2019: Going for Growth, OECD Source: Riigikogu

Key policy measures

9

The basic principles of the Government coalition are forward-looking

Government’s five priorities Main measures to achieve the targets

Investments to the digitalisation of the economy and increases in state R&D financing. IT, robotics and programming expanded in the national curriculum. Lifelong learning for adults. Knowledge-based economy Higher productivity and employment Investments into infrastructure – roads, railways, incl. Rail Baltic. Development of public transport and importance of having a high-quality international air connection with Estonia. Efficiency of current family policy measures will be increased, support for multi-child and young families. Measures to support the housing stock investments of local governments. Family-friendly Estonia Lower poverty of children Reform of the second pillar of pension system, which will allow people to opt out of the second pillar pension scheme if they so wish. Extraordinary pension increase according to the possibilities of the state budget. More child welfare workers and investments to detect children’s problems, including mental health. Cohesive society Lower absolute and relative poverty Investments in research and development – the goal is to increase private sector R&D expenditure to 2% and public sector R&D expenditure to at least 1% of GDP. In order to stimulate both domestic and foreign trade, the excise duty on alcohol will be reduced by 25% and the increase in tobacco excise duty will be lower than previously agreed. Efficient governance Expenditure and employment of the general government will not increase Steps to reduce bureaucracy and administrative burden. Further development of e-state, enabling electronic communication with the state in all fields. A broad-based audit of the state budget will be carried out, in the course of which all sources of state revenue and expenditure will be reviewed and their purposefulness will be assessed. Free and protected state Defence expenditure at least 2% of GDP Cybersecurity capabilities will be strengthened. Independent and consistent foreign and security policy implemented, mainly through involvement in the European Union and NATO.

Economic Developments

10

• 2%

0% 2% 4% 6% 8% 2011 2012 2013 2014 2015 2016 2017 2018 2019 Estonia Euro area Belgium France Latvia Finland Private consumption expenditure 47% Gross fixed capital formation and valuables 26% General government final consumption expenditure 20% Net exports 4% Change in inventories 2% Final consumption expenditure

• f non-profit institutions serving

households 1%

Estonia – the growth story

11

Estonia’s economy has grown strongly for many years, outpacing peers

Source: Eurostat

Real GDP Growth

Source: Statistics Estonia

GDP by expenditure, 2019

• Robust domestic demand and strong exports have been key drivers for the strong GDP growth of around 5% in real terms from 2017 to 2019
• Estonia has been one of the fastest growing economies in the EU during the 2010s as it rebounded quickly from the financial crisis and avoided

the stagnation many EU countries suffered from

• Supported by strong institutions and with increased focus on high value-added sectors like ICT, Estonia’s relatively small and dynamic economy

has a solid basis for future growth

• With a diverse sectoral split, GDP growth is not overly dependent on the contribution of just one sector
• Robust domestic demand and strong exports have been key drivers for the strong GDP growth of around 5% in real terms from 2017 to 2019
• Estonia has been one of the fastest growing economies in the EU during the 2010s as it rebounded quickly from the financial crisis and avoided

the stagnation many EU countries suffered from

• Supported by strong institutions and with increased focus on high value-added sectors like ICT, Estonia’s relatively small and dynamic economy

has a solid basis for future growth

• With a diverse sectoral split, GDP growth is not overly dependent on the contribution of just one sector

Estonia’s GDP – sectoral split

12

Service sectors playing an ever larger role whereas construction has slowed down

Composition of gross value added by sector, 2019

Source: Statistics Estonia Source: Statistics Estonia

Annual growth in selected sectors of the economy

• 5%

0% 5% 10% 15% 20% 25% 30% 2012 2013 2014 2015 2016 2017 2018 2019 Manufacturing Wholesale and retail trade; repair of motor vehicles and motorcycles Information and communication Real estate activities Professional, scientific and technical activities Manufacturing 14% Wholesale and retail trade; repair of motor vehicles and motorcycles 11% Real estate activities 10% Information and communication 7% Transportation and storage 7% Construction 7% Public administration and defence; compulsory social security 7% Professional, scientific and technical activities 6% Education 5% Financial and insurance activities 4% Human health and social work activities 4% Others 18%

• 2
• 1

1 2 3 4 5 6 7 2012 2013 2014 2015 2016 2017 2018 2019 Contribution to VA growth, percentage points Agri Energy, mining Manufacturing Construcion Trade Transportation ICT Finance Prof.services Other

Source: Statistics Estonia

Contribution of different sectors to value added growth

Agriculture Trade Construction Finance ICT Manufacturing Energy, mining Transportation Other

• Prof. services

Strong and dynamic labour market

13

Both low unemployment and high employment ratio drive the dynamic labour market

4,4 4,5 5,0 5,4 6,3 6,7 6,8 7,5 8,5 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% Unemployment rate, % of active 15-74- year population, 2019

15% 20% 25% 30% 35% 40% 45% 50% 55% 60% 2013 2014 2015 2016 2017 2018 2019

Long-term unemployment, share of total unemployment Estonia Euro area Belgium France Latvia Finland

• 4%

0% 4% 8% 12% 16%

• 1%
• 1%

0% 1% 1% 2% 2% 3% 3% 4% 4%

2016 2017 2018 2019 Real productivity growth, % change on previous year Estonia wage growth (rhs) Estonia Euro area Belgium Germany France Finland 68,8 68,7 68,3 66,0 65,3 65,0 63,7 62,4 60,6 59,7 57,0 56,5 54% 56% 58% 60% 62% 64% 66% 68% 70% Employment rate of 15-74 year-old people, 2019

Second highest employment rate in the EU Substantial reduction in long-term unemployment

Source: Eurostat Source: Eurostat Source: Eurostat Source: Eurostat

Very low unemployment rate Fast real productivity growth despite rising wages

5 000 10 000 15 000 20 000 25 000 30 000 35 000 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Working permits granted to persons from

• utside EU

Short-term working permits (up to 1 year) Temporary residence permit for working (up to 5 years) 0% 5% 10% 15% 20% 25% 30% 35% 40% 0-14 years 15-24 years 25-49 years 50-64 years 65-79 years 80 years + Estonia Finland Euro area

Migration has increased the workforce size

14

Estonia has experienced positive migration in recent years

Population by age groups 2019 - large working age population Increase in short-term foreign labour

Source: Statistics Estonia Source: Eurostat Source: Ministry of the Interior

Estonia has a positive net migration inflow

• At the end of 2019, Estonia’s economy had an unemployment rate of
• nly 4.4% and the employment rate had increased to 68.7%, second

highest in the EU(1)

