Data for pharmaceutical sales in Q213 indicate that the market is experiencing a slowdown in growth, which is in line with our forecasts for the full year. However, growth in Q213 compared to Q212 declined significantly, indicating that the relatively small market is now mirroring the macroeconomic picture in Estonia. We expect Estonia's commitment to balanced budgets and fiscally conservative policies on government spending to moderate growth in the pharmaceutical market, with the slowdown in growth to continue into 2014. Relative to the other markets in Central and Eastern Europe, Estonia will remain a relatively modest prospect for drugmakers, shaped by an increased emphasis on generic drugs, an implication of fiscal austerity measures.
Headline Expenditure Projections
- Pharmaceuticals: From EUR276mn (US$370mn) in 2013 to EUR290mn (US$370mn) in 2014; +4.9% in local currency terms and +0.2% in US dollar terms. Local currency forecast of 4.9% in 2014 continues to decline modestly after 5.3% in 2013 and a marked decline from the growth of 9.2 in 2012 due to new market data and macroeconomic expectations.
- Healthcare: EUR1.15bn (US$1.53bn) in 2013 to EUR1.18bn (US$1.50bn) in 2014; +3.2% in local currency terms and -1.5% in US dollar terms.
Estonia scores 52.1 out of 100 in BMI's Pharmaceutical Risk/Reward Rating (RRR) tool, climbing one spot to 10th out of the 20 key markets covered in Central and Eastern Europe. Estonia's Industry Rewards score is still the weakest part of its pharmaceutical profile, at 12.8, significantly below the regional average of 19.2. This is mainly due to by above-average scores in the urban/rural split and pensionable population. As the population ages, the dominant types of disease will shift, with the emergence of many more long-lasting chronic conditions, cancers and degenerative illnesses. This will tip the ratio of working people to dependants towards the latter, increasing the pressure on overall funding for the healthcare system.
Fiscal tightening has already led to pressure on the Health Insurance Fund (HIF) to rein in pharmaceutical expenditure through pricing limits, generic prescribing and reference pricing mechanisms on reimbursed drugs. Nevertheless, there are also factors that present potential rewards in this market. Any growth in demand for medicine is highly dependent on the unemployment levels and the raising of premiums by the HIF. These are tied to the overall economic cycle, and as a result Estonia's pharmaceutical market broadly reflects macroeconomic trends.
Key Trends And Developments
Estonia's demographic profile and population trends are crucial to any understanding of future productivity growth and government spending requirements. Moreover, future expansion of the pharmaceutical and healthcare market will also depend significantly growth in economic activity. BMI recently assessed Estonia's population pyramid for 2013, the change in the structure of the population between 2013 and 2050 and the total population between 1990 and 2050, as well as life expectancy. We see the pensionable population as a percentage of the total working age population steadily rising from an estimated 27.2% in 2013 to 28.2% in 2015, reaching 30.4% in 2020. This trend is reflected in the dependent ratio as a percentage of the total working age population, which is estimated to increase from 51.2% in 2013 to 52.8% in 2015 and 56.5% in 2020. Given that the Estonian health insurance is a social insurance operating on the principle of solidarity and given that the HIF also uses the social tax paid by the working population to cover the cost of health services for people who have no income from work, these factors point to higher fiscal health care spending down the road.
In H213 Grindeks received the Russian certificate of quality standard ISO 9001-2011. The audit of the company was conducted by the Russian Research Institute of Certification. Russia is Grindeks' largest export destination of its products, so the recognition of the high quality of management system in this country is particularly important. According to 2012 data, the volume of Grindeks products exported to Russia amounted to 55.5% of the total turnover of the company. This certificate will speed up the process of customs declaration and reduce the amount of customs duties paid importing Grindeks products in Russia.
BMI Economic View: Although real GDP growth in Estonia will slow to just 1.9% in 2013, employment and wage gains will drive robust private consumer spending, propping up economic activity. Gradually recovering external and investment demand will allow GDP growth to accelerate, reaching 3.2% and 3.0% in 2014 and 2015 respectively. Even though we retain our core view that Estonia will continue to be one of the best performing economies in the region on a sustainable growth trajectory, the caveat of uneven and sluggish recoveries among Estonia's main trading partners stays in place due to Estonia's integration with the Baltics, Russia and Scandinavia. This will continue to restrict stronger export gains in the short term. With the release of the 2014-2017 State Budget Strategy of Estonia affirming the country's commitment to conservative fiscal policy, we forecast the general government budget to achieve balance in 2014 and reach surplus by 2015 allowing a gradual reduction in Estonia's public debt load.
We believe the revenue targets laid out in the budget are achievable over the medium term, while the government's credible track record gives us little reason to expect a significant deviation from stated expenditure goals. The budget will remain in deficit in 2013, reaching -0.4% of GDP in 2013, although temporary instead of structural factors are largely driving current budget dynamics. The current budget broadly balances expenditure goals, increasing social expenditures while scaling back investment spending in coming years as private sector activity is expected to recover. This strengthening private consumption should also support the further development of the country's pharmaceutical market volumes.
BMI Political View: Internationally, relations with Russia are increasingly contentious, and rhetoric on both sides is heating up. The Estonian government recently accused Russia of interference in its local politics. Deep divisions between ethnic Estonians and ethnic Russians will remain a primary source of domestic political tensions. Domestically, perhaps responding to lingering resentment over austerity policies and a fall in popular support for the ruling Reform Party, the current budget includes generous increases to government pension contributions, health care spending, public sector salaries and teacher's minimum wages.
Generally, Estonia's political environment is characterised by consensus among major political parties towards liberal economic policy, conservative fiscal management, and EU convergence. This has helped to substantially mitigate policy risks through the recession, preventing any major breakdown in the leadership despite worsening economic conditions for the majority of the electorate. Thus, we do not foresee any major changes in Estonia's political landscape in the short term, meaning we expect the ruling coalition to remain intact until the next parliamentary elections in 2015. Then, however, a change in government appears the most likely outcome.