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REPUBLIC OF ESTONIA MINISTRY OF FINANCE#54 Table of contents I Introduction p. 5 Economic Developments p. 12 III Fiscal Policy p. 20 IV Debt Management p. 24 V Structural Strengths and Governance p. 28 VI Banking Sector p. 35 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#6REPUBLIC OF ESTONIA MINISTRY OF FINANCE Introduction#7The Republic of Estonia in a nutshell A developed, open and dynamic Northern European economy Population¹ Territory Capital The Republic of Estonia 1,365,884 45,227 km² Tallinn Euro Currency Nominal GDP² EUR 36.2bn GDP per capita² Real GDP growth (yoy)³ Unemployment rate³ EUR 27,040 -3.9% 7.3% Credit ratings Fitch: A+ Stable Moody's: A1 Stable S&P: AA- Negative Tallinn Estonia Narva Estonia Pärnu Tartu Regains WTO NATO Independence membership membership Joins EMU, and adopts Euro currency Non-permanent member of the UN Security Council 1991 1999 2004 2010 2011 2017 2020 2024 Finland: 17.8% Latvia: 10.9% Sweden 10.9% Largest export destinations Lithuania: 7.1% Germany: 6.7% Netherlands: 4.9% UN membership Declaration of independence 24 February 1918 EU OECD membership membership EU presidency 6 Note: (1) Statistics Estonia, as of 1 January 2023; (2) Statistics Estonia, 2022; (3) Statistics Estonia, Q3 2023; (4) Statistics Estonia, 2023 蛋蛋蛋 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#8Key credit highlights of Estonia Estonia benefits from a flexible economy, low debt, strong institutions and energy security • Growth averaged 2.7% annually in the five years to 2022¹; well above the EU average • GDP is projected to have declined by 2% in 2023, mostly due to weak performance of main trading partners² 7 Developed, flexible and competitive economy High fiscal buffers and low debt Strengthened energy and external security Strong governance and predictable institutions • • • • • . • . • • • Stable banking sector with solid ⚫ ratios • Estonia recovered fast from the Covid-19 emergency, driven by strong export growth and a well-performing ICT sector³ GDP had recovered and exceeded its pre-covid level in one year, by Q4 2020; compared with most of EU member states who reached the pre-crisis level in mid-2021 NGEU* funds are expected to provide a further boost to the recovery from 2023 As an EMU* member, Estonia benefits from euro stability and from the ECB's* monetary tools Unemployment remains relatively low at 7.3% in 3Q 2023 (5.6% in 2022)¹ General government budget roughly in balance for a decade prior to 2020 High fiscal buffers have allowed proactive targeted social spending during the Covid-19 and Ukraine crises Efficient tax system and attractive corporate tax rates support Estonia's competitiveness Estonia had the lowest general government debt-to-GDP level of any EU country at 18.5% of GDP in 2022¹ Russian gas imports are being replaced by liquified natural gas (LNG) imports from Lithuania and Finland, while a new back up location for the Finnish LNG terminal has also been built in Estonia At 6.2%, Estonia has the lowest energy import-dependence ratio among EU countries (average 62.5%) in 20224 Energy security is secured by Estonia's large oil shale reserves which are sufficient to meet domestic energy needs Firmly committed to the renewable energy transition, with 38% of energy consumed in 2022 from renewable sources (30% in 2020)4 Defence spending is expected to increase to 3% of GDP over 2023-27 whilst in-country NATO troops have doubled since 2019 Trade links with Russia are minor, with exports representing only 3.6% of total exports in 2022 (4.4% in 2021)¹ A new coalition government took office on 17 April 2023 with sustainability of public financing a key objective Strong and stable institutions and governance reflected in consistent high Worldwide Governance Indicator scores Estonia has the best scores of any Western country in the latest PISA* student assessments Estonian banking sector has one of the highest CET1 ratios in the EU (Q2 2023) - 23.2% vs an average of 15.7% in SSM*5 NPL ratios are among the lowest in the EU at 1% at the end of Q3 20236 Supervising authorities have upgraded supervision of anti-money laundering and crypto currency activities Note: (1) Statistics Estonia; (2) Ministry of Finance of Estonia, Summer 2023 forecast. The forecasted numbers are subject to change; (3) 'ICT' refers to Information and Communications Technology; (4) Eurostat; (5) European Banking Authority; (6) Estonian Financial Supervision and Resolution Authority; (*) NGEU: NextGenerationEU; EMU: European Monetary Union; ECB: European Central Bank; PISA: Program for International Student Assessment; SSM: Single Supervisory Mechanism REPUBLIC OF ESTONIA MINISTRY OF FINANCE#9Proactive and effective crisis policy response The government has adopted a wide range of policy actions to mitigate the impact of crises Crisis policy areas Fiscal policy Main measures undertaken in 2022 to 2024 ✓ Fiscal space is used to increase defence spending, integrate refugees, secure energy supply and to cover increased costs of living for elderly people, families and public sector entities ✓ The government has decided to raise several taxes in 2023 and 2024. The expenditures will be reviewed to reduce the estimated budget deficit in the coming years to ensure sustainability of public finances Social protection Banking system ✓ Increased the basic subsistence allowance to help support the most vulnerable households ✓ The average pension is exempt from income tax to support elderly people ✓ Strengthened due diligence related to anti-money laundering and counter terrorist financing (AML/CFT) ✓ Increased capital requirements and tightened housing loan requirements Trade and energy Labour market and regional policy ✓ Accelerated investments in alternative gas supplies and renewables to further limit Russian imports ✓ Estonian companies have adjusted to trade sanctions with Russia and Belarus; imports from the two countries have been on a persistent downward trajectory with exports flat at a low level ✓ Put in place measures to facilitate the incorporation to the labour market of Ukrainian refugees ✓ Invested in regional policy, including the Just Transition Fund (EUR 340m) and