• The labour market conditions are tight, which has also provided

grounds for wage increases but productivity growth has been robust

• Net migration has turned significantly positive both due to Estonians

returning to their homeland and foreign workforce being imported

• Estonia’s working age population is also proportionately larger than in

many comparable countries

• At the end of 2019, Estonia’s economy had an unemployment rate of
• nly 4.4% and the employment rate had increased to 68.7%, second

highest in the EU(1)

• The labour market conditions are tight, which has also provided

grounds for wage increases but productivity growth has been robust

• Net migration has turned significantly positive both due to Estonians

returning to their homeland and foreign workforce being imported

• Estonia’s working age population is also proportionately larger than in

many comparable countries

Source: (1) Eurostat

• 3 000
• 2 000
• 1 000

1 000 2 000 3 000 4 000 5 000 6 000 7 000 8 000 2015 2016 2017 2018 2019 Net migration, persons Estonian citizens EU citizens Russian citizens Ukrainian citizens Others Net migration

Inflation at healthy levels

15

The fast-growing services sector and tight labour market are the main drivers of inflation

Source: Eurostat Source: Eurostat

Annual HICP* inflation rate in Estonia Annual HICP by components in Estonia

Source: Eurostat

• 2

2 4 6 8 10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % Food Goods Services 1 2 3 4 5 6 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % HICP HICP excl. energy, food, alcohol and tobacco 0,0 0,5 1,0 1,5 2,0 2,5 3,0 % 2010-2018 avg 2019

HICP inflation rates in different countries

* The Harmonised Indices of Consumer Prices (HICP) measure the changes over time in the prices of consumer goods and services acquired by households.

• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% 8% 10% 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % of GDP Current account balance Goods Services Primary income Secondary income

Balance of payments

16

Current account surplus shows that Estonia is a balanced and export-oriented economy

Current account balance peer group comparison, 2019

Source: Eurostat Source: Eurostat Source: Statistics Estonia

Development of current account balance as % of GDP Exports development of high value-added sectors Net foreign direct investment inflow as % of GDP, 2019

0% 5% 10% 15% 20% 25% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % of services exports ICT services Business services

• 9,4
• 2,9
• 1,2
• 0,8
• 0,8
• 0,7
• 0,5
• 0,4

2,2 2,6 3,9

• 12%
• 10%
• 8%
• 6%
• 4%
• 2%

0% 2% 4% 6% % of GDP in 2019

Source: Bank of Estonia

3,4 1,5 1,3 0,5

• 0,4
• 1,4
• 1,6
• 1,9
• 4,1
• 5,5
• 6%
• 5%
• 4%
• 3%
• 2%
• 1%

0% 1% 2% 3% 4% Net FDI inflow as % of GDP in 2019

Active export sector and stable growth

17

Estonia is an export-driven economy - proven track record in recovering from shocks

Source: Statistics Estonia Source: Statistics Estonia

Development of exports as % of GDP

62 61 58 57 61 66 63 63 66 61 74 86 86 84 81 77 78 76 74 73 10 20 30 40 50 60 70 80 90 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Exports of goods and services, %

• f GDP
• 7

6,3 2,8 10,2 17,319,9 9,5 12,6 0,9

• 20,3

24,2 24,2 4,8 2,8 2,6

• 1,5

5,1 3,8 4,3 4,9

• 30
• 20
• 10

10 20 30 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % change YoY

Source: Eurostat

Export of goods and services

82,5 81,7 72,6 59,9 55,9 55,7 48 47,4 46,9 40 36,8 31,4 20% 30% 40% 50% 60% 70% 80% 90% Netherlands Belgium Estonia Latvia Denmark Austria Euro area Sweden Germany Finland Norway France Exports of goods and services as % of GDP, 2019

• The volume of exports has grown at 4-5% annual rate over the past 4
• years. The growth can be attributed to the swift expansion in the exports,

especially in high value-added services exports

• Estonia also has a very good track record of recovering from economic

shocks such as the financial crisis or Russian sanctions

• Estonia has a high trade surplus and exports form a significant part of

the GDP

• The trade surplus arises from the high net export rate of services

whereas Estonia is a net importer of goods

• Downward trending share of exports in GDP is balanced by increasing

domestic demand due to increased domestic wealth

• The volume of exports has grown at 4-5% annual rate over the past 4
• years. The growth can be attributed to the swift expansion in the exports,

especially in high value-added services exports

• Estonia also has a very good track record of recovering from economic

shocks such as the financial crisis or Russian sanctions

• Estonia has a high trade surplus and exports form a significant part of

the GDP

• The trade surplus arises from the high net export rate of services

whereas Estonia is a net importer of goods

• Downward trending share of exports in GDP is balanced by increasing

domestic demand due to increased domestic wealth

Export of goods and services, volume change YoY

28% 29% 30% 31% 32% 33% 34% 35% 0% 5% 10% 15% 20% 25% 30% 35% 2013 2014 2015 2016 2017 2018 2019 Share of services exports as % of total exports % of total services exports Transportation, storage Information & communication Manufacturing Professional, scientific & technical Construction Administrative & support services Wholesale & retail trade Financial & insurance activities Services exports (rhs)

16.3% 10.5% 9.1% 6.8% 6.3% 6.1% 6.0% 4.1%3.8% 3.3% 2.6% 2.1% 2.0% 1.9% 1.5% 1.2% 1.1% 0.4%

0,0 0,5 1,0 1,5 2,0 2,5 EUR billions Exports of goods of Estonian origin, 2019 Re-exports, 2019

Estonia’s exports – sectoral split

18

Diversified exports with strong growth in high value-adding sectors

Source: Statistics Estonia Source: Statistics Estonia

Composition of export of goods by country Composition of export of goods by sector

Source: Statistics Estonia

1 2 3 4 EUR billions Exports of goods of Estonian origin, 2019 Re-exports, 2019

• The share of services in total exports has grown steadily and was

almost 35% in 2019. Information and communication services are driving the development

• Goods continue to form the bulk of the exports and there the stable

Nordic countries are the biggest market, with the other important markets being principally EU countries

• Estonia has an advanced electronics manufacturing sector coupled

with robust ICT exports, and also general manufacturing sector plays an important role in goods exports

• The share of services in total exports has grown steadily and was

almost 35% in 2019. Information and communication services are driving the development

• Goods continue to form the bulk of the exports and there the stable

Nordic countries are the biggest market, with the other important markets being principally EU countries

• Estonia has an advanced electronics manufacturing sector coupled

with robust ICT exports, and also general manufacturing sector plays an important role in goods exports

Development of services exports by sector

19

Imports increasing in nominal terms but slightly decreasing as a % of GDP

Import of goods and services, volume change YoY

Source: Statistics Estonia Source: Statistics Estonia Source: Statistics Estonia

Import of goods and services, share in GDP Composition of import of goods by country, 2019 Composition of import of goods by sector, 2019

