OREANDA-NEWS. Fitch Ratings has affirmed Estonia's Long-Term Local Currency (LTLC) IDR at 'A+' with a Stable Outlook. The Short-Term Foreign Currency (STFC) IDR has been upgraded to 'F1+' from 'F1'. A new Short-Term Local Currency (STLC) IDR of 'F1+' has been assigned.

Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch's sovereign rating on Estonia is 18 November 2016, but Fitch believes that changes to our criteria warrant such a deviation from the calendar and our rationale for this is laid out below.

Fitch will publish a more detailed country-specific report outlining its rationale for these rating actions within 10 working days of this Rating Action Commentary.

The rating committee that assigned the ratings included within this Rating Action Commentary was a portfolio review, and focused on three areas, namely the assignment of STLC IDRs, the review of existing STFC IDRs and the review of the notching relationship between existing LTLC IDRs and Long-Term Foreign Currency (LTFC) IDRs. The committee approved a variation to criteria on the basis that the review applied all relevant sections of our criteria related to the above rating types but did not apply the sections of the criteria related to LTFC IDRs, as the latter were not included in the scope of this review.

KEY RATING DRIVERS

The affirmation of Estonia's LTLC IDR at 'A+' reflects the following key rating driver:

- In line with the updated guidance contained in Fitch's revised Sovereign Rating Criteria dated 18 July 2016, Estonia's credit profile does not support a notching up of the LTLC IDR above the LTFC IDR. This reflects Fitch's view that neither of the two key factors cited in the criteria that support upward notching of the LTLC IDR are present for Estonia. Those two key factors are: (i) strong public finance fundamentals relative to external finance fundamentals; and (ii) previous preferential treatment of LC creditors relative to FC creditors. Additionally, Estonia is a member of the eurozone currency union, which constrains the LTLC IDR at the same level as the LTFC IDR.

The upgrade of Estonia's STFC IDR to 'F1+' reflects the following key rating driver:

HIGH

In line with the updated guidance contained in Fitch's revised Sovereign Rating Criteria dated 18 July 2016, Estonia's STFC IDR meets the criteria required to support a STFC rating at the higher of the two options on our Long-Term rating scale where such optionality exists (at A+, the options are F1 or F1+). Specifically, Estonia benefits from a Reserve Currency Flexibility (RCF) score of greater than 1.0, as its RCF is 3.1.

The assignment of a STLC IDR of 'F1+' to Estonia reflects the following key rating driver and its weight:

HIGH

The assignment of the STLC is consistent with Fitch's approach to assigning ST ratings by using its LT/ST Rating Correspondence table to map the STLC IDR from the LTLC rating scale. According to Fitch's Rating Definitions, the Fitch Rating Correspondence Table is "a guide only and variations from this correspondence will occur". However, variations to this approach are rare in the case of sovereign ratings.

Estonia's STLC meets the criteria required to support a STLC rating at the higher of the two options on our Long-Term rating scale where such optionality exists (at 'A+', the options are 'F1' or 'F1+'). STLC ratings for investment-grade entities are inherently about liquidity and financing flexibility. Additionally, our criteria state that we will always select the higher of the two options for STLC IDRs where such optionality exists.

RATING SENSITIVITIES

The main factors that could lead to a change in the LTLC IDR are as follows:

- A change in the LTFC IDR

- A change in the key factors or supporting factors for notching up of the LTLC IDR from the LTFC IDR

The main factors that could lead to a change in the STFC IDR or the STLC IDR are as follows:

- A change in the LTFC IDR (for the STFC IDR)

- A change in the LTLC IDR (for the STLC IDR)

The rating sensitivities outlined in the previous Rating Action Commentary dated 20 May 2016 are unchanged in respect of the LTFC IDR. Consistent with the criteria variation referred to above, a review of the LTFC IDR and associated rating sensitivities was not included as part of this review.

ASSUMPTIONS

The assumptions outlined in the previous Rating Action Commentary dated 20 May 2016 are unchanged in respect of the LTFC IDR. Consistent with the criteria variation referred to above, a review of the LTFC IDR and associated assumptions was not included as part of this review.