ERDF* (EUR 23m), both funded by the EU, and various other investments as part of the Cohesive Estonia Strategy 2021-2030 Note: (*) ERDF: European Regional Development Fund 8 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#10Estonia's credit ratings are resilient to crises Creditworthiness reflects the country's solid fiscal position and strong institutions . Through a proven track record of development and growth, Estonia has been able to improve its credit rating over the years Estonia's credit ratings have approached those of its larger Western European peers (with Estonia now rated higher than most regional peers) Rating agencies highlight Estonia's track record of strong fiscal and economic policies, combined with an established institutional set-up, as key rating strengths Estonia's creditworthiness is also supported by its low government debt and very high debt affordability and by a flexible and dynamic economy Estonia's improving credit rating path AA/Aa2 AA-/Aa3 A+/A1 A/A2 A-/A3 BBB+/Baa1 BBB/Baa2 BBB-/Baa3 1997 1999 2001 2003 2005 S&P Fitch - Moody's 2007 2009 2011 2013 2015 2017 2019 2021 Source: Standard & Poor's, Fitch Ratings, Moody's, all as of 28 December 2023 Evolution of general government gross debt (% of GDP) 2023 AA- A+ A1 9 Estonia compared with peer group Estonia Finland AA- AA+ Negative A1 Stable Aa1 Country S & P Outlook Moody's Outlook Fitch Outlook Stable Stable 140 120 A+ Stable 100 AA+ Stable 80 Belgium AA Stable Aa3 Stable AA- Negative 60 Ireland AA Stable Aa3 Stable AA- Positive 40 Czech Rep. AA Stable Aa3 Stable AA- Negative 20 Slovenia AA- Stable A3 Stable A Stable 0 Lithuania Latvia A+ A+ Negative Negative A2 A3 Stable A Stable 2011 2012 2013 2014 Stable A- Positive - Estonia Ireland 2015 2016 Czech Rep. Slovenia 2017 2018 2019 2020 2021 2022 Lithuania Latvia Belgium Finland Source: Standard & Poor's, Fitch Ratings, Moody's, all as of 28 December 2023 Source: Eurostat, Statistics Estonia REPUBLIC OF ESTONIA MINISTRY OF FINANCE#11Security agreements reduce external threat NATO has renewed its commitment to Estonia, which is stepping up its defence spending Russian actions in Ukraine have strengthened NATO's commitment to the Baltics, including the stationing of additional troops in Estonia. In parallel, Estonia has strengthened its own security strategy by materially increasing defence spending above 2% of GDP EU membership • Estonia's membership in the EU and eurozone provides significant monetary, financial and institutional stability • The EU has its own security and defence cooperation agreement, strengthened at the Bratislava Summit in 2016 • The security plan focuses on responding to external crises, building partner capacity and protecting the EU and its citizens Defence spending (2% GDP NATO recommended level) NATO membership ⚫ Joined NATO in 2004, with NATO troops stationed in the country since 2017 ⚫ The allied troop contingent increased to 2,200 after the Russian invasion of Ukraine in a show of commitment from the organization • • Finland/Sweden NATO membership to further strengthen the Baltic umbrella The new government plans to keep defence spending well above the 2% level of GDP which NATO members pledge Number of NATO military personnel in Baltics 9 7.62 7.55 7.55 7.48 8 20,000 6.72 7 5.98 5.37 5.34 6 4.91 15,000 5 4 3 10,000 2 17,800 1 2.12 2.40 2.05 2.37 2.89 3.28 3.22 3.20 3.11 0 5,000 2019 2020 2021 2022 2023f 2024f 2025f 2026f 2027f Expenditure in % of GDP 0 NATO members pledge Lithuania Share of GG* total expenditure (in %) 10 Source: Statistics Estonia, Ministry of Finance Budget Strategy 2024-2027 Note: (*) GG: General Government Source: Statista, September 2023 7,600 6,900 Latvia Estonia 雲雲 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#1211 • Energy security being assured beyond Russia Diversified energy mix and reserves allow the phase out of all Russian energy imports Imports of Russian natural gas to Estonia ended in April 2022. Estonia has reduced natural gas usage (including replacing it with local shale oil) and set up a natural gas strategic reserve to mitigate further risks With a strong renewable energy sector and large oil shale reserves (and the technology to process it into energy products), Estonian energy import dependency is amongst the lowest in Europe¹ • Diversification efforts are already showing results, as Estonia can now import LNG from the Lithuanian and Finnish LNG terminals. Estonia has also built a backup location for the Finnish LNG terminal (based on a floating storage and regasification unit) For the 2021-22 season, subsidy schemes were established for all household energy consumers and enterprises. For the 2022-23 season, the government again provided subsidies for all household consumers (electricity, gas, district heating) Baltic Sea incidents in 2023 have impacted crucial regional infrastructure, including the Balticconnector gas pipeline between Estonia and Finland, and two communication cables. The Balticconnector gas pipeline was suspended due to an unexplained pressure drop during a severe storm in October 2023. As a result, Elering, the Estonian system operator, ensured uninterrupted gas supply to Estonian consumers through Latvia. Investigations are ongoing, but most probably the pipeline was damaged by an anchor of a Hong Kong-flagged vessel. The pipeline is expected to be repaired by April 2024 subject to ice conditions of the sea. The full operational capacity of the internet cable connecting Estonia and Sweden has been restored² Energy import dependency (2022)³ Total energy supply by product (2022) Source: Eurostat Oil and petroleum Electricity products 2% Non-renewable waste 1% Peat and peat products 0% Natural gas 6% Renewables and biofuels 28% 2% Russian energy import share diminishes4 1,500 1,000 500 Oil shale and oil sands 61% 100% 80% 60% 40% 20% 80% 60% 40% 20% 0% Sweden Romania Estonia Latvia Finland Czechia Denmark Poland Croatia France Slovenia Hungary Germany Slovakia Portugal Lithuania Belgium Spain Austria 0 2016 2017 2018 Source: Eurostat Source: Eurostat Note: (1) Eurostat; (2) This information is subject to change as investigations progress; (3) Share of total energy needs of a country met by imports; (4) Energy