Source: Statistics Estonia

65 65 65 66 69 71 73 71 70 56 68 80 84 81 78 73 74 72 71 69 10 20 30 40 50 60 70 80 90 100 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % of GDP

• 6,2
• 30,6

21,3 27,2 9,7 2,4 3

• 1,9

6 4,2 5,7 3,7

• 35
• 25
• 15
• 5

5 15 25 35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % change YoY

12.6% 10.2% 10.2% 9.4% 9.1% 8.1% 6.3% 4.2% 3.4% 2.5% 2.3% 2.2% 2.1% 2.0% 1.5% 1.4% 1.1% 0.7%

0,0 0,5 1,0 1,5 2,0 2,5 EUR billions 1 2 3 4 EUR billions

Imports play a large role for a small economy

• 6,2
• 30,6

21,3 27,2 9,7 2,4 3

• 1,9

6 4,2 5,7 3,7

• 35
• 25
• 15
• 5

5 15 25 35 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 % change YoY

Household finances

20

Households have healthy finances backed by rising dwelling prices

2 000 4 000 6 000 8 000 10 000 12 000 14 000 16 000 20% 30% 40% 50% 60% 70% 80% 90% 100% 110% 120% 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 EUR million % Household debt as % of income, lhs Disposable income, gross, rhs Financial liabilities, rhs 60 80 100 120 140 160 180 200 220 240 Index, 2010=100 Total Apartments Houses

Dwelling price indices

Source: Statistics Estonia, Bank of Estonia Source: Statistics Estonia

1 000 2 000 3 000 4 000 5 000 6 000 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 EUR million

Source: Pensionikeskus

Household debt relative to disposable income

60 65 70 75 80 85 90 95 100 105 110 jaan.15 apr.15 juuli.15

• kt.15

jaan.16 apr.16 juuli.16

• kt.16

jaan.17 apr.17 juuli.17

• kt.17

jaan.18 apr.18 juuli.18

• kt.18

jaan.19 apr.19 juuli.19

• kt.19

jaan.20 apr.20 Index Economic sentiment indicator

COVID-19 affects economic sentiment

Source: Estonian Institute of Economic Research

Net pension assets

Climate policy and energy sector

21

Estonia is largely self-sufficient in energy production and moving towards renewables

• Estonia has already met its 2020 renewable energy target of 25% in gross final energy

consumption and is on good track to meet the 2030 target of 42%

• Estonia is among the least dependent EU countries on energy imports thanks to the oil shale

reserves in Estonia and increasing renewable energy capacity

• Due to environment and climate policies, the share of the oil shale energy is diminishing

(production of oil shale electricity fell by half in 2019), and renewable energy production is increasing

• Renewable energy made up 51% of total Estonian power output in the first three months of

2020 (1)

• Of the renewable energy 49% was wind power, 47% biomass, biogas and waste, and the

rest hydroelectric and solar energy (1)

• In 2019, the renewables totalled 30% of electricity production (1)
• Renewable energy accounted for 24% of the total electricity consumption in Q1 2020 (1)
• In 2019, the share of renewable energy was 21% (1)
• By 2030, the goal is to achieve a share of at least 30%
• Estonia has already met its 2020 renewable energy target of 25% in gross final energy

consumption and is on good track to meet the 2030 target of 42%

• Estonia is among the least dependent EU countries on energy imports thanks to the oil shale

reserves in Estonia and increasing renewable energy capacity

• Due to environment and climate policies, the share of the oil shale energy is diminishing

(production of oil shale electricity fell by half in 2019), and renewable energy production is increasing

• Renewable energy made up 51% of total Estonian power output in the first three months of

2020 (1)

• Of the renewable energy 49% was wind power, 47% biomass, biogas and waste, and the

rest hydroelectric and solar energy (1)

• In 2019, the renewables totalled 30% of electricity production (1)
• Renewable energy accounted for 24% of the total electricity consumption in Q1 2020 (1)
• In 2019, the share of renewable energy was 21% (1)
• By 2030, the goal is to achieve a share of at least 30%
• Estonia aims to reduce greenhouse gas emissions by almost 80% by 2050 compared to 1990

emission levels

• This entails reduction of 70% by 2030 and 72% by 2040
• The objectives are in line with those of the Paris Agreement
• Estonia will also meet the EU’s 2020 renewable energy target, and supports the EU’s long-

term climate neutrality target by 2050

• Estonia’s strategy to reach emission reduction targets is based on:

Increasing the share of renewables in the energy sector Reducing burning of oil shale and refining it into higher value-added products such as shale oil and using the by-product gas for electricity Modernisation of the vehicle fleet and public transport Supporting the reconstruction of the building stock

• Estonia aims to reduce greenhouse gas emissions by almost 80% by 2050 compared to 1990

emission levels

• This entails reduction of 70% by 2030 and 72% by 2040
• The objectives are in line with those of the Paris Agreement
• Estonia will also meet the EU’s 2020 renewable energy target, and supports the EU’s long-

term climate neutrality target by 2050

• Estonia’s strategy to reach emission reduction targets is based on:

Increasing the share of renewables in the energy sector Reducing burning of oil shale and refining it into higher value-added products such as shale oil and using the by-product gas for electricity Modernisation of the vehicle fleet and public transport Supporting the reconstruction of the building stock

30 40 50 60 70 80 90 100 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 CO2 emissions, Index, 1990 = 100 Estonia European Union - 28 countries 0% 5% 10% 15% 20% 25% 30% 35% Share of renewable energy in gross final energy consumption Estonia EU - 28 countries

Source: Eurostat Source: International Energy Agency

Renewables play a large role in Estonia Total emissions have come down drastically

Source: (1) Elering

Banking Sector

22

0% 1% 2% 3% 4% 5% 6% 7% Interest rate on loans to households Interest rate on loans to non-financial corporations Interest rate on EUR deposits of households Interest rate on EUR deposits of non-financial corporations

Interest rate on loans and deposits

Stable and profitable banking sector

23

Well-capitalised banking system with solid interest rate margins

Ownership structure of Estonian banking sector

Source: (1) Estonian Financial Supervision Authority; (2) ECB Source: Bank of Estonia

Strong capital adequacy position

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 2011 2012 2013 2014 2015 2016 2017 2018 2019 Total ratio Estonia CET1 ratio Estonia CET1 ratio eurozone SIFIs Minimum total capital requirement Sweden; 56,7% USA; 14,6% Finland; 6,5% Norway; 6,5% Estonia; 9,0% Others; 6,7%

By owner’s residency as of 5 May 2020

• Estonia’s banking sector predominantly comprises subsidiaries of larger,

well-capitalised Nordic banks

• As of 5 May 2020, nearly 70% of the banking sector was Nordic-controlled.

