The share of bad loans fell to 1.9 pct

Annual growth in new housing loans slowed to 10%. Housing loans worth 62 million euros were taken out in November, which was a little less than in September and October. More was taken out in loans during the month than was repaid from earlier loans, meaning that the housing loan portfolio grew by 10 million euros. Annual growth in the loan portfolio was the same as in October at 0.5%.

Large loans granted to the real estate sector boosted the turnover of corporate loans. Almost half of the 206 million euros in new long-term loans and leases that were granted in November went to real estate and construction companies. Borrowing was somewhat more modest in most other sectors of the economy, as it was in October.

The annual growth in the loan and lease portfolio of the banks remained at a modest 1.3%. During the month the total volume of loans and leases to Estonian companies and households grew by 35 million euros to 14.9 billion euros. Although borrowing has been somewhat more active this year than last, this has not led to any rapid growth in the volume of loans. Growth in the volume of loans in November was restrained not only by the natural amortisation of the portfolio and write-offs of problem loans, but also by the reclassification of non-financial companies as financial companies.

Loan interest rates have been kept down by EURIBOR. The average interest rate for housing loans granted in November was 2.7%, and that for long-term corporate loans was 3.2%. Interest rates on loans have been at around the same level for more than a year now.

The share of loans overdue by more than 60 days in the loan portfolio fell to 1.9%. At the end of November the loan portfolios of the banks contained 256 million euros of overdue loans, which is close to the pre-crisis level of early summer 2008. Most of the reduction in problem loans has come in the corporate portfolio, where the volume of loans overdue by more than 60 days in November was half that of a year earlier.

Deposits of the Estonian non-financial sector passed the 9 billion euro mark in November. During the month the deposits of Estonian companies and households grew by 138 million euros and the annual growth rate accelerated from 5% to 6%. This notable growth in deposits was driven by companies while the deposits of households remained at the same level in November as in the previous month.

Source: Bank of Estonia

Author: Jana Kask, Deputy Head of the Financial Stability Department of Eesti Pank

Municipalities near Tallinn losing residents

Local governments located around Tallinn are suffering because more residents decide to register as residents of Tallinn in order to use the benefits such as free public transport, writes Postimees.

While Tallinn had 393,232 residents in 31 December 2011, it now has over 430,000 people in its register.

Read more from BBN

Mayor of Tallinn to earn 4,420 euros a month

The council of Tallinn last week adopted a regulation by which the Mayor of Tallinn Edgar Savisaar will earn 4,420 euros a month starting from 2014.

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Cinemas terminate merger plan

Owners of Estonia’s two leading cinema operators announced their joint decision to terminate the agreement made in July under which Forum Cinemas wished to acquire Solaris Kino in order to expand its activities in Estonia.

The parties confirmed that the main reason for terminating the agreement was opposition of the Competition Board to the transaction.

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49 mEUR worth of Estonian kroons still unexchanged

At the start of November there was a total of 49 million euros worth of Estonian kroons still unexchanged, with 42 million euros in banknotes and 7 million euros worth of coins. During November kroons worth about 125,000 euros were returned to Eesti Pank. In 2011, 318 million euros worth of kroons were returned to Eesti Pank, in 2012 3.5 million euros worth, and in the first eleven months of 2013 1.8 million.

Kroons can be exchanged for euros at Swedbank and SEB cash handling outlets across Estonia until the end of 2013. From 2014 it will still be possible to exchange kroons for euros at Eesti Pank at the rate of 15.6466 with no service fee.

People who live outside Tallinn and who want to change kroons for euros near to their home will be able to do so only until the end of December. From January kroons can be exchanged for euros at the central rate with no fee and in unlimited amounts at the Eesti Pank Museum in Tallinn. The Eesti Pank Museum is open from Tuesdays to Fridays 12-17 and on Saturdays at 11-16.

In January and February it will be possible to exchange Latvian lat banknotes for euros at the central exchange rate and with no service fee in the museum of Eesti Pank. Latvian coins will not be exchanged in Eesti Pank. The daily limit per person and per transaction is 1000 euros.

Source: Bank of Estonia

Estonian economy needs more investments

Estonia’s economic growth continued to be based on domestic demand in 2013 and this was primarily driven by higher household incomes and consumption. The support for the Estonian economy from exports has been less than was earlier forecast because growth in Estonia’s main trading partners was weaker than expected in the first half of the year. The consequence was that the Estonian economy declined in the first half of 2013. Although growth recovered in the third quarter, growth for the full year will be a modest 1%. Estonian economic growth will accelerate as export markets recover, reaching 2.6% in 2014 and 3.9% in 2015.

