The debt crisis increases risks to Estonia’s financial stability

The international financial environment has deteriorated significantly in recent months. Whereas financial-market tensions used to be confined to just a few euro-area countries, the debt crisis has now spread further afield. This has been accompanied by a growing lack of confidence in the European banking system, which has resulted in disturbances in the functioning of the interbank loan market and it has become more difficult for banks to obtain financing in the bond market.

While we responded to heightened inflationary pressures by raising monetary policy interest rates, we have preserved the supply of unlimited liquidity by the Eurosystem to commercial banks. Among other things, we have extended the maturities of monetary policy loans and are going to resume the purchase of covered bonds. According to the European Banking Authority, it is important to require that banks raise their capital and, if the private sector lacks funds, governments will have to take measures.

There are two main channels through which the debt crisis may affect the Estonian financial sector. First of all, if euro-area liquidity and financing problems start having a stronger effect on the Nordic parent banks, their subsidiaries and branches operating in Estonia will also face more expensive financing costs. So far, risks related to parent banks have been alleviated by the financial markets’ high confidence in the Nordic banking system and economic and fiscal policy. One of the key factors in tackling problems accompanying the transmission of the crisis is smooth cross-border crisis management cooperation. Second of all, if external demand, the primary growth driver in Estonia, were to shrink to a great extent, the banking sector’s income and the improvement in loan quality might suffer a setback. The likelihood of these risks materialising has increased in recent months.

The Estonian economy has successfully withstood global economic volatility and the past year’s economic developments have been supporting financial stability. Compared to a couple of years ago, the Estonian economy is more balanced, which means our economy’s resilience to worsening external conditions has improved significantly.

The likelihood of pessimistic future scenarios in the global economy has increased notably since the second half of the summer. The uncertain environment sets very high standards to Estonia’s fiscal policy. Thus, the preparation of the 2012 state budget should proceed from the Ministry of Finance’s economic forecast risk scenario, while adhering to the objective of exiting the fiscal deficit, which was established in the state budget strategy. In addition, it is important to avoid an excessive volatility of general-government expenditure and to ensure that reserves are sufficient.

The capitalisation of the Estonian banking sector is currently sufficient to manage with risks arising from a possible downturn. At the same time, the deepening debt crisis and deteriorating global economic environment put an additional pressure on banks’ liquidity and capital buffers in the entire Europe. Therefore, when distributing profit and managing capital and liquidity, banking groups should bear in mind that strong buffers are of utmost importance in the volatile economic and financial environment.

Read more from Bank of Estonia website

Estonians- white with the most HIV penetration

According to the World Factbook Estonia is 41st country in a top ranking list of countries with highest HIV / AIDS adult prevelance rate after several African countries, followed by Ukraine (44), Russia (48) and Latvia (60. position).

This entry gives an estimate of the percentage of adults (aged 15-49) living with HIV/AIDS. The adult prevalence rate is calculated by dividing the estimated number of adults living with HIV/AIDS at yearend by the total adult population at yearend.

HIV / AIDS adult prevelance rate 1.2% (2009 est.) (see country comparison here)
People living with HIV/AIDS 9,900 (2009 est.) (see country comparison here)
HIV/AIDS deaths fewer than 500 (in 2009 est.) (see country comparison here)
According to 2004 data Estonians are also quite obese (14.4% of population).

Source: CIA-The World Factbook

Population of Russians in Estonia is 26 pct

According to Statistics Estonia, by the data of the last, 2000 Population Census, five bigger ethnic groups and over a hundred representatives of various ethnic nationalities live in Estonia.  The share of Russian population was  25,5% in 2010, which is 342 379 people. The later does not take into account the unregistered migration, the office reported to the blog of Brilliant Fixer.

Ten population censuses have been conducted on the territory of Estonia, the first of which was carried out in 1881. During the five generations, Estonians have been ethnic majority in Estonia. During the first Population Census, Germans and Russians were the most numerous ethnic minorities, accounting for correspondingly 5% and 3% of the population (nearly 47,000 and 29,000). During the next Population Census in 1897, the share of Germans had decreased below 4% and the decline continued also during the next censuses. At the same time the share of Russians in population increased and reached its peak during the 1989 Population Census, when Russians accounted for 30% of the population in Estonia.