The US share arises from Blackstone’s ownership share of Luminor Bank

• The parent banks have a proven propensity to support their subsidiaries if

needed

• Estonian banks have on average the highest CET1 ratio of any euro area

country according to ECB’s Q4 2019 statistics

• Interest rate margins have been resilient and remain at healthy levels,

with the difference between interest on household loans and deposits at 3.62% at the end of Q1 2020 (1)

• Estonia’s banking sector predominantly comprises subsidiaries of larger,

well-capitalised Nordic banks

• As of 5 May 2020, nearly 70% of the banking sector was Nordic-controlled.

The US share arises from Blackstone’s ownership share of Luminor Bank

• The parent banks have a proven propensity to support their subsidiaries if

needed

• Estonian banks have on average the highest CET1 ratio of any euro area

country according to ECB’s Q4 2019 statistics

• Interest rate margins have been resilient and remain at healthy levels,

with the difference between interest on household loans and deposits at 3.62% at the end of Q1 2020 (1)

(1) (1) (1) (2)

Source: (1) Bank of Estonia Source: Estonian Financial Supervision Authority

0% 10% 20% 30% 40% 50% 5 10 15 20 25 dets.00 dets.01 dets.02 dets.03 dets.04 dets.05 dets.06 dets.07 dets.08 dets.09 dets.10 dets.11 dets.12 dets.13 dets.14 dets.15 dets.16 dets.17 dets.18 dets.19 EUR billions Stock of non-residents' deposits, EURbn Stock of residents' deposits, EURbn Growth of deposits, % (rhs)

• 10%

0% 10% 20% 30% 40% 50% 60% 70% dets.00 dets.01 dets.02 dets.03 dets.04 dets.05 dets.06 dets.07 dets.08 dets.09 dets.10 dets.11 dets.12 dets.13 dets.14 dets.15 dets.16 dets.17 dets.18 dets.19 Total growth of loan stock, % Growth of loan stock to resident non-fin. corporations, % Growth of loan stock to resident households, %

Sustained growth in loans and low NPLs

24

Non-performing loans have decreased substantially and lending growth is conservative

Development of non-performing loans Loan growth in the banking system

Source: Bank of Estonia Source: Bank of Estonia

Loan-to-deposit ratio

Source: Bank of Estonia

Growth of deposits

Source: Bank of Estonia

0% 1% 2% 3% 4% 5% 6% dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… dets.… Overdue loans, over 90 days, share in loan portfolio, % 0% 50% 100% 150% 200% 250% dets.00 dets.01 dets.02 dets.03 dets.04 dets.05 dets.06 dets.07 dets.08 dets.09 dets.10 dets.11 dets.12 dets.13 dets.14 dets.15 dets.16 dets.17 dets.18 dets.19 Loan to deposit ratio, % Loan to deposit ratio of residents, % Loan to deposit ratio of non- residents, %

63,2 50,9 41,4 39,1 37,6 35,0 31,2 20,1 11,2 8,8 5,1 3,8 10 20 30 40 50 60 70 2014 2015 2016 2017 2018 2019 Outgoing payments, EUR billion TOTAL USD 8,5% 6,6% 4,3% 1,3% 0,5% 0,3% 0,5% 1,2% 3,6% 10,6% 9,6% 8,4% 10,0% 6,2% 6,1% 19,1% 16,2% 12,7% 11,8% 7,9% 10,0% 11,4% 9,2% 6,6% 2,8% 1,5% 1,0% 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20% Share of total deposits Off-shore deposits Deposits from platform holders Other non-resident deposis Non-resident total All non-residents outside EU

Money laundering risks have declined

25

Estonia has taken multiple measures to tackle money laundering

Dynamics of non-resident deposits

Source: Estonian Financial Supervision Authority Source: Estonian Financial Supervision Authority

• In recent years, Estonia has taken multiple steps to reduce the risks of

misuse of the banking system

• Combating money laundering has been a strategic priority for Estonian

FSA since 2016 and an area of focus since 2014

• Legislative changes to Money Laundering and Terrorist Financing Act are

currently before Parliament

• Forced and guided closures of high-risk business lines of multiple credit

institutions and total closure of Danske Bank’s operations in Estonia

• The share of non-resident deposits in the banking system has declined

sharply and the non-resident composition has changed with non-residents

• utside EU being only 1% of the total in 2019
• Outgoing payments, especially in USD, have diminished greatly
• In recent years, Estonia has taken multiple steps to reduce the risks of

misuse of the banking system

• Combating money laundering has been a strategic priority for Estonian

FSA since 2016 and an area of focus since 2014

• Legislative changes to Money Laundering and Terrorist Financing Act are

currently before Parliament

• Forced and guided closures of high-risk business lines of multiple credit

institutions and total closure of Danske Bank’s operations in Estonia

• The share of non-resident deposits in the banking system has declined

sharply and the non-resident composition has changed with non-residents

• utside EU being only 1% of the total in 2019
• Outgoing payments, especially in USD, have diminished greatly

Outgoing payments per year, EUR billion

Fiscal Discipline

26

2 000 4 000 6 000 8 000 10 000 12 000 14 000 2012 2013 2014 2015 2016 2017 2018 2019 2020e 2021e Estonia, EUR million

Forecast: Government revenue Total government revenue Forecast: Government spending

Estonia – Model for fiscal prudence

27

Prudent fiscal policy in long-term and low tax relative to GDP

• 0,3

0,2 0,7 0,1

• 0,5
• 0,8
• 0,6
• 0,3
• 9,0%
• 7,0%
• 5,0%
• 3,0%
• 1,0%

1,0% 2012 2013 2014 2015 2016 2017 2018 2019 Government budget deficit / surplus, % of GDP Estonia Euro area Belgium 22,6 32,8 38,7 40,1 40,5 42,2 42,3 44,8 45,1 46,5 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Tax-to-GDP ratio in 2018, %

Gross Debt-to-GDP ratio Tax-to-GDP ratio Budget surplus/deficit Total general government spending and tax revenue

Total general government spending Source: European Commission Source: (1) Eurostat; (2) Estonian Ministry of Finance, forecasts as of 15 April 2020 (The forecasts on revenue and expenditure are subject to change) Source: Eurostat Source: Eurostat

8,4 35,1 48,6 58,8 59,4 59,8 70,4 84,1 98,1 98,6 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% General government gross Debt-to-GDP ratio in 2019, %

(1) (2) (1) (2)

Low tax rates boost competitiveness

28

Low tax rates provide competitiveness and buffer for fiscal balancing

12,5 20,0 20,0 21,4 22,0 25,0 25,0 25,0 29,9 32,0 10% 15% 20% 25% 30% 35% Top statutory corporate income tax rate in 2020, %

10,7 14,7 14,8 15,1 26,6 28,3 29,3 30,6 32,9 39,8 55,1

0% 10% 20% 30% 40% 50% 60% Overall implicit tax rate on capital in 2018, % 20,0 32,0 40,0 47,5 49,5 50,0 51,1 51,5 52,3 53,1 55,9 0% 10% 20% 30% 40% 50% 60% Maximum personal income tax rate in 2020, %

