Government will reach budget surplus by 2013

At today’s meeting the government approved the State Budget Strategy for the next four years according to which the budget of the general government sector will reach surplus by the year 2013. By the end of the strategy period in 2015, the set target surplus should reach the level of 1 per cent of the GDP. The budget plan enables to start increasing the amount of reserves again in order to guarantee economic stability in future. The government intends to retain the structurally balanced budget in surplus throughout the entire strategy period.
According to Jürgen Ligi, Minister of Finance, the government follows the balanced budget goal of the general government sector established in the previous strategy. “The most important message of this strategy is to demonstrate that the government does not intend to slacken the budget policy even after the elections. The promises are responsibly formulated in the government’s programme and shall be balanced within necessity by means of economizing and additional revenue,” said the Minister.
The State Budget Strategy foresees lowering the tax burden to the pre-recession level or to 31 per cent of the GDP by the year 2015. In order to reach it, several measures connected with the tax changes of the labour force shall be applied, i.e. lowering of the tax rate to 20 per cent by the year 2015, decreasing the rates of the unemployment insurance premium and establishing the maximum level to the social tax.
Irrespective of the relative lowering of the tax burden, the state income will increase during the entire period from 2012 to 2015. During the period the tax income shall increase by 6 per cent a year on average. In comparison with the year 2010, the income shall increase by 1.1 billion euros or by 19.3 per cent by 2015.
In order to reach surplus, it is primarily necessary to manage expenditure and increase the revenue. When the labour market experienced a major adjustment within the two last years, an improvement of the situation is expected in 2011, having also a positive impact on the tax receipts. The state revenues will increase due to higher tax proceeds from the improved economic situation, the dividends of state companies, the increase of the excise duty on tobacco in 2013, and the lowering of the maximum level of the income tax incentive.
The next four years will demonstrate the continuation of sustainable and growth-supportive State Budget Strategy. Budget expenses are planned in compliance with possibilities and taking into account the goal to reach the budget surplus. The increase of government departments’ operating costs is not planned and their share will decrease from the level of the last year’s 6.5 per cent of the GDP to 5 per cent by the year 2015.
The amount of investments in the budget increases every year. The total amount of investments during the strategic period will be at least 700 million euros, including the central government’s investments of 81 million euros via Riigi Kinnisvara AS.
New major initiatives such as the structural changes in the education, the introduction of the parental pension, the remuneration of doctoral candidates and the application of the financing principles of the children free-time activities, the introduction of education allowance based on necessity have an impact of the state budget expenses.
The government’s goal is to retain the current net asset level of the general government sector or in other words the marketability of assets must exceed the debt load. According to the current forecasts there is no need to take new loans on the level of the central government and within the following years it is possible to cover the budget deficit and financing transactions from the State Treasury’s liquidity reserve in full amount. Hence, the total amount of the general government sector’s reserves will decrease within the years 2011-2013, but thereafter a new increase of the reserves is expected.
The State Budget Strategy constitutes the basis for the 2012 budget). The goal is to ensure sustainable budget policy in an intermediate perspective and to make the government’s activity in the management of the state and the areas of activity more effective.
In addition to the State Budget Strategy, the government – as a member of the euro zone for the first time approved the Stability Programme for the year 2011. The programme outlines the government’s policy and performance vis à vis the requirements set by the Stability and Growth Pact.
Source: Estonian Ministry of Finance

Banks earned a net profit of 74 MEUR in the first quarter

In the first quarter, Estonia’s enterprises were issued 10% more loans and leases than a year ago. Short-term financing of industrial enterprises increased 47%. Investment loan turnover growth, on the other hand, has remained relatively subdued. However, since the economy is expanding, the financing need of investment in production capacity is likely to increase, so borrowing is going up this year.

Household borrowing activity has been weaker compared to that of companies. Year-on-year, just 4% more housing loans were issued in the first quarter. The most active household credit market segment is car lease, where new transactions posted a 70% annual growth in March.

The loan and leasing portfolio keeps shrinking, since the repayment of earlier loans is outpacing the amount of new loans. The corporate and household loan and leasing stock declined by 113 million euros (0.8%) in March. The loan and leasing portfolio was 14.8 billion euros by end-March, which is 6.7% smaller than a year ago.

Loan interest rates remained at the same level as in February. The average interest margin on loans issued in March declined slightly, so the rise in EURIBOR did not have a considerable effect on the price of new loans. The average interest rates on housing loans and long-term corporate loans were 3.4% and 4.2%, respectively, in March.

The annual deposit growth rate slowed to 4% in March. The total volume of corporate and household deposits increased by 27 million euros, amounting to 7.4 billion euros. Deposit growth has been positive in recent months owing to household savings. The latter increased to some extent also as a result of income tax returns at the start of spring. Corporate deposits decreased for the third month in a row in March and their volume was 6% smaller compared to the end of 2010.

