Ministry of finance report about financial stability

The banks operating in Estonia are not facing any liquidity or solvency problems. However, we have recently witnessed several occasions where situation has changed considerably in just a few days as the global developments have wider impact. The briefing below gives an overview about the Estonian financial sector, describes potential risks and explains how these are managed.

 

I – Current situation of the financial market of Estonia

The financial market of Estonia is relatively unique when compared to the rest of Europe. Our position in the current turbulent situation is better due to the following reasons:

  • The relatively small share of the financial sector in the total economy.
  • More than 90% of the banks operating in Estonia are under Scandinavian ownership.
  • The majority of banks operating here belong to major conservative banking groups.
  • Concentration of the banking market is very high – the biggest market shares are divided between a few banking groups.
  • The interbank moneymarket is very small, which is why potential problems in one bank should not have a direct impact on other banks.
  • The banks operating here are very well capitalised. This means that all funds in our banks are well protected.
  • The loan burden ratio of the Estonian private sector to GDP is relatively low (135% in Estonia, while approx. 200% in the US and Denmark, approx. 400% in Iceland).
  • Estonia has small public debt.

More facts about the banking market of Estonia:

  • The banking system of Estonia is a part of the common banking market of the Northern Baltic region and Europe.
  • 6 banks are registered as companies operating in Estonia. All others operate as branches of banks located in other countries (Denmark, Sweden).
  • Only the banks that are registered in Estonia are under the supervision of Estonia and participate in its deposit guarantee system. Branches of banks registered elsewhere are subject to the supervision and deposit guarantee systems of their home countries (i.e. countries where they are registered).

II – International measures for stabilising financial markets

  • Major problems started when the property bubble in the US burst and the country declared a financial crisis. Crisis reached Europe because many of the bad assets had been sold to European financial institutions using various complex methods.
  • The steps to be taken by the EU to stabilise the financial markets were decided on 7 October at the meeting of the ministers of finance of the EU. It was agreed that the following is necessary:
    • improvement of the trust of people and reliability of banks
    • harmonisation of deposit guarantee and other limits in order to avoid possible distortion of competition
  • Many European countries (United Kingdom, France, Belgium, Sweden, etc.) have applied various national measures in order to prevent and resolve potential situations of crises after the appearance of problems on the financial markets.
    • The measures taken by each country depend on the nature of the problem that needs to be resolved and the general situation in the financial sector of the state.
  • Measures adopted by the Government of Sweden on 20 October undoubtedly have the biggest impact on us. The decision is particularly important for Estonia, because the two banks with the biggest market shares over here are subsidiaries of Swedish banks.
    • The decision was to create a fund for guaranteeing the loans of banks located in Sweden and the state is also prepared to offer liquidity assistance (basically give loans) and acquire shareholdings in banks.
    • By doing this, Sweden increased further the reliability of the banking markets of the Nordic and also the Baltic countries, as the subsidiaries are also able to benefit from these resources if necessary.

III – What has Estonia done to guarantee financial stability?

  • Increasing the deposit insurance coverage for the purpose of increasing the reliability of the Estonian banking market is an important part of the contribution made by the state.
    • Today, the state guarantees the deposits of all private persons and SMEs held in banks registered in Estonia (i.e. excluding branches) 100% in the extent of 50,000 euros.
    • Deposit means the most ordinary current accounts of debit cards, term deposits and foreign currency deposits.
    • What this means is that if a bank goes bankrupt, the Guarantee Fund will compensate these persons for the deposits they held in such a bank in the amount of up to 50,000 euros and within 90 days.

o Banks are required by law to treat investments and the assets of pension funds separately from their own assets. This means that if a bank goes bankrupt, the pension pillars and investment accounts of people have been kept separately.

IV – What else could Estonia do to ensure financial stability?