33,2 37,2 37,3 41,9 42,6 42,7 46,7 47,9 49,4 52,2

0% 10% 20% 30% 40% 50% 60%

Tax wedge on labour in 2019, 100% of earnings, %

Tax on capital Tax wedge on labour Corporate income tax Personal income tax maximum rate

Source: European Commission Source: European Commission Source: European Commission Source: European Commission

The main principles of Estonian tax policy are (1) simple tax system and (2) broad tax base and low rates. The structure of the tax system is growth- enhancing with relatively small deadweight losses, and the tax collection system is efficient. Taxes are divided into state taxes and local taxes to ensure sustainable and socially and regionally balanced growth. CIT, PIT and VAT are all state taxes. The main principles of Estonian tax policy are (1) simple tax system and (2) broad tax base and low rates. The structure of the tax system is growth- enhancing with relatively small deadweight losses, and the tax collection system is efficient. Taxes are divided into state taxes and local taxes to ensure sustainable and socially and regionally balanced growth. CIT, PIT and VAT are all state taxes.

Social protection 34,1% Education 14,9% Health 14,6% Economic affairs 13,6% General public services 8,1% Defense 5,6% Public order and safety 4,8% Recreation, culture and religion 3,8% Housing and community amenities 0,5%

Government spending – future growth

29

Government spending aims to fuel future growth, with ageing not a serious problem

Education 15% Transport 13% Entrepreneurship and innovation 12% Research and development 12% Energy 7% Regional development 7% Environment 6% Labour market 6% Other sectors 22% 19,3 22,1 23,6 27,6 28,5 29,8 30,2 31,0 16 18 20 22 24 26 28 30 32 Percentage points of GDP

• 0,8

2,1 2,6 3,0 3,6 4,1 5,0 6,3

• 1

1 2 3 4 5 6 7 Percentage points of GDP

Estimated change in age-related spending 2016-2070

Change in age-related spending 2016-2070 Age-related spending in 2016

Estonia’s age-related spending is at low levels

Source: The 2018 Ageing Report, European Commission Source: The 2018 Ageing Report, European Commission

Total sectoral EU contribution + own contribution: EUR 3.72bn

Source: Statistics Estonia

Distribution of the original state budget for 2020

Total state expenditure was approved at EUR 11.7bn

Source: Ministry of Finance

Distribution of European Structural Funds 2014-2020

Government invests in the future

30

Government spending in education and R&D aims to fuel sustainable future growth

Consistently high education expenditure Government sector R&D expenditure comparison

Source: Eurostat Source: Eurostat Source: Eurostat

7% 9% 11% 13% 15% 17% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Education expenditure, % of total general government expenditure Estonia Ireland Belgium Finland Austria Euro area Germany France 0,00% 0,05% 0,10% 0,15% 0,20% 0,25% 0,30% 2010 2011 2012 2013 2014 2015 2016 2017 2018 Government sector R&D expediture as % of GDP Estonia Netherlands Denmark Ireland

• Education and R&D have been at the core of the government policies

during the past years

• Spending on education relative to total government expenditure is the

highest in the European Union at 15.8% in 2018(1)

• Although government R&D expenditure relative to GDP is not a high

absolute figure, it compares well to peers

• The current government (elected in 2019) has a priority policy objective

to increase state financing of R&D to at least 1% of GDP – more than six-fold increase from 2018

• Furthermore, the recent COVID-19 response package includes

support for domestic research and development of tracking and tackling the coronavirus

• Education and R&D have been at the core of the government policies

during the past years

• Spending on education relative to total government expenditure is the

highest in the European Union at 15.8% in 2018(1)

• Although government R&D expenditure relative to GDP is not a high

absolute figure, it compares well to peers

• The current government (elected in 2019) has a priority policy objective

to increase state financing of R&D to at least 1% of GDP – more than six-fold increase from 2018

• Furthermore, the recent COVID-19 response package includes

support for domestic research and development of tracking and tackling the coronavirus

Government investments are at a robust level in Estonia

4,9 4,2 3,6 3,4 3,1 3,0 2,8 2,6 2,5 2,3 2% 3% 3% 4% 4% 5% 5% 6% Gross fixed capital formation, % of GDP in 2019 Source: (1) Eurostat

14,2 12,0 10,9 10,1 9,8 9,1 8,5 7,8 6,5 5,5 4,6 3,3 2,9 0% 2% 4% 6% 8% 10% 12% 14% 16%

Pension system and social security

31

Pension system and social security funds deliver financial security to Estonians

Estonians stay in employment until an older age than peers

Source: Eurostat Source: Pensionikeskus

I pillar: State pension

• Retirement age is ~64 years. By 2026, the retirement age will be

increased to 65

• The state pension operates on a PAYG basis
• The state pension is paid by the state mainly from social tax receipts.

II pillar: Mandatory funded pension

• Employees pay a monthly 2% of their gross salary to their selected

pension fund from an approved list, with the state adding 4%

• II pillar pension funds are privately managed
• The parliament aims to make II pillar voluntary

III pillar: Supplementary funded pension

• Voluntary contributions to a pension fund, with some tax benefits
• III pillar pension funds are privately managed

The Health Insurance Fund

• Receives the majority of its revenue from the Government, namely a

defined share of social tax collected

• Organizes national health insurance to provide insured people (over

90% of the population) with access to necessary healthcare services, medicines, medical equipment and cash benefits

The Unemployment Insurance Fund

• Administers the social insurance provisions related to unemployment,

and organizes labor market services that help unemployed persons find new employment

• Funded by insurance premiums (1.6% + 0.8% of gross salary)

The Estonian pension system consists of three pillars: There are two social security funds in Estonia

Employers pay 33% social tax based on the salaries of their employees, part of which is directly transferred to the health insurance fund, with the remainder nominally allocated to the payment of the state pension Employers pay 33% social tax based on the salaries of their employees, part of which is directly transferred to the health insurance fund, with the remainder nominally allocated to the payment of the state pension

III Pillar II Pillar I Pillar

40% 65-70%

Expected pension, % of last salary

Pension system structure

Employment rate, persons 65 years or older, 2019 The pillars I and II combined provide about 40% of pre- retirement income. The additional saving of pillar III should rise the total to around 65-70%.