imports include transit of energy to third countries REPUBLIC OF ESTONIA MINISTRY OF FINANCE 2019 2020 Natural gas (m. m3) (lhs) Oil and solid fossil fuels (k. tonnes) (Ihs) Oil and solid fossil fuels (% from Russia) (rhs) Natural gas (% from Russia) (rhs) 2021 0%#13REPUBLIC OF ESTONIA MINISTRY OF FINANCE Redisson SCCALLAOULEVARD OLÜMPIA Economic Developments#1413 A wealthy and dynamic economy Real growth and per capita GDP exceed most peers over the last five years • Estonia has become a wealthy and diversified economy with a solid track-record of economic growth and a GDP per capita level which is amongst the highest in the CEE region at EUR 27,040 in 20221 • The strong recovery following the Covid-19 crisis, fuelled by accommodative policies and a flexible private sector, demonstrates economic resilience and institutional strength • The Russian Ukrainian war had an impact on GDP growth, which was -0.5% in 2022 and -2% (forecast) in 2023, but which is expected to return to its long-term potential of around 2.5% - 3.0% per year from 2024 onwards² • The Ukraine crisis has impacted Estonia through high energy prices, trade disruptions and weakening economic confidence Real GDP growth (Annual % change) 8 6 4 0 -2 -4 -6 -8 Euro area Baltic peers avg. A decade of rapid convergence (GDP per capita) 40,000 30,000 20,000 10,000 0 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Estonia (lhs) European Union (lhs) Estonia - Volume index of GDP per capita (EU27=100) (rhs) Source: Eurostat 100 80 60 7.20 6.73 5.90 -Estonia 3.40 1.77 -0.50 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Source: Eurostat Share of gross value added by economic activity (Q3 2023) Other 28.2% Agriculture 3.7% Manufacturing 13.8% Construction 7.2% 40 20 Technical activities Trade 13.0% 5.9% Real Estate 10.4% Transportation Finance 5.9% ICT 5.0% 6.9% Source: Statistics Estonia Note: (1) Statistics Estonia, 2022; (2) The Ministry of Finance of Estonia, Summer Forecast 24 August 2023, however, there can be no assurance that such growth will be achieved in the timescale currently envisaged or at all REPUBLIC OF ESTONIA MINISTRY OF FINANCE#1514 A track record of rapid post-crisis recovery Estonia has historically bounced back from crises faster than peers Comparison of the MoF's* GDP forecasts (index 2018=100) 130 120 Fiscal policy space + Open, diverse and flexible economy 110 100 90 I I 80 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024f 2025f 2026f 2027f 2019 Summer Forecast 2020 Summer Forecast 2023 Summer Forecast Capacity to recover swiftly from external shocks -2022 Summer Forecast Source: Ministry of Finance of Estonia Estonia is exposed to external shocks due to its openness, but it has also returned to growth quickly (real GDP %) 20 10 0 Euro Area -10 Baltic peers average ―― Estonia -20 Stronger Economy post- Covid-19 Covid-19 Ukraine-Russia expected to resume crisis growth co conflict growth 2024f Avg. 2010-12 growth: Estonia 4.30% vs. Euro Area Financial Crisis 0.97% and Baltic peers 2.77% 2005 2006 2007 2008 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023f Source: Statistics Estonia, Eurostat, IMF World Economic Outlook April 2023, Ministry of Finance of Estonia Summer forecasts. Forecasted numbers are subject to change. Note: (*) MoF: Ministry of Finance 2009 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#16NGEU funds support sustainable growth Total NGEU transfers are expected to be around 2% of 2023 GDP over the next four years . . Estonia's EUR 953m Recovery and Resilience Plan (including the Recovery and Resilience Facility and RePowerEU) is expected to help the country become more sustainable, resilient and prepared for the green and digital transitions. 59% of the plan is expected to support climate objectives and 22% of the plan is expected to foster the digital transition NGEU has allocated close to EUR 1.42bn in grants, in addition to the EU's long-term budget grants amounting to EUR 3.37bn The Recovery and Resilience Facility is the main source of funds, with an expected amount of EUR 863m. The funds are expected to be allocated in the green and digital transitions, energy efficiency, sustainable transport and health and social sectors The REACT-EU, RePowerEU, Just Transition Fund and the European Agricultural Fund for Rural Development complete the NGEU budget EU ESIF* spending relative to budget (December 2023) Expected NGEU funds in Estonia 2020-2026 (EURM) European Agricultural Fund for Rural Development (EAFRD) Just Transition Fund (JTF) 198.9 63.0 RePowerEU 90.0 REACT-EU 207.4 2 Recovery and Resilience Facility (RRF) 863.3 98% 94% 94% 94% 88% 85% 82% 76% Other 10% COVID-19 preparedness 39% Sustainable transport 10% Health and social 10% Digital transition 13% Repairing the 2 economy 37% Energy efficiency 23% Access to healthcare services 14% Digital Estonia 14% Slovenia Lithuania Estonia Czech Rep. Latvia ESIF EU Belgium Slovakia Source: Ministry of Finance of Estonia 15 Source: European Commission Note: (*) NGEU: NextGenerationEU; ESIF: European Structural and Investment Funds Green transition 30% * Sectoral split of funds applies to the Recovery and Resilience Facility REPUBLIC OF ESTONIA MINISTRY OF FINANCE#17-4 222 24 20 16 12 8 4 0 2019-12 Inflation is on a downward trend Annual inflation is estimated to be lower than forecasted for 2023-20241 Baltics harmonized index of consumer prices (HICP in %) • Inflation in Estonia slowed down to 4% year-on-year in November 2023, which represents the lowest level in the past 2.5 years. The price level has remained unchanged since spring 25 Estonia Latvia -Lithuania • Since mid-2023, energy has negatively contributed to HICP inflation in Estonia after energy prices peaked a year ago 20 15 • ECB policy normalization and weak consumer sentiment are helping to contain inflation 10 Annualized monthly HICP • The Ministry of Finance of Estonia projects that HICP inflation will slow from 9.6% in 2023 to 4.8% in 2024 and to 2.6% in 2025 as the drivers fuelling inflation, mainly imported, subside. 