Estonian companies have increased their competitiveness

At the Äriplaan 2016 conference on Wednesday, Sept.30 2015, Governor of Eesti Pank Ardo Hansson spoke of how Estonian companies have succeeded in increasing their non-price competitiveness. The need to improve competitiveness has become ever more important in coming years as higher labour costs have made production more expensive.

Despite the strong growth in wage costs, companies find that their competitiveness in the European Union market has improved. “The opinion of companies suggests that non-price competitiveness has improved and Estonia’s advantage as a producer lies in more than cheap labour resources,” explained Governor Hansson.

Non-price competitiveness shows whether companies are able to increase exports despite higher prices and labour costs by concentrating on something other than prices. Non-price factors can include innovation, product variety, recognition and quality, position in global production chains, and integration in international production networks.

However, Mr Hansson underlined that in the near future Estonian companies will have to work on developing non-price competitiveness even more than they have so far as the working age population in Estonia starts to shrink. “The number of workers has not fallen yet, but Estonia is entering a demographic autumn and the labour market will lose 30,000 people over the next five years. The decline in the working age population means that it will soon become harder for companies to find employees and wage pressures will increase. Estonian companies have done well at improving their competitiveness and this gives us the chance to become gradually more successful”, he explained.

He noted that inflation is likely to move from its level of around zero this year to 2.5-3% in the coming years. “The biggest beneficiaries so far have been companies focused on the domestic market, as cheaper energy has boosted the real purchasing power of households. If prices start to rise in the years ahead, people will find their purchasing power no longer rises so fast”.

Mr Hansson said that the Estonian economy is capable of faster growth than the current 2%, but to grow faster than 4% would need assistance from structural reforms.

He considered that another risk to economic growth alongside excessive rises in labour costs is that corporate profits may continue to decline. This would limit the ability of companies to make the investments that will provide growth in the future. He also noted the risk from the Nordic real estate markets, because if prices start to fall sharply there, the Nordic bank groups operating in Estonia could face difficulties that could mean they may not be able to continue providing loans to Estonian companies on favourable terms.

Source: Bank of Estonia

Businesses need to be ready for the new 20-euro banknotes

On 25 November, the central banks of the euro area, including Eesti Pank, will release a new €20 banknote into circulation with a new design and security features. So that the new note can enter smoothly into circulation, it is important for companies to update their cash handling equipment in good time, and to know about the new features of the notes.

The most eye-catching change to the twenty-euro notes of the new series is a completely new security feature, a transparent portrait window on the right of the note on the hologrammic strip. Looking at the note against the light reveals a portrait of Europa in the window. The other security features – the watermark portrait of Europa and the hologrammic strip, the emerald green number, and the short raised lines on the edge of the note – are like those on the five and ten-euro notes of the new series.

Paying with the new banknotes will be simple and straightforward a long as merchants update their cash-handling equipment and authentication devices. To do this they will need to contact their equipment suppliers.

“All retailers have to accept circulating banknotes that are legal tender. If the cash authentication device is broken or needs updating, it is still possible to check the authenticity of notes using the feel, look, tilt method”, said Rait Roosve, Head of the Cash and Infrastructure Department at Eesti Pank.

Eesti Pank is organising training events about the new banknotes for cash handlers in Tallinn, Tartu, Pärnu and Narva in October and November. Details of the training events and registration information can be found in Estonian on the Eesti Pank website.

More detailed materials on the security features of the banknotes, with pictures and videos can be found on the website

In addition to this, the European Central Bank will send all cash handlers in Estonia a booklet on the new twenty-euro note in October. The booklet can also be ordered from Eesti Pank (, 6680 719).

The European Central Bank has published a list of devices that can authenticate the banknotes of the new series, including the twenty-euro note, on its website (

Source: Bank of Estonia

Half of the harvest has been gathered

According to Statistics Estonia, by 15 September, 78% of the sown area of cereals, 57% of the sown area of rape and turnip rape, and 52% of the area under potatoes had been harvested in Estonia.

By the same time last year, 93% of the sown area of cereals, 82% of the sown area of rape and turnip rape, and 54% of the area under potatoes had been harvested.

Winter crops ripened and were harvested mostly in the dry period of August, while by the harvesting of spring crops weather conditions had already deteriorated. The share of winter crops that have been harvested totals 91%, while that of summer crops amounts to 72% of the sown area. Among spring crops, 85% of barley, 61% of oats, and 53% of spring wheat has been harvested. Also, 96% of winter rape and winter turnip rape, and 11% of spring rape and spring turnip rape have been harvested.