Estonians, Russians and other ethnic nationalities, 1881–2010

Diagram: Estonians, Russians and other ethnic nationalities, 1881–2010

During the 2000 Population Census, representatives of 142 ethnic nationalities were enumerated in Estonia. Five bigger ethnic groups (with more than 10,000 representatives) are Estonians, Russians, Ukrainians, Belorussians and Finns. During the previous, 1989 Population Census, the different ethnic nationalities totalled 121. The changes in the ethnic composition of the population in the period between the two censuses may be first and foremost connected with the migration taking place during the 11 years and possible change of self-determination.

Ethnic minorities in Estonia (excl. Russians), 1881–2010

Diagram: Ethnic minorities in Estonia (excl. Russians), 1881–2010

A new overview about ethnic nationalities living in Estonia will be provided after the 2011 Population and Housing Census which will begin at the end of the year. This year the Population Census will be conducted for the eleventh time on the territory of Estonia. Previous censuses were carried out in 1881, 1897, 1922, 1934, 1941, 1959, 1970, 1979, 1989 and 2000. The ethnic nationality was registered already during the first Population Census. If to exclude the 1897 Census encompassing the whole Russia, ethnic nationality has been asked in all Censuses conducted on the territory of Estonia during 130 years.

Source: Statistics Estonia

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Elcoteq’s Tallinn plant seeking buyers

Despite the bankruptcy of the Luxembourg-registered and Helsinki-listed parent Elcoteq SE, Elcoteq Tallinn continues to operate while waiting to be sold to a new owner, writes news2biz.

Elcoteq SE’s creditors declined to allocate new loans in June, causing the company liquidity problems, which eventually led to the bankruptcy of Elcoteq’s three Finnish plants in August, and the parent’s bankruptcy.

In the process, several head managers have left the company during the crisis. According to Elcoteq’s lawyer in Helsinki: “Actually it is hard to determine now correctly, who is in position to give you any comments.”

Nevertheless, the future looks not so dim for the Estonian unit, after all. The CEO of Elcoteq Tallinn Jan Kotka says that the unit is profitable, continues to work and fulfill the customers’ orders while waiting to be sold as an asset by Elcoteq SE’s receivers.

Read more from BBN

Latvian parliament says yes to third Dombrovskis’ government

On 25 October, the Latvian parliament voted in support of the new government. It is headed by the current Prime Minister Valdis Dombrovskis, who now takes the office for the third time in a row.

57 members of Saeima voted for the new government; in addition to all 56 members of the coalition – including the six MPs who broke off from Zatlera Reformu partija – the government also received a vote from Ingmars Lidaka, member of opposition Zalo un zemnieku savieniba.

Dombrovskis’ party Vienotiba and ZRP each receive control of five ministries, and the other coalition party VL-TB/LNNK receives two, although it has more seats in Saeima than ZRP. The six breakaway MPs, despite rumours to the contrary, receive no seats in the government.

Read more from BBN

Brussels freezes EU fund payments to Estonia

The European Commission has frozen payments of structural funds to Estonia citing low supervision over the use of funds, writes Äripäev.

According to EC, a financial audit made by the Estonian finance ministry has shown that financial statements provided to the EU payments department have not followed proper procedure; that the department lacks an overview of spending; that data provided to the department is questionable; and that the department may not have a clear overview of the bankruptcies and liquidations of entities receiving EU funds.

The commission said the disciplinary action would stay in force until supervisory measures are improved and Estonia begins to pay closer attention to the way ministries hand out EU funds.

Read more from BBN

The share of overdue loans below 6 pct

In September, new lending to companies was among the highest of the past three years. Compared to previous months, corporate long-term loans and leases prevailed, with their volume making up 226 million euros. The notable growth in new lending was mostly due to a couple of large real estate related projects. Manufacturing companies also took more investment loans. New lending to companies has been picking up since the spring of 2011, accounting for some 30%, annually, in the third quarter.

Compared to a year ago, 27% more housing loans were taken in the third quarter. SHousing loans issued in September made up 54 million euros, which is the highest loan volume since the start of 2009. The issue of study loans was also more active at the start of the school year, but 32% smaller than a year ago.

Although the volume of loans issued within the month increased, the household and corporate loan stock decreased by 10 million euros due to repayments. The total loan and leasing stock was 14.6 billion euros at the end of the month, which is 5.3% smaller than a year ago.

Further lending activity is curbed by intensified risks in the external environment. Export-driven economic growth and favourable interest rates have supported borrowing in 2011. However, possible deterioration in the external environment may weaken the confidence of borrowers and tighten credit conditions.