1 Without accounting for tax measures (incl. VAT hike), inflation is forecast to be around 3% next year. However, the latest data points to a steeper slowdown, as HICP is estimated to be 9.2% in 2023 and lower than forecasted in 2024 as well HICP breakdown in Estonia (%) 28 5 0 -5 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Statistics Estonia, Eurostat לאלו 2021 2022 Jan-23 Feb-23 Mar-23 Apr-23 May-23 Jun-23 Jul-23 Baltics HICP components as of November 2023 (%) 2020-02 2020-04 2020-06 2020-08 2020-10 2020-12 2021-02 2021-04 2021-06 2021-08 2021-10 2021-12 2022-02 2022-04 2022-06 2022-0 2022-10 2022-1 2023-02 2023-04 2023-06 2023-08 16 ■Energy Services (overall index excluding goods) Source: Eurostat Food including alcohol and tobacco Non-energy industrial goods Note: (1) Ministry of Finance of Estonia, Summer 2023 forecast 2023-10 -2 -3 3 1.9 1.7 1.7 2 1.5 1.6 1.4 1.4 1.2 0.9 1 0 -0.2 -1 Estonia Food including alcohol and tobacco Services (overall index excluding goods) Source: Eurostat -2.7 Latvia Energy -2.3 Lithuania Non-energy industrial goods REPUBLIC OF ESTONIA MINISTRY OF FINANCE Aug-23 Sep-23 Oct-23 Nov-23#1817 Low unemployment and high participation Estonia's labour market remains resilient and Ukraine migration is expected to further ease tensions • Estonia's unemployment rate of 7.3% in Q3 2023 remains relatively low despite the impact of the Covid-19 and weak economic sentiment¹ ⚫ In addition, the rate of labour market participation is amongst the highest in the EU, at 81.9% of the total population in 20222 • Productivity has risen significantly since 2015 and Estonia's overall competitiveness and export market shares remain stable despite some pressure on nominal wages • Positive net immigration is expected to partially offset labour shortages, while active labour policies contained in the Estonia 2035 strategy are expected to help ease demographic pressures by providing a better match between skills, education and labour market requirements • Refugees from the war in Ukraine arriving in Estonia have had a substantial positive impact on the local labour market. 73% of refugees aged 20-64 were participating in the labour market by working or looking for work in September 2023, while the participation rate for local residents was 87.3% in 20223 Average annual unemployment (% of 15-74-year-olds) 14 12 9.9 10 8.6 7.3 8 6.4 6.8 5.8 6.0 5.4 6.9 6.2 6 4.5 5.6 4 2 0 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 H1 Source: Eurostat Estonia Euro area Real labour productivity per person (index 2015=100) Employment (% of 20-64-year-olds over total population) 125 120 85 81.9 80.5 115 79.2 79.7 79.1 79.3 80 76.7 77.0 110 75.0 74.1 75 73.1 105 100 70 10 95 65 90 85 60 2015 2016 2017 2018 2019 2020 2021 2022 2023 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Estonia Euro area Estonia Lithuania Euro area Belgium Czech Rep. Slovenia Source: Eurostat Source: Eurostat Note: (1) Statistics Estonia; (2) Eurostat; (3) Labour Market Review 1/2023 by the Bank of Estonia REPUBLIC OF ESTONIA MINISTRY OF FINANCE#19Current account is in a small deficit Current account is forecast to rapidly move towards balance as energy prices are falling • Estonia has a strong net external creditor position compared to its rating peers • The current account deficit widened to 3.2% of GDP in 2022 from 2.6% of GDP in 2021, primarily impacted by the significant increase in imported energy prices and stocking of goods associated with the war in Ukraine and the introduction of sanctions • With a dynamic export sector, current account deficits are expected to decrease in the coming years, largely financed by non-debt creating FDI*. The new budget strategy forecasts the current account deficit to shrink to 0.6% of GDP in 2023, revised down from the Spring Forecast (1.6%)¹ . The impact of the Russia-Ukraine conflict on the external accounts is contained by the fact that around 80% of exports to Russia are re- exported, bearing a lower domestic value added • A strong track-record of attracting foreign investment into high value- added sectors is further evidence of the openness of Estonia's economy During the first nine months of 2023, FDI flows to the Estonian economy started to recover from the 2022 low, reaching 2.7% of GDP. It is anticipated that geopolitical tensions affected greenfield investments in 2022, however, the latest data indicates a stronger trajectory, especially in FDI flows to the financial sector and professional, scientific activities Net foreign direct investment 4,000 3,000 2,000 1,000 0 -1,000 بل 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Current account balance (% of GDP) 8 6 4 2 0 -2 -4 -6 -8 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 Goods and services Secondary income Source: Eurostat Net external debt (% of GDP) 0 -10 -20 15 10 -30 5 -40 -36.4 -35.2 -32.9-31.5 0 -50 -5 12.1.13.5 -11.5 -17.7 Primary income Current Account -0.7 -5.0 -8.7 -10.0 Estonia AA Sovereigns median A Sovereigns median ■2022 2023f 2024f 2025f Net FDI, EURm (lhs) Net FDI, % GDP (rhs) 18 Source: Statistics Estonia Note: (1) Ministry of Finance of Estonia, Summer 2023 forecast; (*) FDI: Foreign Direct Investment Source: Fitch Sovereign Data Comparator December 2023 酥酥 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#20A large export sector dominated by ICT Russia's dominance diminished sharply as fuels and gas imports have been fully phased out Total exports of goods and services (% of GDP) 90 80 Estonia's main services exports 3,500 40 3,000 70 30 2,500 60 2,000 50 20 20 1,500 40 30 1,000 10 10 20 500 10 0 0 0 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 ■ Estonia Euro area Source: Eurostat Trade partners (2023) 2013 2014 2015 2016 2017 Transport, EURm (lhs) Other business services, EURm (lhs) ICT, share % (rhs) Source: Statistics Estonia Trade mix (2022) 2018 2019 2020 2021 2022 ICT, EURM (lhs) Transport, share % (rhs) Other business services, share % (rhs) Finland Other 28.0% 17.8% Other 26.4% Finland 14% Consumer Other goods goods services ICT Consumer goods Transport 6% 2% 7% equipment Latvia 4% Transport services 9% Other ICT goods serv. 4% 4% Transport 9% serv. 8% 10.9% Latvia 11% Machinery 14% Transport equipment 8% Other serv. 13% Norway 3.3% Exports Italy 2% Imports Exports Other services 18% Imports Belgium Poland 3% 3.4% Denmark/ Sweden 10.9% China 4% Germany 11% Fuels 9% Industrial supplies 