Educated and Competitive Estonia

32

17,4 21,6 25,9 28,7 31,1 31,4 33,1 33,7 34,8 36,0 36,5 38,5 40,7

15% 20% 25% 30% 35% 40% 45% Lower secondary education or lower, % share of total 15-64 year population in 2019

The leading European country in education

33

Deep penetration and high quality of education – building blocks for future growth

Few people with only lower secondary education or lower

Source: Eurostat

High attainment of tertiary education

Source: Eurostat

Tertiary Education, % share of total 15-64-year population in 2019

15,8 16,9 18,7 19,5 20,8 21,0 23,4 23,7 25,5 25,9 26,1 28,0

10% 15% 20% 25% 30% Mean score in PISA 2018 Reading Mathematics Science Average of Reading, Mathematics, Science

Estonia 523 523 530 526

Finland 520 507 522 516 Poland 512 516 511 513 Ireland 518 500 496 505 Slovenia 495 509 507 504 United Kingdom 504 502 505 503 Sweden 506 502 499 503 Netherlands 485 519 503 502 Denmark 501 509 493 501 Germany 498 500 503 500 Belgium 493 508 499 500 Czech Republic 490 499 497 495 United States 505 478 502 495 France 493 495 493 494 Portugal 492 492 492 492 Austria 484 499 490 491 OECD average 487 489 489 488 Latvia 479 496 487 487 Spain

• 481

483 482 Lithuania 476 481 482 480 Hungary 476 481 481 479 Italy 476 487 468 477 Luxembourg 470 483 477 477 Croatia 479 464 472 472 Slovak Republic 458 486 464 469 Malta 448 472 457 459 Greece 457 451 452 453 Cyprus 424 451 439 438 Romania 428 430 426 428 Bulgaria 420 436 424 427

Estonia is the top European country in PISA tests

Source: OECD, Programme for International Student Assessment, PISA 2018 results

Institutions Infrastructure ICT adoption Macroeconomic stability Health Skills Product market Labour market Financial system Market size Business dynamism Innovation capability

Estonia CEE peer group average* Nordic peer group average**

Global Competitiveness Report

34

Estonia is characterised by dynamism, strong institutions and lead on ICT

Source: World Economic Forum, The Global Competitiveness Report 2019 * CEE peer group: Latvia, Lithuania, Slovenia, Slovakia, Poland, Czech Republic, Croatia, Hungary ** Nordic peer group: Finland, Sweden, Denmark, Norway, Iceland

Highlights for Estonia

• Despite being a small economy, Estonia ranks well in World Economic

Forum’s Global Competitiveness Report 2019 with the overall rank of 31

• Estonia’s strengths are firmly based on strong institutions, adoption of

ICT, macroeconomic stability, healthy and skilled population, flexible labour market and dynamic business environment

• Market size is an obvious drawback but at the same time Estonia is an

export-oriented economy, and World Economic Forum sees room for improvement in infrastructure compared to the peer group

• Despite being a small economy, Estonia ranks well in World Economic

Forum’s Global Competitiveness Report 2019 with the overall rank of 31

• Estonia’s strengths are firmly based on strong institutions, adoption of

ICT, macroeconomic stability, healthy and skilled population, flexible labour market and dynamic business environment

• Market size is an obvious drawback but at the same time Estonia is an

export-oriented economy, and World Economic Forum sees room for improvement in infrastructure compared to the peer group

Estonia ranked top 10 worldwide in sub-categories:

Category Estonia's rank Banks' regulatory capital ratio 2 Competition in services 4 Credit gap 1 Debt dynamics 1 Digital skills among active population 8 Efficiency of seaport services 8 Electricity access 2 Flexibility of wage determination 1 Inflation 1 Mean years of schooling 4 Mobile-broadband subscriptions 5 Non-performing loans 7 Organised crime 5 Quality of land administration 6 Time to start a business 8 Trade tariffs 7 Trademark applications 9

Estonia’s performance by category

2 9 11 13 15 16 32 35 43

20 40 Finland Belgium Estonia Germany Ireland Austria France Slovakia Italy 2019 World Press Freedom Index rank

Stability and competitiveness

35

Estonia is a free and sustainably competitive society with effective governance

2 7 11 14 15 20 22 23 29 10 20 30 Finland Estonia Austria Ireland Germany France Slovakia Belgium Netherlands 6 10 14 20 22 27 29 48 64 20 40 60 Ireland Estonia Netherlands Finland Sweden Germany Austria Belgium France Global Sustainable Competitiveness Index 2019 rank 2020 Index of Economic Freedom rank Source: 2020 Index of Economic Freedom, The Heritage Foundation Source: 2019 World Press Freedom Index, Reporters Without Borders Source: The Global Sustainable Competitiveness Index 2019, SolAbility

Press freedom Sustainable competitiveness Economic freedom

90 66 85 92 87 90 94 60 84 86 88 90 88 52 92 84 89 88 75 61 80 86 79 64 50 55 60 65 70 75 80 85 90 95 100 Voice and Accountability Political Stability and Absence of Violence Government Effectiveness Regulatory Quality Rule of Law Control of Corruption Percentile rank

Estonia 2018 Belgium 2018 France 2018 Latvia 2018

Source: 2018 Worldwide Governance Indicators, World Bank

• Estonia has a strong, stable and well-functioning

governance system

• The country compares well to its Western

European peers in Worldwide Governance Indicators

• Stable governance aids growth and encourages

investments into the country

• Business-friendliness is a key competitive

advantage for Estonia, and it ranks highly in World Bank’s Ease of Business index, and is also judged sustainably competitive

• Estonia is a free society with high rankings in both

press freedom and economic freedom

• Estonia has a strong, stable and well-functioning

governance system

• The country compares well to its Western

European peers in Worldwide Governance Indicators

• Stable governance aids growth and encourages

investments into the country

• Business-friendliness is a key competitive

advantage for Estonia, and it ranks highly in World Bank’s Ease of Business index, and is also judged sustainably competitive

• Estonia is a free society with high rankings in both

press freedom and economic freedom

Strong governance framework in Worldwide Governance Indicators Ease of doing business

10 18 20 22 24 27 32 42 46 20 40 Sweden Estonia Finland Germany Ireland Austria France Netherlands Belgium Source: Doing Business 2020, World Bank 2019 Ease of Doing Business index rank