Loan interest rates were similar to those of August, since both Euribor and the average loan interest margin changed very little. In September, the average interest rates on housing loans and long-term corporate loans were 3.4% and 4.0%, respectively.

The share of loans overdue by more than 60 days shrank to 5.9% of the loan portfolio, while the volume of such loans decreased by more than 50 million euros within the month. Overdue loans declined across all segments, but the most in the real estate sector. Overdue loans and loan provisions also decreased owing to write-offs. In addition, banks have reduced earlier write-downs, as assessments of some loan projects have improved.

The decrease in write-downs increased banks’ quarterly net profit by 7.8 million euros. In the third quarter, banks operating in Estonia earned a total net profit of 424 million euros. 80% thereof was extraordinary financial income from the sale of subsidiaries. Another factor contributing to operating earnings was an increase in the net interest income, since both Euribor and lending activity grew somewhat compared to the previous quarter.

Growth in household deposits accelerated to 13%. Corporate and household deposits increased by 54 million euros in September, to 7.7 billion euros. In addition to demand deposits, the volume of time deposits has also been on the increase, which is partly related to uncertainty in financial markets.

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

Read more from Bank of Estonia website

Tallinna Vesi dispute likely to alarm foreign investors

Foreign investors are doubtless keeping a close eye on the ongoing dispute between Tallinna Vesi, the country’s biggest water utility, and the Estonian Competition Authority, writes Äripäev. This week the authority issued an injunction to the company, demanding that it either submit a proposal by November 14 to cut its service prices or have all current prices unilaterally cut by 36%.

The exact percentage is also a topic of debate since the company is interpreting the injunction as saying that the current water tariff must be cut 29%. 

On the news that that the company may lose about 12 million euros in annual earnings due to being forced to lower its water tariff by almost a third, Tallinna Vesi share price fell to the lowest level since it started trading in June 2005.

In a stock exchange statement, Tallinna Vesi said that it completely disagrees with the position of the Competition Authority and will seek a court injunction to block the move.

Read more from BBN

Read also: Tallinn Water profit margin at 60%

Tartu University among world top 400

Estonia’s University of Tartu has for the first time merited a spot in the World University Rankings of Times Higher Education (THE), placing in the shared 350th to 400th position in this year’s rankings.

At the top of the newly-released rankings is the California Institute of Technology. Harvard University, which led the rankings for the last seven years, is in shared second together with Stanford University, followed by Oxford and Princeton.

THE ranked the top universities across the globe on the basis of indicators such as the learning environment, volume, income and reputation of research, citations, innovation and international outlook, i.e. share for foreign staff and students.

The United States and Britain have the most universities in THE scoreboard. Of universities in Estonia’s neighbourhood, the Swedish Karolinska Institute, Lund and Uppsala were ranked respectively 32nd, 80th and 87th, and the University of Helsinki 91st.

Source: Estonian Review

Tartu University website


Growing deposits in 2Q

 In the second quarter the financial position of households improved, owing to the continued growth in deposits. The loan liabilities of non-financial corporations decreased by 50 million euros while the deposits increased by approximately 92 million euros, owing mainly to the growth of foreign deposits. In contrast to the previous two quarters repayments of foreign loans exceeded the volume of new loans and domestic liabilities grew due to increased borrowing. However, the stock of domestic debt was approximately 5 per cent lower and foreign debt 6 per cent higher compared to the previous year. Over the year the share of foreign debt has increased by 2 percentage points to 26 per cent. As in the first quarter, the trade credit of companies vis-à-vis the rest of the world increased significantly (more than 200 million euros), owing to the strong increase in exports.

In the second quarter the financial position of households improved further, owing to the continued growth in deposits. The financial assets of households increased due to the growth of deposits by approximately 200 million euros. The rise in assets was reduced by a decrease of 110 million euros in the value of securities. In contrast to previous quarters, loan liabilities remained broadly unchanged as borrowing increased in the spring. In total, the loan liabilities of households have decreased by 8.2 per cent since the peak at the end of 2008.

Public sector’s assets increased. The deposits of the public sector grew in the second quarter by 84.5 million euros. Equity investments increased by approximately the same amount.

In the second quarter of 2011 the Estonian economy as a whole was a net lender vis-à-vis the rest of the world (22 million euros). In the first quarter households and the public sector were the net lenders and non-financial corporations and financial institutions were the net borrowers.

Read more and see graph on the website of Bank of Estonia

Author:  Viljar Vald, Financial Sector Policy Division of Eesti Pank, Senior Specialist