25% Machinery 13% Food and beverage 6% Food and beverage 3.5% 6% Russia Netherlands Germany 3.6% 4.9% Source: Statistics Estonia 6.7% Lithuania 7.1% Netherlands Sweden Poland 5% 7% 8% Lithuania 9% Fuels 12% Industrial supplies 23% Source: Statistics Estonia 19 蛋黃酥 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#21REPUBLIC OF ESTONIA MINISTRY OF FINANCE AZ Fiscal Policy#2221 A long track record of fiscal prudence Getting the deficit back to a low level is a priority for the new government • Estonia has a long track record of fiscal prudence, and is among the few EU member states never to have entered the Excessive Deficit Procedure of the EU's Stability and Growth Pact • The general government budget deficit was 1.0% of GDP in 2022, with tax collection better than expected in the high inflation environment, and is forecast to be 3.3% of GDP for 2023 (2024: 2.9%), with additional allocations to defence spending, to integrate refugees and to mitigate the impact of cost-of-living pressures on elderly people and families¹ • To reduce the deficit, the government has decided to increase income tax rates from 20% to 22% from Jan 2025, VAT rates were increased from 20% to 22% from Jan 2024 • Estonia places a high importance on fiscal transparency, meeting good or advanced practices on 27 out of 36 principles of the IMF Fiscal Transparency Code Budget deficits in 2012-2022 (% of GDP) 15 10 At 0.87% fiscal deficit average for 2012-2022, Estonia ranks amongst the most fiscal prudent Euro Area Member States Enhanced fiscal efficiency and transparency State Budget Act of 2014 formalizing the requirement to maintain a structural fiscal balance 2014 Budget Balance rule amendment allowing the government to budget structural deficits of 0.5% when equivalent previous surpluses were accumulated 2017 Performance-Based Budgeting reform aiming to reduce superfluous expenditure, enhance government efficiency and improve the quality of public services 2020* *From 2020-2023, the general escape clause of the Stability & Growth Pact (SGP) has applied - meaning that this principle is currently not followed in light of the current exceptional economic circumstances Tax ratio in 2022 (% of GDP) 37.5 38.5 40.3 41.0 35.3 -30.3 31.6 32.9 42.2 42.4 43.1 43.3 43.3 46.2 0 5 -5 2012 2013 2014 2015 2016 Estonia Slovenia 2017 2018 2019 Lithuania Czech Rep. 2020 2021 2022 Euro area Latvia Source: Eurostat Note: (1) The Ministry of Finance of Estonia, State Budget 2024, 27 September 2023 Latvia Lithuania Source: Eurostat Estonia Czech Rep. Slovenia Netherlands EU average Germany Sweden Denmark Finland Austria Belgium France REPUBLIC OF ESTONIA MINISTRY OF FINANCE#2340 20 100 80 60 50 0 Source: Tax Foundation Estonia Latvia Israel Turkey Turkey Switzerland New Zealand Luxembourg Czech Republic JARISI Lithuania Lithuania Australia Australia Hungary Slovak Republic Гнарамс Canada memands Canada Slovenia Norway Germany Netherlands Finland Austria International tax competitiveness index 2023 • Low government debt and high affordability provide further fiscal space United States Costa Rica Korea Japan Greece • Low tax rates provide competitiveness and a buffer for fiscal balancing • The main principles of Estonian tax policy are (i) a simple tax system and (ii) a broad tax base. The structure of the tax system is growth- enhancing and the tax collection system is efficient • Estonia leads the OECD Country Rankings on the 2022 International Tax Competitiveness Index • 500 0 -500 -1,000 Government spending aims to fuel future growth, with age-related spending not a serious burden. Estonia's age-related spending is low when compared to peers and the EU average -1,500 -2,000 12 10 Source: The 2021 Ageing Report, European Commission 8 6 4 2 لس 0 -2 EE LV DK LT EU SE FI AT NL BE REPUBLIC OF ESTONIA MINISTRY OF FINANCE 22 CZ IE SI SK Central Government, EURm (Ihs) Local Government, EURm (lhs) Source: Statistics Estonia, Ministry of Finance of Estonia Social Security Funds, EURm (Ihs) -GG nominal deficit, % GDP (rhs) Estimated change in age-related spending 2019-2070 (% of GDP) 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023f 2024f 2025f 2026f 2027f Fiscal balance evolution by government sector 1% 0% -1% -2% -3% -4% -5% -6% Fiscal space to cushion long-term challenges Despite crisis-related fiscal spending, Estonia's public finances remain strong 22#2423 Crisis-related spending priorities are met Energy security, defence and social needs of Estonians and refugees receive attention • Fiscal buffers built over a decade of fiscal prudence have allowed the government to approve exceptional supplementary budgets which have cushioned the impact of the Covid-19 and Ukraine crises in 2020-22 • The new government coalition has approved several tax increases and will review expenditures to reduce estimated budget deficits in the coming years to ensure sustainability of public finances . Exceptional spending related to energy security, defence, and social protection (incl. Ukrainian refugees) remain priorities from 2023 • The Recovery and Resilience Plan (including REPowerEU), will contribute EUR 567m to reforms and investments in energy security and renewables up to 2026 Crises-related additional budgetary costs (% of GDP) 1% 0% -1% -2% -3% -4% -5% 2018 2019 2020 ■ Other Energy measures 2021 2022 2023f ■2020 tax revenue shortfall Defence measures 2024f 2025f Covid measures ■Costs of refugees 2026f Composition of expenditures by function in 2022 (% of GDP) General government services Source: Ministry of Finance of Estonia Limited supplementary budget expenditures Social protection 31% 9% 16,000 National defence 15.3% 6% 14,000 Public order and security 5% Education 14% Economy 12% Environmental protection 2% 12,000 10,000 Housing and Leasure time, culture and religion 5% Healthcare 15% utilities 1% Source: Ministry of Finance of Estonia 2020 ■Supplementary budget (EURM) ◆ Supplementary budget (% of total budget) Source: Ministry of Finance of Estonia 20% 15% 10% 7.8% 6.0% 5% 0% 2021 2022 Initial state budget (EURM) REPUBLIC OF ESTONIA MINISTRY OF FINANCE#25REPUBLIC OF ESTONIA MINISTRY OF FINANCE Debt Management 40 Bill.