  • Similarly to other countries, Estonia also has three main possibilities to support the stability of financial markets:
    • Give loans to troubled banks in order to help them cope with liquidity or payment difficulties.
    • Guarantee loans issued to banks from elsewhere.
    • Acquire a stake in a problematic bank.
  • The only goal for such intervention and assistance would be to ensure the stability of the state’s financial system and preventing bigger damages to the rest of the economy.
  • Considering the deep financial integration in the region, any steps that could be taken by Estonia would be regionally coordinated.

V – Background dataSource: Estonian Ministry of Finance

V – Background data

Table 1 – General government debt burden in Europe

Table 2 – State reserves

Table 3 – Share of the banking sector in GDP (mln EUR)

Table 4 – Volumes of used assistance packages

Table 5 – Market shares of Nordic banking groups, end of 2007
See normal size graphs on ministry website!

85 bEEK accrued to the state budget last year

According to the initial information by the Ministry of Finance, 84.9 billion kroons accrued to the budget of the Estonian state in 2008, i.e. 94.1 percent of the budgeted revenue. The expenditure of the state budget reached 90.1 billion kroons, i.e. 94.4% of the budgeted expenditure.

As of the end of the year the state budget expenditure exceeded the revenue by 5.2 billion kroons. The excessive expenditure was financed out of reserves.

 

Tax revenue accounted for 70.4 billion and non-tax revenue for 14.5 billion kroons of the annual total revenue of the state budget of 84.9 billion kroons. In comparison with 2007 the state budget revenue rose by 2.9 billion kroons, i.e. 3.4 percent.
 
Tax revenue amounted to 70.4 billion kroons by the end of 2008, i.e. 95.8 percent of the budgeted amount. In comparison with 2007 the tax revenues rose by 2.7 billion kroons, i.e. 3.9 percent.

In 2008 social tax accruals amounted to 31.3 billion kroons, i.e. 99.2 percent of the budget amount. In comparison with 2007 the social tax accruals increased by 4 billion kroons, i.e. 14.8 percent.

Last year personal income tax accruals amounted to 4.3 billion kroons, i.e. 104.3 percent of the budget amount.
In 2008 the personal income tax accruing to local authorities amounted to a total of 11.5 billion kroons. In comparison with 2007 the annual accrual rose by 1.7 billion, i.e. 16.9 percent.

Corporate tax accruals amounted to a total of 4.2 billion kroons in 2008, i.e. 102.9 percent of the amount planned in the budget and supplementary budget. In comparison with 2007 the corporate tax accruals increased by 82.3 million kroons, i.e. 2 percent.

Value added tax accruals totalled 20.5 billion kroons last year, i.e. 90.1 percent of the amount planned in the budget and supplementary budget.
1.4 billion kroons of value added tax accrued in December, i.e. 31.6 percent less than in December 2007. The considerably smaller accrual of value added tax in December can be attributed to the use of advance payment, higher value added tax arrears, and postponement of declaration of value added tax until the new year.

Last year excise duty accruals totalled 9 billion kroons, i.e. 91.9 percent of the amount planned in the budget and supplementary budget. Overall, excise duty accruals of 2008 exceeded those of 2007 by 776.6 million kroons, i.e. 9.5 percent.
 
Non-tax revenue accruals amounted to 14.5 billion kroons in 2008, i.e. 87 percent of the amount planned in the budget. In comparison with 2007 the accrual of non-tax revenues increased by 209.2 million kroons last year, i.e. 1.4 percent.

Aid accounts for the largest share of the accruals of non-tax revenue with 7.4 billion kroons. External funds amounted to 5.6 billion kroons thereof, i.e. 62.5 percent of the amount planned in the budget. In comparison with 2007 the amount of aid has risen by 244.3 million, i.e. 3.3 percent.
 
In addition to aid 1.8 billion kroons accrued to the state budget from the sale of goods and services, i.e. 99.7 percent of the amount budgeted. 650.6 million kroons accrued from sales of material and immaterial property and assets, while revenue earned on property and assets amounted to 3.2 billion kroons, which account for 43.7 and 138.7 percent of the budgeted amounts, respectively.