COVID-19 Response

36

COVID-19 response and effects

37

Rapid response to the COVID-19 pandemic

Self isolation of people with COVID-19 and their families All public gatherings banned. Museums, theatres, cinemas, spas, swimming pools etc. were closed Schools and universities closed. Individual local governments to decide on opening of the kindergartens Border controls introduced on March 17th prohibiting entry of all but Estonian citizens, permanent residents and their relatives, and workers involved in freight transport. People arriving in Estonia must self-isolate for 14 days Internal travel restrictions to Estonian islands No visitors allowed in hospitals, social and elderly care houses and prisons Shops, bank branches and cafes need to follow social distancing rules The state of emergency was not renewed and came to an end on 17 May 2020 However, the Government decided on 16 May 2020 that health care emergency measures should stay in place, including the requirement for people with COVID-19 and their families to self-isolate for 14 days, and that schools could start to re-open In addition, restrictions on other activities are to be gradually relaxed: for sports events, public meetings and entertainment from 1 June, and for restaurants, cafes, theatres and cinemas from 1 July 2020. Restrictions on border controls with Finland, Latvia and Lithuania were also relaxed from 16 May 2020 The Ministry of Finance at the end of March forecasted a 8% fall in GDP in 2020, taking into account the impact of the lockdown and the rapid slowdown in economic activity. At the same time GDP growth forecast for 2021 was set at 8%. Unemployment in Estonia will increase, and registered unemployment rate reached 7.5% at the end of April 2020, up from 5.7% at the end of February 2020 (1) Since the forecast in March, the Supplementary Budget has been approved by the parliament with measures totalling EUR 2.8bn, or 10.8% of the GDP (est. EUR 25.9bn in 2020) The Supplementary Budget is to balance the economic impact of the lockdown and economic slowdown and likely to result in a smaller fall in GDP than forecasted in March 2020. New forecasts will be prepared over the summer Special governmental committee formed to manage, supervise and make decisions regarding the COVID-19 pandemic. The committee is led by the Prime Minister and includes ministers from relevant areas – finance, economy, social affairs, internal affairs etc. Declaration of Emergency, 12 March 2020 State of emergency lapsed, 17 May 2020 Governance and supervision Expected Economic Impact

Source: (1) Estonian Unemployment Insurance Fund

Fiscal and financial budgeting

38

COVID-19 and response measures will lead to budget deficit – funding secured

The government’s 2020 Supplementary Budget in April 2020 to tackle the spread of the virus and to develop measures to support the economy

going forward:

• To cover the direct expenditure for the health care system and other areas

stemming from the COVID-19

• To preserve salaries for citizens
• To support SMEs and large businesses
• To provide economic stimulus to facilitate exiting the current economic

slowdown

The 2020 Supplementary Budget measures total EUR 2.8bn (10.8% of GDP)

The Ministry of Finance forecasts a EUR 1.3bn (5.1% of GDP) decrease in tax collections in 2020 compared to the budget approved in December 2019

• EUR 461 million collection of social insurance taxes
• EUR 328 million of VAT collection
• EUR 310 million of income tax collection
• EUR 142 million of excise duties collection

COVID-19 response measures Fiscal impact of the pandemic

As a result of the 2020 Supplementary Budget, the general government budget deficit is projected to be EUR 2.62 bn (10.1% of GDP) in 2020 The projected general government budget deficit will result to Central Government funding requirement of EUR 3.78 bn (14.6% of GDP) in 2020 and EUR 1.2 bn (4.3% of GDP) in 2021 The general government debt is expected to increase to 22% of GDP by end-2020 from 8.4% in 2019 The Government is temporarily halting its contributions to second pillar pension funds from 1 July 2020 to 31 August 2021

• Will increase revenue by EUR 142 million

On 13 March 2020 the Estonian State Treasury increased its T-Bill programme amount from EUR 400mn to EUR 1bn On 27 March 2020 the Republic of Estonia signed a EUR 750mn 15-year loan agreement with the Nordic Investment Bank (NIB) and has secured a EUR 200mn financing facility loan from the Council of Europe Development Bank On 13 April 2020, the Parliament decided to deploy the full balance of the Stabilisation Reserve Fund (EUR 430 million) to cover costs stemming from the COVID-19 pandemic and to reduce related economic risks during 2020 and 2021 Estonia is contemplating raising additional longer-term funding through capital markets in the form of EUR bonds

Securing the funding Impact on public finances

April Supplementary Budget

39

EUR 2.8bn (10.8% of GDP) supplementary budget

Measure EUR millions % GDP Share of total package

On-lending to businesses

• EUR 550mn support for SMEs and large businesses (Direct lending via Kredex SA)
• EUR 200mn support for Agricultural Business via direct lending by Rural Development Foundation and for expected

losses on guarantees given to third-parties guaranteed by the Foundation

750 2.9%

Additional expenditure and investments

• EUR 230mn for Special reserves to cover expected and unforeseen expenditure from COVID-19 pandemic
• EUR 80mn for direct expenditure for purchases of PPE, testing, ventilators etc
• EUR 150mn for unforeseen expenditure reserve
• EUR 222mn grants for support of i) the transport sector ii) tourism, iii) construction sector and iv) development of fast

internet connection to remote areas

• EUR 130mn for local governments
• EUR 30mn for direct costs from COVID-19 and compensation for the loss in revenues
• EUR 100mn for support investments and road maintenance
• EUR 27mn for supporting artists and athletes for cancellations of sports and culture events and compensation for the loss

in revenues of churches

• EUR 19mn for schools, universities and R&D for covering the costs of exiting the state of emergency and to finance

analysis of the spread of COVID-19, to develop testing etc.

628 2.4%

Additional expenditure by social security funds

• EUR 224mn for increased expenditure by the Health Insurance Fund
• EUR 250mn for increased expenditure by the unemployment benefit funds

474 1.8%

Changes to tax and interest rates

• EUR 269mn for excise duties on electricity, gas and diesel have been reduced from 1 May 2020 to 30 April 2022
• EUR 88mn for lowering tax interest rates and other tax rates

357 1.4%

Provisions for losses from guarantees

• EUR 300mn for losses from guarantees given to third parties by Kredex

300 1.2%

Increase in share capital of state-owned companies

300 1.2%

TOTAL

~EUR 2,800mn 10.8%

Debt Management

40

0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10%

200 400 600 800 1 000 1 200 1 400 1 600 2004200520062007200820092010201120122013201420152016201720182019 EUR million Liquidity Reserve Stabilisation Reserve Fund MoF's debt portfolio % of GDP (rhs)

Republic of Estonia funding

41

500 1 000 1 500 2 000 2 500 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020* 2021* 2022* 2023* 2024* 2025* 2026* 2027* 2028* 2029* 2030* 2031* 2032* 2033* 2034* 2035* EUR million New borrowing Redemptions MoF's debt

Borrowing and redemption projection * Financial reserves

Source: State Treasury of Estonia Source: State Treasury of Estonia * Assuming a EUR 1bn 10-year bond transaction in 2020

• The Republic of Estonia set up a EUR 400 million domestic T-bill

programme in March 2019 in order to diversify its funding sources

• In March 2020, the programme size was increased to EUR 1bn
• Since the launch of the programme, Estonia has conducted three EUR

100mn-400mn auctions of 6-and 12-month bills

• On 7 May 2020 the outstanding amount of T-bills was EUR 675mn
• The plan is to have auctions 2-4 times a year depending on maturity

profile and funding needs

• The Republic of Estonia set up a EUR 400 million domestic T-bill

programme in March 2019 in order to diversify its funding sources

• In March 2020, the programme size was increased to EUR 1bn
• Since the launch of the programme, Estonia has conducted three EUR