#26Very low and highly affordable debt burden Estonia compares very favorably with peers on nearly every relevant debt ratio • Estonia's debt to GDP level remained the lowest in the EU area at 18.5% of GDP in 2022, despite the exceptional financing needs associated with the Covid-19 pandemic and the war in Ukraine¹ • During the Covid-19 pandemic, general government debt increased from 8.5% of GDP in 2019 to 18.6% in 2020¹ General government debt metrics in 2022 (% of GDP) 120 100 • The 2024 State Budget introduced various revenue austerity measures to decrease the deficit, which are expected to result in a mild general government debt increase to 20.9% of GDP by end-2024 and 80 60 40 • Estonia's debt burden compares even more favorably on a net basis, with the MoF's financial reserves at 11.1% of GDP at end-20222 • In September 2023, general government debt was EUR 6.8bn, of which the largest share (71%) was obligations of the Ministry of Finance (EUR 4.9bn). 1,2 Government guarantees in favor of EFSF (EUR 482m) are also considered part of general government debt Interest expense to revenues (%)³ 18.5 20 4.0 0 Estonia Lithuania Latvia Czech Rep. 111 Ireland Slovakia Slovenia Finland Euro area Gross debt Net debt Source: Statistics Estonia, Eurostat, IMF Fiscal Monitor October 2023 Composition of the general government debt in 2023 (EURm)4 5 4 3.04 2.78 3 2.11 1.91 1.62 2 1 0.66 3.68 3.58 2.93 2.72 0 Estonia Finland Lithuania Latvia Czech Slovakia Slovenia Ireland Rep. AA Sov. A Sov. median median ■ 2022 ■ 2023 ■2024 2025 ♦2022-25 average Local governments 1,088 (2.8%) Other 677 (1.7%) State guarantee in favour of EFSF 437 (1.1%) 25 Source: Fitch Sovereign Data Comparator December 2023 Source: Statistics Estonia, MoF Forecasts (State Budget 2024) Note: (1) Statistics Estonia; (2) Ministry of Finance of Estonia; (3) 2024/2025 Fitch data are projections only; (4) % are reflecting debt as a percentage of GDP Ministry of Finance 5,322 (13.7%) 酥酥酥 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#27A favourable debt amortisation profile Estonia has no significant maturing long-term debt until 2030 Term to maturity in years (Q3 2023) 10 9 8 7.1 7.1 7.3 7.4 7.6 7.7 7.9 8.1 8.1 7 6.1 6.2 6 5.1 5 4 3 2 1 0 Poland Hungary Czech Rep. 30 25 20 20 Estonia Italy Latvia Cyprus Bulgaria Germany Finland Malta Luxembourg Ireland Lithuania Netherlands Denmark 8.7 8.7 8.7 8.7 1,800 Smooth amortisation profile in the medium term (EURm) 1,600 1,400 1,200 1,000 800 600 400 Source: European Commission External debt service to current account receivables (%)¹ 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036 Source: Ministry of Finance of Estonia MoF projected debt portfolio (EURm)² 200 0 8,000 26 6,000 4,500 15 10 4,000 3,000 2,500 1,500 2,000 521 1,021 5 400 350 1,582 1,680 1,820 1,718 0 0 Estonia Czech Rep. Slovakia Slovenia Latvia Belgium AA median A median 2021 2022 2023 2024f ■2018-2022 Avg. 2023 ■IFI loans ■Short term instruments ■ Eurobond Source: Ministry of Finance of Estonia Source: Fitch Sovereign Data Comparator December 2023 Note: (1) Amortisation paid/due on medium and long-term gross external debt plus interest payments on all gross external debt; (2) Forecasts on debt are subject to change REPUBLIC OF ESTONIA MINISTRY OF FINANCE#28Ministry of Finance funding strategy Conservative debt and financial risk management policies Debt management strategy ⚫ Balanced budget policies kept debt at very low levels up to the start of the Covid-19 pandemic in 2020. Financial reserves exceeded debt • Since 2020, most funding needs have been met with Eurobonds and IFI loans, with some T-bill and ECP issuances. Going forward, the share of short-term debt is expected to increase somewhat, with Eurobond issuance meeting the majority of requirements • In 2023, gross borrowing amounted to EUR 1.54bn (4.0% of GDP), including EUR 826m issuance of short-term debt, EUR 210m IFI loan drawdowns, and Eurobond issue of EUR 500m.¹ In 2024, gross borrowing is projected at EUR 2.0bn • The MoF's financial reserves of EUR 2.55bn (6.6% of GDP) consist of (i) Liquidity Reserve for daily cash management (EUR 2.1bn) and (ii) Stabilisation Reserve Fund for crisis situations (EUR 0.4bn) as at end- December 2023.¹ Reserves decreased during 2023 in line with expectations from EUR 3bn in December 2022 Financial risk management Composition of the MoF's debt portfolio (December 2023)³ T-bills and ECP 10% IFI loans Eurobond 34% 56% Source: Ministry of Finance of Estonia MoF's financial reserves and debt portfolio (EURm)³ 6,000 The Liquidity Reserve was around EUR 1.8bn on average in 2023, with the level modelled to withstand a similar shock to the 2008-2009 crisis¹ 5,000 4,000 • The average term to maturity of Estonia's debt was 7.1 years as at Q3 2023² 3,000 • As regards interest rate risk, the MoF debt portfolio's average time to refixing was 4.9 years in December 2023, while the weighted average interest rate of the debt portfolio was 2.8% p.a¹ 2,000 1,000 27 • The MoF's interest risk management policy follows ALM*-principles, where part (EUR 700m) of the debt portfolio maintains a similar duration to the Liquidity Reserve and the remainder of the outstanding debt has to be fixed for at least 3 years 0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 ■Financial reserves ■MoF debt Source: Ministry of Finance of Estonia Note: (1) The Ministry of Finance of Estonia; (2) European Commission; (3) As of 29 December 2023; (*) ALM: Asset and Liability Management REPUBLIC OF ESTONIA MINISTRY OF FINANCE#29REPUBLIC OF ESTONIA MINISTRY OF FINANCE Structural Strengths and Governance#3029 Estonia has a predictable policy environment Estonia stands out for its good governance and strong, transparent institutions • Estonia has a predictable and consensual policy environment. Its institutions and governance have allowed successive governments to put in place a long-term growth strategy which has credibility and to address the challenges of recent crises including Covid-19 and Ukraine Parliamentary elections took place on March 5, 2023, with Prime Minister Kaja Kallas' centre-right Reform Party remaining the largest party • The new coalition, comprising the Reform Party, Estonia 200 and Social Democrats, maintains a prudent policy agenda driven by the key priority of