Since the economy is recovering, the loan repayment ability of borrowers has been improving steadily. Loans overdue by more than 60 days decreased by 38 million euros in March and their share in the loan portfolio shrank by 0.2pp (to 6.2%). Banks also reduced their earlier provisions for possible loan losses, which also supported their profitability.

Banks in Estonia earned a net profit of 74 million euros in the first quarter. The net profit was more than three times larger than in the previous quarter and exceeded the total earnings of 2010 by 3 million euros. The adoption of the euro has cut banks’ net fee and commission income and financial income. However, the decline was offset by higher net interest income growth and their profit before loan losses was 8% larger than a year ago.


Figure 1. Corporate loans and leases issued within the quarter

Figure 2. The weighted average interest rate on housing loans and long-term corporate loans issued within a month and 6-month EURIBOR

Figure 3. Quarterly loan losses and net result of the banking sector

Author: Jana Kask, Head of the Financial Sector Policy Division of Eesti Pank
Source: Bank of Estonia

European debt crisis still poses risk to Estonia

A pickup in economic growth at end-2010 in most European Union countries has improved external conditions for Estonia’s economy and financial system. However, debt-crisis related problems in some euro-area Member States are still on the agenda and have even deteriorated.

The global economy has recovered faster than expected, helping the Estonian enterprises overcome the downturn more rapidly. The good adaptability of companies is reflected by the fact that exports have increased faster than demand in our main destination markets, whereas the volume of goods export is already larger than before the crisis. Increasing capacity utilisation, strengthening confidence, and decreasing unemployment indicate that domestic demand has started to contribute to economic growth.

Price growth has in recent months been rapid in both Estonia and the euro area. This has been mostly due to food and commodity price growth in the global market; domestic factors have so far played a modest role. Looking ahead, it is very important to avoid the pass-through of commodity prices, since this would harm the competitiveness of enterprises. In order to reduce the effect of a commodity price pass-through, it is necessary to focus on improving domestic competitiveness and on the setting of administered prices as well as to prevent wage growth from exceeding productivity growth.

From the viewpoint of the sustainable development of public finances, it is essential that the government continue with their plans related to reducing budgetary deficit and to improving the efficiency of the public sector. Higher tax income, which results from faster growth, should first and foremost be used for achieving fiscal balance and restoring reserves. This is especially important in light of the budget strategy adopted last spring, according to which the budget should reach a surplus in 2013 at the latest.

The general risk assessment of Estonia’s financial stability has changed very little compared to the late autumn of 2010. With economic growth picking up, domestic risks to loan quality have declined the most. Looking at the forecasted economic growth and financial-sector developments, it is likely that the profitability and capitalisation of banks will increase. On the other hand, considering that interest rates are increasing somewhat, whereas the real income is growing rather modestly, the loan repayment ability of borrowers may deteriorate. External risks have not changed due to the ongoing debt crisis in Europe. The disclosure of banks’ stress tests carried out by the European Banking Authority and back-stop measures should help reduce the financing risks of banks.

In light of amendments to international and also to the Estonian legal framework, the strengthening of the capital of banks is a positive development. Future decisions regarding profit distribution or equity should also consider the requirements planned to be set to the volume and quality of equity. Thus, the proposal made by the Swedish Financial Supervision Authority to establish higher capital requirements to banks should be supported.

The actions of the Swedish Financial Supervision Authority and Sveriges Riksbank help alleviate liquidity risk deriving from the international financial environment intermediated by banking groups operating in Estonia, but also risks related to possible imbalances due to rapid economic growth in Sweden. Liquidity risk is also softened by decisions that have increased the share of liquid assets in most of the banks operating in Estonia. In order to ensure that banks will continue successful liquidity management also in the future, it is important to focus on either more effective cross-border cooperation or maintaining liquidity buffers, depending on their business model.

Source: Bank of Estonia

Estonia’s natural increase positive again after 20 years

According to the revised data of Statistics Estonia, in 2010 35 people more were born than died. The population of Estonia was 1,340,194 on 1 January 2011.

15,825 people were born and 15,790 people died in 2010. The number of births exceeded the number of deaths last 21 years ago in 1990.

In 2010, 62 children more were born than a year earlier but the number of births was still smaller by about 200 than the last decade’s record in 2008 when more than 16,000 children were born.

On the contrary the number of deaths has been rapidly decreasing during the last three years and in 2010 291 people less died than a year earlier. Thus the positive natural increase was mainly achieved due to the decrease in the number of deaths.

Births, deaths and natural increase, 1990–2010

Diagram: Births, deaths and natural increase, 1990–2010

617,757 males and 722,437 females lived in Estonia at the beginning of 2011. Population growth continued due to the natural increase in Harju and Tartu counties.