100mn-400mn auctions of 6-and 12-month bills

• On 7 May 2020 the outstanding amount of T-bills was EUR 675mn
• The plan is to have auctions 2-4 times a year depending on maturity

profile and funding needs

• Balanced budget policies have kept Estonia’s borrowing needs at very

low levels

• At the end of 2019, the MoF’s financial reserves (EUR 1.4bn) were twice

as large as the amount of the MoF’s outstanding debt obligations (EUR 700mn)

• The MoF has had a positive net financial position (where financial

reserves exceeded debt) at least since 2004

• The current funding consists of:
• European Investment Bank: EUR 570mn
• Nordic Investment Bank: EUR 750mn
• T-Bills: EUR 675mn
• Balanced budget policies have kept Estonia’s borrowing needs at very

low levels

• At the end of 2019, the MoF’s financial reserves (EUR 1.4bn) were twice

as large as the amount of the MoF’s outstanding debt obligations (EUR 700mn)

• The MoF has had a positive net financial position (where financial

reserves exceeded debt) at least since 2004

• The current funding consists of:
• European Investment Bank: EUR 570mn
• Nordic Investment Bank: EUR 750mn
• T-Bills: EUR 675mn

T-Bill programme launched in May 2019

Historically, funding needs have been fully met by long-term loans from IFIs

1 2 3 4 5 6 7 8 9 Years Average maturity

Funding outlook and strategy

42

Funding is well-diversified between IFI loans, T-bills and, going forward, bonds

Planned debt portfolio composition – 30 June 2020

Total planned debt 30 June 2020: ~EUR 2,700 million

Average maturity of debt

Source: State Treasury of Estonia Source: State Treasury of Estonia

• As a result of the 2020 Supplementary Budget the general government

budget deficit is projected to be EUR 2.62 bn in 2020, and the Central Government funding requirement to total EUR 3.78 bn in 2020 and EUR 1.2bn in 2021

• With these increased nominal funding needs of Estonia, the Debt to

GDP ratio is expected to increase to 22% by end-2020 from 8.4% in end-2019

• The Republic of Estonia has already secured a EUR 750mn bilateral

loan facility from the Nordic Investment Bank and a EUR 200mn financing facility loan from the Council of Europe Development Bank, with the rest of the funding need in 2020 to be covered by an increase in the outstanding T-bill stock and with EUR benchmark Government bond borrowing

• After the planned EUR 1bn 10-year transaction, Estonia plans to issue

1-2 more benchmark bonds in 2020-2021

• In terms of refinancing risk, the average term-to-maturity will increase

markedly from 4 years as of end-2019 to 7 years as of end-2020 - close to the average term-to-maturity of 8 years for OECD countries*

• Going forward, the MoF’s plan is to build up the stock of T-bills and

then use a combination of capital markets issuances and loans from European supranationals to cover funding needs

• As a result of the 2020 Supplementary Budget the general government

budget deficit is projected to be EUR 2.62 bn in 2020, and the Central Government funding requirement to total EUR 3.78 bn in 2020 and EUR 1.2bn in 2021

• With these increased nominal funding needs of Estonia, the Debt to

GDP ratio is expected to increase to 22% by end-2020 from 8.4% in end-2019

• The Republic of Estonia has already secured a EUR 750mn bilateral

loan facility from the Nordic Investment Bank and a EUR 200mn financing facility loan from the Council of Europe Development Bank, with the rest of the funding need in 2020 to be covered by an increase in the outstanding T-bill stock and with EUR benchmark Government bond borrowing

• After the planned EUR 1bn 10-year transaction, Estonia plans to issue

1-2 more benchmark bonds in 2020-2021

• In terms of refinancing risk, the average term-to-maturity will increase

markedly from 4 years as of end-2019 to 7 years as of end-2020 - close to the average term-to-maturity of 8 years for OECD countries*

• Going forward, the MoF’s plan is to build up the stock of T-bills and

then use a combination of capital markets issuances and loans from European supranationals to cover funding needs

* Source: OECD Sovereign Borrowing Outlook 2020

IFIs 45% Eurobonds 35% T-bills 20%

* Assuming a EUR 1bn 10-year bond transaction in 2020

Contemplated Transaction

43

Indicative key terms

44

Key terms of the contemplated EUR sovereign bond transaction

Issuer: Republic of Estonia Issuer Ratings: S&P: AA- (positive) / Moody’s: A1 (stable) / Fitch: AA- (stable) Format of the Notes: Regulation S Registered note offering under standalone documentation Status of the Notes: Senior unsecured Tenor: 10 years Currency: Euro Size: Benchmark Maturity Date: [ ] 2030 Coupon: Fixed, annual, ACT/ACT (ICMA) Denominations: EUR 1,000 / EUR 1,000 Listing: Irish Stock Exchange's Regulated Market Governing Law: English law Target Market: Eligible counterparties, professional clients and retail clients (all distribution channels) Joint Lead Managers: Citi, Nordea, Societe Generale

Updated economic information

45

A summary of main data releases between 25 May 2020 and 1 June 2020

Macroeconomy

• GDP 2020 Q1: -0.7% YoY and -3.7% QoQ (down from 4.3% in 2019 and 3.9% in 2019 Q4) (1)
• Wage growth 2020 Q1: 4.8% YoY (down from 7.5% in 2019 and 6.4% in 2019 Q4) (1)
• Registered unemployment May 2020: 7.8% (2)
• Industrial production 2020 April: -16.9% YoY and -8.4% MoM (1)
• Retail sales volumes 2020 April: -15% YoY and -13% MoM (1)

Budget deficit

• General government budgetary deficit 2020 Q1: 1.7% of GDP (3)
• Deficit was 1.1% larger than 2019 Q1

Tax receipts

• Tax revenues 2020 Q1: EUR 2,023.3 million (-3.2% YoY) (4)
• Tax revenues 2020 January-April: EUR 2,736.2 million (-4.1% YoY) (4)
• Budget execution 2020 Q1: 19.2% (22% in 2019 Q1) (4)

Tax debt

• EUR 396 million as of end-April 2020 (4)
• Represents a 46% increase vs. 2019

The MoF’s financial reserves

• As of end-March 2020, total of EUR 1.18 billion (of which the Liquidity Reserve EUR 768.5 million and

the Stabilisation Reserve Fund EUR 411 million) (3)

• As of end-April 2020, total of EUR 1.74 billion (of which the Liquidity Reserve EUR 1.31 billion and the Stabilisation Reserve Fund EUR

431.4 million) (3)

Source: (1) Statistics Estonia; (2) Estonian Unemployment Insurance Fund; (3) Ministry of Finance; (4) Estonian Tax and Customs Board