protecting macroeconomic stability • The new government aims to ensure the broad-based security of the Estonian state, to invest in the competitiveness of the Estonian economy and in energy security and to implement green reforms, while modernizing tax policy Estonian parliament composition Estonian Reform Party 38 seats Social Democratic Party 13 seats Source: Riigikogu Government 65 seats Estonia 200 14 seats Isamaa ("Fatherland") 10 seats Estonian Centre Party 7 seats Conservative Peoples Party of Estonia 16 seats Unaffiliated 3 seats Opposition 36 seats Estonia is an agile country in making reforms - top performer as measured by OECD's reform responsiveness rate indicator 2017-2018 Responsiveness Rate Indicator 60 58.3 50 50.0 50.0 40.0 40.0 40.0 41.7 41.7 41.7 41.7 41.7 42.9 40 28.6 30.0 31.3 31.4 30 25.0 25.0 25.0 20.0 20.0 21.4 21.4 20 16.7 16.7 16.7 10.0 8.3 10 0 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 Source: Economic Policy Reforms 2019: Going for Growth, OECD FRA GRC EST REPUBLIC OF ESTONIA MINISTRY OF FINANCE#31Governance indicators continue to shine Institutional effectiveness, rule of law and regulatory quality are clear credit strengths World governance indicators 2022 100 90 90 80 • Estonia leads most World Governance Indicators against regional and rating peers Regulatory quality is among world's highest • Executive and legislative institutions are strong even compared to Western European countries ⚫ The institutionalization of e-government services weighs positively on efficiency and effectiveness of the public sector Additionally, Estonia ranks among the world leaders on economic and social liberties and control of corruption indexes 70 60 88 93 81 81 78 72 66 69 75 71 90 85 80 81 81 93 87 88 89 74 90 88 83 83 83 91 90 76 75 78 50 Voice and Accountability Political Stability and Absence of Violence/Terrorism Government Effectiveness Regulatory Quality Rule of Law Control of Corruption . ■Estonia ■ Belgium ■Lithuania Czech Republic Slovenia ◆ Peer's average * Source: World Bank; * Peer group composed by Belgium, Lithuania, Czech Republic and Slovenia Economic freedom index¹ Sustainability competitiveness index¹ Press freedom index¹ 0 10 20 30 40 50 0 10 20 30 0 10 20 30 40 50 60 Ireland 3 Estonia 7 Ireland 2 2023 Rank 2023 Rank 2023 Rank Estonia 6 Latvia 9 Lithuania 7 Latvia 17 Slovenia 10 Estonia 8 Lithuania 20 Czech Rep. Slovenia 22 Ireland 13 Czech Rep. 14 21 Lithuania 14 Latvia 16 10 37 Czech Rep. 17 Slovakia 17 Slovakia Belgium 33 Slovakia 26 Belgium 31 43 Belgium 28 Slovenia 50 30 Source: Heritage Foundation Note: (1) Index rankings are global Source: SolAbility Source: Reporters Without Borders 雲雲 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#32Estonia's value-added ICT sector leadership Policies to diversify the economy into technology sectors pay off • A high sectoral diversification reduces the sensitivity of Estonia's economic growth to idiosyncratic shocks Despite its small size, Estonia has positioned itself as a hub for the ICT services industry, whose share of real gross value added increased to 8.0% in 2022 from 5.2% in 2013¹ Estonia's bet on digital transformation is already paying off, as it ranks amongst the top ten countries on key digitalization indicators, paving the way for greater productivity and economic flexibility • Investments in technology are expected to be accelerated further with the use of NGEU funds to support the digital transition strategies contained in Estonia's Recovery and Resilience Plan Estonia's homegrown global ICT success stories S Skype Bolt pipedrive 7WISE playtech ✓ veriff Estonia ranks among the top ten countries in three key WEF digital transformation indicators Flexible work arrangements Digital skills Digital legal framework 50 60 70 80 90 50 60 70 80 90 50 60 70 80 90 T Netherlands Finland New Zealand Sweden United States Luxembourg Switzerland Estonia United States Luxembourg China Australia Finland Denmark Estonia Iceland Singapore UAE Netherlands Singapore Israel Denmark Saudi Arabia Malaysia Estonia Sweden Finland Germany Korea, Rep. Netherlands Source: World Economic Forum Global Competitiveness Report 2020 Note: (1) Statistics Estonia 31 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#3332 Lithuania A commitment to green energy sources. Renewable energy supply remains a priority despite short-term energy market disruptions • Estonia has a legal commitment to reach climate neutrality (net zero emissions) by 2050 • As an intermediate target, the law requires that by 2030 renewable energy accounts for at least 65% of gross domestic final energy consumption • Other intermediate targets relate to improvement of energy efficiency and security • The share of renewable energy has significantly increased in the energy mix while greenhouse gas emissions have steadily decreased • Extensive climate and energy policy measures are included in the state budget strategy up to 2027, including EUR 5.6bn of EU grants and other budgetary funding (within the 2021-2027 period) • The government subsidizes the uptake of renewable electricity (wind and solar) through reverse auctions, with the most recent one concluded in August 2022 for 540 GWh a year, and the next one for 650 GWh a year under way (as of September 2023). Reverse auctions for a total volume of at least 1 TWh are planned for 2024 and 2025 Share of energy from renewable sources in 2022 (%) 60 50 38.5 40 23.0 30 20 22 ° 10 0 Finland Albania Latvia Denmark Montenegro Source: Eurostat Estonia Portugal Austria Lithuania Croatia Serbia Romania Spain Greece Slovenia European Union Moldova Georgia Germany France Emissions of greenhouse gases in Estonia 25 Italy Cyprus Bulgaria Kosovo North Macedonia Czechia Slovakia Energy poverty (2022) 17.5% Inability to keep home adequately warm (% total homes) Source: Eurostat Euro area 9.7% 10 сл 5 7.1% 7.1% 3.4% 2.9% 2.6% 0 Slovakia Latvia Estonia Czech Rep. Slovenia 20 15 2013 2014 ■Net emissions of greenhouse gases, million CO2-equivalent tonnes ■Emissions of greenhouse gases per capita, CO2-equivalent tonnes Source: Statistics Estonia 2015 2016 2017 2018 2019 2020 2021 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#3433 Estonia is joining the EU