According to preliminary data, in Estonia, in 2015 cereals were grown on 352,800 hectares, of which 78% has been harvested for grain. One hectare of the harvested area gave on average 4,593 kilograms of cereals, with the average yield per hectare being 4,094 kilograms for rye, 4,987 kilograms for wheat, 4,352 kilograms for barley and 3,173 kilograms for oats. A part of cereals sown for grain will be harvested for green fodder.

Rape and turnip rape were grown on 70,800 hectares. Most of winter rape and winter turnip rape has been harvested, while most of spring rape and spring turnip rape has not been harvested yet. One hectare of the harvested area gave on average 3,156 kilograms of rape seeds and turnip rape seeds.

Potatoes were grown on 5,800 hectares, of which 52% has been harvested. One hectare of the harvested area gave on average 24,039 kilograms of potatoes.

Source: Statistics Estonia

Refugees find it tough to start a business in Estonia

Äripäev writes that a case of an Armenian family who moved to Estonia three years ago and has been planning to open a national restaurant in Estonia shows that it’s tough for refugees to start their own business in Estonia.

The main problem that is that banks are unwilling to grant loans to a family that does not have citizenship. They also don’t comply with the requirements to the grants offered by Enterprise Estonia.

Read more from BBN

Estonia rocked by corruption scandal

The Internal Security Service KAPO on Sept.22, 2015 detained Tallinn Mayor Edgar Savisaar as a suspect for repeatedly accepting bribes.

The Center Party chairman is suspected of repeatedly accepting bribes in 2014 and 2015 in assets and favors for himself as well as for a third party with a total value of several hundred thousand euros.

Read more from BBN

Asset purchases by central banks will make borrowing cheaper

Responding to questions in the Riigikogu on Sept.21, 2015 about the asset purchase programme of the euro-area central banks, Governor of Eesti Pank Ardo Hansson said that the asset purchases will make borrowing cheaper for Estonian companies and households too.

Mr Hansson explained to the Riigikogu that the central banks of the euro area are buying bonds from the market to encourage the investors selling the bonds to invest their money elsewhere. The revival in the economy provoked by this will lead inflation to climb gradually towards the common target of the euro-area central banks of keeping inflation rates below, but close to, 2% over the medium term.

At the decision of the Governing Council of the European Central Bank, the central banks of the euro area are buying some 50 billion euros of private-sector bonds each month, of which Eesti Pank’s share is around 120 million euros. They are only buying from the secondary market and generally buy sovereign bonds from their own country. As the Estonian government has not issued any bonds, Eesti Pank has decided to buy bonds of European institutions like the European Financial Stability Fund and the European Investment Bank from the secondary market.

Eesti Pank requested exceptional permission from the European Central Bank to buy bonds from Elering, a state-owned company, and has bought a total of 30 million euros of such bonds since June. Mr Hansson also noted that Elering is not getting any direct benefit from the purchases by Eesti Pank as the central bank is only allowed to buy the bonds from the secondary market.

Mr Hansson stressed in his answer that central banks can only use monetary policy to offer short-term easing to the economy, and that it cannot create long-term economic growth. “Monetary policy is no substitute for the structural reforms needed to boost competitiveness and keep state finances in order.”

He said that there is no need to issue additional bonds to fund the state budget, given the cyclical position of the Estonian economy. “The Estonian economy is currently in a position where the government should be looking to start making savings rather than to borrow to cover additional costs.”

In the longer-term, said Mr Hansson, Estonia will need to face up to various problems. “In planning our finances, we should remember that the Estonian population is ageing quite quickly, which means that there will be fewer workers and more people needing care. The subsidies from the European Union will also start to decline as the income level of the state rises. One of Estonia’s advantages has been the low level of government debt and it would not be sensible to increase that debt when financial pressures may be just around the corner,” he added.

Source: Bank of Estonia

Estonia has one of the most open economies in EU

Adjusted data show that the current account of the Estonian balance of payments had a surplus of 205 million euros in 2014. Goods exports were smaller than imports, but the opposite applied for services, and in total the surplus of goods and services increased to 681 million euros. Revenues from European Union Structural Funds for infrastructure development were significantly lower in 2014. The outflow of capital from the financial account was 191 million euros larger than the inflow and the main channel for the outflow was portfolio investments.