In comparison with 2007 the revenue on property and assets rose by 120.3 million kroons, i.e. 3.8 percent.
Other revenue totalled 1.4 billion kroons, i.e. 120 percent of the budgeted amount. In comparison with 2007 other revenue accrued in the amount of 17.1 million kroons, i.e. exceeding that of 2007 by 1.2 percent.
 
Budget expenditure amounted, according to initial information, to 90.1 billion kroons as of the end of 2008, i.e. 94.4 percent of the amount planned in the budget and supplementary budget.

Last year various allocations such as social aid and allocations intended for a specific purpose constituted the largest portion of the expenditure classes with a total of 65.1 billion kroons. In comparison with 2007 this expenditure rose by 10.8 billion kroons, i.e. 16.6 percent. This can be attributed mainly to rises in pensions and other social aid.

5.5 billion kroons, i.e. 61.2 percent of the planned amount has been paid out of external aid. As of the end of December 2008 18.7 billion kroons, i.e. 3.1 billion (16.7 percent) more than in 2007 has been allocated for operating expenses.
 

The figures indicated in this press release give an initial overview of the implementation of the budgeted revenue and expenditure in 2008, taking into account the expenditure transferred from 2007. Implementation of the revenue and expenditure of the state budgeted cannot be equalised with the budgetary position of the Estonian general government, which is calculated upon fulfilment of the Maastricht criteria.

Final figures of implementation of the state budget are specified and approved in the annual report not later than in August 2009. The initial budget deficit and debt data of the general government in 2008 will be published by the Estonian Statistical Office on March 31.

Source: Estonian Ministry of Finance

Estonian Air to increase flights to Moscow

The Estonian national carrier Estonian Air is going to increase the frequency of its flights between Tallinn and Moscow, making five weekly flights instead of the present three from June.
Starting from 4 June, Estonian Air will increase the frequency of flights on the Tallinn-Moscow route, adding a Friday return flight departing at 13.25 from Tallinn and a Friday return flight departing from Tallinn at 7.05.
Estonian Air spokeswoman Ilona Eskelinen said Moscow was a destination where the growth in the number of passengers was among the highest.
At present, Estonian Air makes three weekly flights from Tallinn to Moscow — on Monday, Wednesday and Friday.
The additional flights will be serviced by a 88-seater CRJ NextGen aircraft.

Source: Estonian Review

862 000 tons of cereal production in 2008

According to preliminary data of Statistics Estonia, in 2008 the cereal production was 862,300 tons, which was 2% smaller than in the previous year.

In 2007 the cereal production of 880,000 tons was the largest during the last 16 years. In 2008 the cereal production was influenced by rainy harvesting period, which was the reason why particularly the spring crop production was smaller than expected.

Of the total cereal production, 65,700 tons of rye, 339,600 tons of wheat and 349,500 tons of barley were produced. Compared to 2007, the production of rye increased by 4,700 tons, the production of wheat and barley decreased by 6,200 tons and 13,200 tons, respectively. In 2008 cereals were sown on 309,100 hectares, the average yield per hectare was 2,790 kilograms, of which 3,076 kilograms of rye, 3,170 kilograms of wheat and 2,557 kilograms of barley.

The production of potatoes amounted to 125,400 tons, which was over a third less compared to 2007. Potatoes were sown on 8,700 hectares; the average yield of potatoes was 14,316 kilograms per hectare.

The production of rape and turnip rape seed totalled 110,000 tons, which was 27% less compared to 2007. Rape and turnip rape was sown on 77,700 hectares; the average yield per hectare was 1,416 kilograms of rape and turnip rape seed.

In autumn 2008, 41,000 hectares of winter wheat, 12,700 hectares of winter rye and 6,700 hectares of triticale were sown for harvesting of the year 2009.

Source: Statistics Estonia