Population by county, 1 January 2011
County Population
Whole Estonia 1 340 194
Harju county 528 468
Hiiu county 10 000
Ida-Viru county 167 542
Jõgeva county 36 550
Järva county 35 963
Lääne county 27 283
Lääne-Viru county 66 861
Põlva county 30 778
Pärnu county 88 327
Rapla county 36 652
Saare county 34 577
Tartu county 150 535
Valga county 33 889
Viljandi county 55 275
Võru county 37 494


Natural increase is the difference between births and deaths during the year. Positive natural increase shows the predominance of births, and negative natural increase – the predominance of deaths. Only live births are taken into account as births in population registration.

The preliminary population and natural increase was published by Statistics Estonia on 21 January. The revised data differ from preliminary data because the data of deaths and births in January were based on the registration month. The revised data are based on the actual month of the event.

In Estonia two population numbers are in use – one based on the data of Statistics Estonia and the other based on the Population Register. The population number published by Statistics Estonia is based on the 2000 Population and Housing Census data which are supplemented with the annual data on registered births and deaths. The Population Register data are based on the registration of a person’s place of residence. Internationally, the Census data are considered more accurate than the Register data, because people may have different reasons for alteration of data while registering their place of residence. At the same time, the quality of Statistics Estonia’s data is deteriorated by the long period of time since the last Census and by the fact that the population number does not include migration data. Thus, it is very important that the 2011 Population and Housing Census (PHC 2011) would be a success and we could switch to one population number after that.

PHC 2011 is going to take place from 31.12.2011 to 31.03.2012 and it will be conducted using a combined method: from 31.12.2011 to 31.01.2012 permanent residents can fill out the Census questionnaire over the Internet and those who do not use the e-Census option will be interviewed by the enumerator at home from 16.02 to 31.03.2012.

Source: Statistics Estonia

Estonia’ largest football stadium may be sold

Aivar Pohlak, head of the Estonian Football Association, has started to look for investors who could buy the national football stadium in Lilleküla in Tallinn, writes Äripäev.

According to Pohlak, the price of the stadium is EUR 29 million.

Experts interviewed by Äripäev admitted that investors may be interested in buying a 59,200 square metre property next to the main stadium that today has training courts since it would be a lucrative estate for building apartment or office buildings.

Read more from BBN

Belarus buys second-hand cars from Estonia

Second-hand car dealers from Belarus have become the main buyers of cars in Estonia, mostly interested in cars that cost between EUR 5,000 and 15,000, writes Eesti Päevaleht daily.

The reason why Belarus businessmen are interested in Estonian second-hand cars is the customs union between Russia, Belarus and Kazakhstan that will enter into force in July and increase the tax on imported cars from 30 eurocents a cubic centimeter to one euro.

Read more from BBN

Contact if you want to import cars or trucks from Estonia.

Estonia has a high Internet freedom

The US organisation Freedom House placed Estonia among countries of the highest internet freedom. Freedom House studied the situation of internet freedom in 37 countries. The organisation focused its attention on access to the internet, internet limitations, and internet users’ violations.

In addition to Estonia, the organisation classified the United States, Germany, Australia, Great Britain, Italy, the Republic of South Africa, and Brazil among countries with free internet use.

Kenya, Mexico, South Korea, Georgia, Nigeria, Malaysia, India, Jordan, Turkey, Indonesia, Venezuela, Azerbaijan, Rwanda, Russia, Egypt, Zimbabwe, Kazakhstan and Pakistan are countries of partial internet freedom according to Freedom House.

Thailand, Bahrain, Belarus, Ethiopia, Saudi-Arabia, Vietnam, Tunisia, China, Cuba, Myanmar and Iran were placed among non-free countries.

Estonia took part in the study for the third year running and Freedom House has previously also found Estonia to be a country with free internet. According to Freedom House, Estonia does not have considerable political censorship, no internet users or bloggers have been arrested, and no web 2.0 applications have been blocked. In the opinion of the organisation, Estonia is among the technologically most developed and interneticized world countries.

Freedom House said in the part of its report pertaining to Estonia that the first internet link in the country was opened in 1992 and since then Estonia had become a country where use of the internet was the widest.

The organisation pointed out that the limitations set to the internet in Estonia were some of smallest in the world and that there was no censorship of any kind.

As the only limitation the organisation pointed out the act on the protection of personal information, as well as the act that entered into force in 2010 which obliges organisers of remote gambling to apply for a license of the Tax and Customs Board. Freedom House also mentioned the cyberattacks against Estonia in spring 2007. The organisation said that there had been no attacks against internet journalists in Estonia but added that internet comments sometimes crossed the limit of good taste.

Freedom House said in comment of the study that dangers to internet freedom were growing in the world. Among the most considerable dangers the organisation mentioned cyberattacks, political censorship, and government control over internet infrastructure.

Freedom House, based in New York, is a non-government organisation observing political and civil liberties in world countries. It also issues a yearly world press freedom report.

Source: Estonian Review

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