Estonian exports and imports of goods and services stood at 167% of GDP in 2014. This is double the European Union average and shows that the national economy depends to a large extent on the external environment. The index of openness is usually higher for small countries than for large ones.

For more, see The Estonian Balance of Payments Yearbook 2014. The English version of the balance of payments yearbook for 2014 will be published on the Eesti Pank website on 30 September.



Source: Bank of Estonia (See better graph )

Risks at the housing market

• Growth of house prices one of the fastest in Europe
• House prices have grown faster than households’ incomes
• Surge in supply should slow future price growth

Growth of house prices one of the fastest in Europe
Of the 27 countries Eurostat has data for, Estonia has seen, since 2010, the biggest increase in dwelling prices. The prices of apartments (which amount to around 75% of all purchase-sale transactions in real estate) have increased the most, by around 11% a year since 2011. Higher incomes are enabling households to improve their living standards. Real estate is also an attractive investment option, as nominal interest rates for loans and deposits are very low and housing rents have increased substantially. Construction prices have also risen a bit since 2010, but much less than dwelling prices.

House prices have grown faster than households’ incomes
Since 2010, the prices of dwellings in Estonia have risen faster than average net wages. Since mid-2014, a fall in interest rates has improved housing affordability somewhat for those who wish to purchase a dwelling with a mortgage. Despite the fast increase in real estate prices, demand for housing has grown, and the number of purchase-sale transactions has been rising since 2012. Although demand for housing loans has increased in line with the rise in activity on the real estate market, the role played by the loan market has been smaller, and lending more conservative, than during the previous growth cycle.

Surge in supply should slow future price growth
Construction data show that the development of new dwellings has picked up in 2014-2015. A substantial number of new dwellings has reached or will reach the market soon. The larger supply should reduce the growth of real estate prices, especially in the apartments segment.

Source: Swedbank

Read more here

Falling energy prices keep consumer prices moving downwards

Data from Statistics Estonia show that consumer prices continued to fall in August, declining by 0.3%, as they had in the previous month. The consumer price index stood 0.3% lower in August than in July. Inflation in the euro area has been stable at 0.2% for the past three months despite significant volatility in the prices of fuels.

Prices of the main sources of energy continued to fall in August as motor fuels were down 14% on the year, natural gas was down 19%, and heat energy was down 5%. Prices of imported energy are still some 30% higher than they were during the crisis in 2009, partly because the euro has been weak against the dollar. Cheaper energy benefits the Estonian economy as it allows consumption to increase, boosting GDP growth. The fall in energy prices in the past year has raised real household incomes by 1.3%. The low price of oil on global markets is likely to prove temporary however, and long-term consumption and investment decisions should not be based on that price.

The remainder of the consumer basket without energy increased in price by 1.1% in August. The share in the consumer basket of goods and services for which prices are falling has shrunk consistently over recent months, and whereas prices were falling for half of all goods and services at the start of the year, in August they were falling for only 43% of them. Having fallen for a long time, the import prices of manufactured goods started to rise from the second quarter. This was probably due to the weaker exchange rate for the euro. The rise in import prices has been more clearly transmitted into retail prices in the euro area but the effect in Estonia has been minor so far. Service price rises accelerated to 2.2% in August, mainly because prices for leisure services and rents rose.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

The increase in the current account surplus- reasons

The surplus on the current account of the balance of payments increased in the second quarter of this year to equal 6% of GDP. Corporate income tax was the cause of the large change, as it is calculated separately for large dividends. External sector statistics treat exceptionally large dividends as a reduction in a company’s equity, and so it is not the size of the dividend that affects the calculation of the current account, but rather the income tax applied to it. In technical terms this meant a reduction in the outflow of direct investment, and this in turn increased the current account surplus.

On top of corporate income tax receipts, the current account surplus increased due to a reduction in the outflow of investment income that stemmed from lower profitability for foreign owned companies and an increase in the surplus on the goods and services account. Unfortunately this increase came not from increased growth in the exporting sector, but from a reduction in imports of goods. This reflects the low level of investment activity and may prove an obstacle to GDP growth in the near term.

Given a current account surplus, it is to be expected that external assets grew faster than liabilities. This growth continued in the second quarter of this year, and by the end of June the Estonian net international investment position, which shows the gap between assets and liabilities, had dropped to -38% of GDP. Estonia’s external liabilities have not been so small in net terms in the past 15 years.

Source: Bank of Estonia

Author: Andres Saarniit, Economist at Eesti Pank