The euro area economy has recovered at the expected speed and the economic decline that had lasted for six consecutive quarters came to an end in the second quarter. The joint forecast produced by the central banks of the euro area sees that the euro area economy should grow by 1.1% in 2014 and 1.5% in 2015. Inflation in the euro area will stay at 1.4% this year and will slow to 1.1% next year as domestic demand is weak, food commodity prices are falling, and energy price rises will be small as the oil price falls. It is expected that euro area inflation will pick up to 1.3% in 2015. Limited price pressures mean that financial markets expect interest rates to remain very low throughout the forecast horizon. The Governing Council of the European Central Bank has equally confirmed that its monetary policy interest rates will remain low for an extended time.

Interest rates have stayed low in the Estonian lending market and access to bank loans has been good but despite this, growth in fixed capital formation came to a stop in 2013. The main reason was that companies had little need for investment as their existing production resources have been underused. The recovery in export markets should encourage companies to invest in increasing their fixed assets. Increased production capital and an improved supply of capital to labour will allow competitiveness to be maintained and will raise production levels even as the working age population is shrinking and labour costs are rising rapidly. Low levels of investment activity will threaten both the development prospects for companies and the sustainability of economic growth.

Employment increased rapidly in the first half of 2013, but the growth levelled off in the third quarter. A small but constant fall in employment is expected in the coming years. Employment is mainly falling due to the ageing of the population and emigration, and therefore unemployment will similarly fall in the next few years. Unemployment will fall slowly because the current workforce can be employed more intensively through increases to the working hours that were cut after the crisis.

Higher productivity of employees, rises in the minimum wage and an increased public sector payroll will keep growth in household incomes strong in the years to come. The rapid rise in incomes will improve the real purchasing power of households, but combined with consistently low interest rates it could push real estate prices to rise too fast.

Estonian companies have thus far managed to cover their rapidly rising wage costs with price rises, but this is mainly the case for businesses that are focused on the domestic market. Those that are exposed to foreign competition have not been able to raise prices to the same extent. In the economy as a whole, wage growth has outstripped the growth in labour productivity, but wage growth and productivity growth are forecast to come more into line as economic activity recovers. If economic growth remains weak, it will be exporting companies that will primarily find it hard to maintain profitability in the face of rapid and constant wage rises, and this could lead them to reduce their numbers of employees.

Consumer price growth will remain moderate in Estonia in the coming years, reaching 2.1% in 2014 and 2.9% in 2015. Prices will rise more slowly than in previous years, partly because the impact of the sharp rise in electricity prices on the consumer basket will pass out from the comparison base at the start of 2014. Price pressures will also be reduced by a fall in the price of oil. The prices of imported goods will start to rise gradually as the euro area economy recovers. Core inflation will increase at the same time, driven by domestic factors, principally wage rises. The risks to prices are more on the upside because a recovery in global economic growth that is faster than expected could lead demand for commodities, including oil, to push prices higher.

The fiscal position of the general government will remain strong in the next few years. Spending under the budget will still exceed income throughout the forecast horizon. The structural fiscal position with cyclical effects stripped out will remain in surplus throughout the years covered by the forecast, but the surplus will shrink. The government’s decision to focus on the structural surplus and to delay reaching nominal balance may not be justified, given that there is some mismatch between assessments of the economic cycle. Although the economy as a whole is below its potential output, rapid growth in employment, wages and private consumption have increased the tax take and so the negative impact of the economic cycle on the fiscal position is smaller. If the target of nominal balance is repeatedly pushed back, this will pose a threat to strict fiscal discipline and will not allow the state to increase the reserves it would use to balance the economy if the downside risks should be realised.

Read more from Bank of Estonia website

SEB: construction sector suffers a major slowdown in 2014

The SEB Business Barometer projects economic growth in 2014 will be led by industry, wholesalers and exporters, while the construction sector suffers a major slowdown.

According to the study released today, the share of Estonian companies surveyed that are planning investments in excess of 30,000 euros decreased from 48 percent for this year to 41 percent for next year.

The share of those planning innovation activity decreased from 62 percent to 59 percent. Size seems to matter here, as the innovation leaders will be larger firms and industrial firms – the latter will also provide a predicted 30 percent of new jobs next year. By region, innovation will be greatest in Saaremaa and Hiiumaa (even though Ida-Viru County leads the industrial sector), according to the findings.

On the other hand, firms focused on the domestic market had less significant plans for investment and innovation.

The construction sector faces harder times ahead, with one in four companies predicting a decline in turnover, and accounting for as much as 40 percent of next year’s job loss. On a positive note, 92 percent of companies overall predict growth in turnover in 2014, thanks largely to domestic demand.

The greatest growth is expected in Pärnu County, where every third company expects turnover to grow by over 15 percent.

The share of exporters expecting to expand to existing or new markets was 31 percent, down by 5 percent from the year before.

Source:  ERR via Estonian Review