electricity grid Connection to the Continental Europe Synchronous Area key to reduce energy-related risks • The Baltic Synchronization Project is expected to connect electricity grids in Estonia, Latvia and Lithuania with the Continental Europe Synchronous Area (CESA) through Poland, strengthening energy security. The connection is expected to also enable Estonia to export more renewable electricity to other Member States • The project is expected to be finalized in early 2025. The Baltic power system is already technically ready for emergency synchronization to CESA through the existing Lithuania-Poland interconnection and the newly installed transformers in Alytus, Lithuania. Opportunities to speed up completion are currently being investigated • A budget of EUR 1.8bn for the Baltic Synchronization Project has been approved, including EUR 1.05bn support from the EU's Connecting Europe Facility Baltic power system Transmission line to be built or reconstructed Existing transmission line Connection to the pole Synchronous condenser Decoupling from the Russian electricity system Finland EstLink 1 Püssi Kiisa L300 EE-LVIII -ühendus Estonia EstLink 2 L301 L353 EE-LV III ühendus Viru Russia Electricity production and trade (in GWh) 15,000 10,000 5,000 -5,000 0 2013 2014 2015 2016 2017 Electricity production total Exports of electricity Source: Statistics Estonia 2018 2019 2020 2021 2022 Q3 2023 Imports of electricity -Net imports Ventspils Riga CHP-2 Riga HPP Latvia Brocēni Liksna Muša Telšiai Harmony link . Lithuania Sweden Utena IAE NordBalt Russia Neris Vilnius Alytus Poland LitPat link 蛋黃酥 Belarus REPUBLIC OF ESTONIA MINISTRY OF FINANCE#35Education as a lever for future growth Estonia's investment in education returns some of the best scores in the world GG* expenditure in education in 2021 (% of GDP) Estonia amongst world frontrunners in PISA scores Mean score in PISA 2022 7.7 Average of 3 Mathematics Reading Science 6.6 6.3 scores 6.0 5.9 5.7 5.7 5.7 5.6 5.5 5.5 5.2 5.2 5.1 5.1 5.0 Source: Eurostat Iceland Sweden Denmark Belgium Estonia Slovenia Tertiary education attainment in 2022 (% of 15-64-year-olds) 41.3 40.2 Finland Switzerland Latvia Cyprus Malta France Croatia Czechia Netherlands Norway OECD average 472 476 485 478 Singapore 575 543 561 560 Macao 552 510 543 535 Japan 536 516 547 533 Chinese Taipei 547 515 537 533 Korea 527 515 528 523 Hong Kong 540 500 520 520 Estonia 510 511 526 516 Canada 497 507 515 506 Ireland 492 516 504 504 Switzerland 508 483 503 498 Australia 487 498 507 497 Finland 484 490 511 495 New Zealand 479 501 504 495 United Kingdom 489 494 500 494 Poland 489 489 499 492 36.7 35.1 34.5 Czech Republic 487 489 498 491 31.0 Denmark 489 489 494 491 United States 465 504 499 489 26.0 23.5 Sweden 482 487 494 488 Belgium 489 479 491 486 Austria 487 480 491 486 Slovenia 485 469 500 485 Latvia 483 475 494 484 Germany 475 480 492 482 Netherlands 493 459 488 480 France 474 474 487 478 Lithuania Belgium Estonia Slovenia Latvia Euro area Slovakia Czech Rep. Portugal 472 477 484 478 Source: OECD 34 Source: Eurostat Note: (*) GG: General Government 雲雲 REPUBLIC OF ESTONIA MINISTRY OF FINANCE#36REPUBLIC OF ESTONIA MINISTRY OF FINANCE Banking Sector UUSMAA CORPOR GUTMAN makaroke#3736 Low-risk banking sector exhibits strong ratios NPLs are still near all-time lows while capitalisation and liquidity ratios remain solid CET1 ratio by countries (Q2 2023) Trajectory of nonperforming loans (% change) 25% 20% 15% 10% 5% 0% Estonia Luxembourg Latvia Ireland Lithuania Belgium Finland L Slovenia Germany T Source: European Banking Authority Loan-to-deposit ratio (% change) SSM average Netherlands France Italy Portugal Austria Greece Spain 2 64 12 10 8 Total Consumer loans Households Non-financial corporations 0 2015 2016 2017 2018 2019 2020 2021 2022 2023 Q3 Source: Estonian Financial Supervision and Resolution Authority Liquidity ratios strengthen since 2018 33225250D 200 14 250% HQLA (EURbn) (lhs) 12 200% 150 10 150% 15 8 100 10 6 100% 50 4 50% -5 2 -10 0 0 0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2017 2018 2019 2020 2021 2022 2023 Q3 Q3 I Loan growth rate (lhs) Deposit growth rate (lhs) Loan-to-Deposit ratio (rhs) Source: Estonian Financial Supervision and Resolution Authority Source: Estonian Financial Supervision and Resolution Authority REPUBLIC OF ESTONIA MINISTRY OF FINANCE#3837 AML, Crypto and Russia risks in check Financial authorities strengthen their controls of risky financial activities Direct exposure to Russia, Ukraine and Belarus is negligible, representing only 0.01% of the total loan portfolio of Estonian banks • A new regulation to reduce risks associated with Virtual Asset Service Providers (VASPS) came into force on 15 June 2022 with the following changes: • Additional minimum capital and audit requirements, reporting requirements and stricter rules for operations • Stricter rules have resulted in the number of licenses dropping to 53 as of 31 December 2023 from 381 on 31 December 2021 • The Estonian Financial Supervision and Resolution Authority (FSA) will license and supervise VASPs in future according to new draft law (expected to be in 2025) Combating money laundering remains a strategic priority for Estonia's FSA and legislative changes were passed in 2021 to comply with the latest money laundering directive from the European Union (EU 2018/1673) • Since 2022, the FSA has raised capital requirements and tightened housing loan requirements to prevent further risks to the banking system • Swedish banks and US financial companies owned 81.8% of Estonia's banking capital as of Q2 2023 Geographical breakdown of loan portfolio (Q3 2023) Poland 1.1% Latvia 8.8% Lithuania 15.0% Nordic Russia Other 0.6% 0.004% 0.0% Other Europe 1.8% Estonia 72.9% 25% Non-EU deposits (including from the UK) are dropping 6,000 5,000 20% 4,000 15% 3,000 10% 2,000 1,000 5% 0 0% 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Q3 Source: Estonian Financial Supervision and Resolution Authority Non-resident total, EURm (lhs) Non-resident total, share in total deposits % (rhs) -Non-resident outside EU, share in total deposits % (rhs) Source: Estonian Financial Supervision and Resolution Authority REPUBLIC OF ESTONIA MINISTRY OF FINANCE