The loan and lease portfolio grew by 6 pct over the year

  • The volume of loans that are long-term overdue remains small at only 1.4% of the portfolio in February
  • The total deposits of Estonian companies and households in February were at the same level as in the previous month and stood at 10.8 billion euros

The loan and lease portfolio of Estonian companies and households grew by 6% over the year to February. The total volume of loans and leases increased over the month by 87 million euros to 16.2 billion euros.

The total stock of loans and leases to companies was 7% larger in February than a year earlier. The 770 million euros of new loans and leases to companies was around the same as the average for last year. More than half of the long-term loans issued in the first months of 2016 were granted to companies in real estate and retail that are mainly focused on domestic consumption.

The stock of housing loans continued its stable growth in February and was 4.3% larger than a year earlier. As is usual in the first months of the year, the volume of new housing loans was lower in February and stood at 68 million euros. As in previous months, the volume of car leases grew fast and was 18% larger in February than it was a year earlier. The stock of overdraft and credit card lending increased in February for the first time in several years, increasing by 0.7% over the year.

The average interest rates on the new loans issued during the month were at the same level as in the preceding months. The interest rate for long-term loans taken by companies was down slightly in February at 2.1%, but this rate varies with the risks of the project that the loan is for. Competition is tight between the banks in the corporate loan market, and this is leading to a reduction in interest margins. The average interest rate on housing loans issued during the month remained stable at the level of the preceding months of 2.2%.

The quality of the loan portfolio has remained good. The percentage of loans overdue by more than 60 days in the loan portfolio increased slightly in February to 1.4%, but this is still small. The volume of long-term overdue loans increased mainly because of an increase in the volume of overdue loans to industrial companies.

The total deposits of Estonian companies and households in February were at the same level as in the previous month and stood at 10.8 billion euros. Total deposits were 9.7% larger in February than a year before, meaning that the deposits of Estonian companies and households continue to grow faster than their bank loans.

Source: Bank of Estonia

Auhtor: Mari Tamm, Economist at Eesti Pank

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Estonians have a small loan burden

  • The primary residence in the most valuable asset of Estonian households as its value accounts for roughly half of that of all assets
  • One fifth of the real assets of households are the assets of businesses that they own and that they work for
  • The largest part of the financial assets of Estonian households are bank deposits and financial assets account for a smaller share of assets than they do in other euro area countries
  • The loan burden of Estonian households is smaller than the euro area average and their financial buffers are also smaller

Eesti Pank and Statistics Estonia jointly carried out the Household Finance and Consumption Survey (HFCS) of Estonian households in 2013. A survey of households collected data on their assets, liabilities, income and consumption.

The results of the survey show that Estonian households have less in assets than households in the rest of the euro area do, though the results for Latvia and Lithuania have not yet been published. The median value of net assets in Estonia (the value of a household’s assets minus the total of its liabilities) was the smallest of any country in the euro area, coming in last place behind Germany and Slovakia. The median value is the central figure where half of households are above and half are below. The median value for the net assets of Estonian households was 43,600 euros in 2013.

In Estonia and in other countries, net assets are more unevenly distributed among households than incomes are. The Gini coefficient for the distribution of net assets in Estonia, which is a measure of inequality, is one of the highest in the euro area. The higher the coefficient, the greater the inequality that it expresses1. The coefficient was only higher than it was in Estonia in Germany, Austria and Cyprus. One possible cause of the inequality in assets is the large variation in real estate prices across the different regions of Estonia.

The most valuable asset that Estonian households have is their main residence. The share of home owners is higher in Estonia at 77% than the euro area average of 60%. The value of the primary residence accounts for roughly half of that of all the assets of households, which means that the wealth of households is largely dependent on the value of their homes.

Equally, a relatively large share of the real assets of Estonian households are the assets of businesses that they own and that they work for on a daily basis. These assets account for one fifth of all real assets, which is almost twice the euro area average. Such assets are owned by around 12% of households in Estonia and their median value is 11,700 euros.

The financial assets of Estonian households are mainly in bank deposits and they account for a smaller share of assets than they do in other euro area countries, making up 10% of assets in Estonia and 17% in the euro area. The low share of financial assets is similar to the shares in other euro area countries with relatively lower income levels like Slovakia, Slovenia, Portugal and Greece. Like in Estonia, the financial assets in these countries are not very diversified and mainly consist of bank deposits.

The lion’s share of loans in Estonia are real estate loans, and housing loans make up the largest share of them, accounting for 85% of the total loan burden. The loan burden of Estonian households is smaller than the euro area average as 37% of households in Estonia have a loan, while the euro area average is 44%. In comparing the loan burden, it should be remembered though that its optimal level depends on incomes and the income levels in other countries in the euro area are generally higher than that in Estonia. The loan burden of Estonian households is relatively large compared to those in countries of a similar income level.

It is worth noting for Estonia that the majority of loans are to younger households, for two main reasons. Firstly, there are many people in older households who got their residence through privatisation and did not need a loan to buy it. Secondly, the housing loan market in Estonia only emerged relatively recently, from the start of the 2000s.

Although the loan burden here is smaller than in other euro area countries, Estonian households also have relatively small financial buffers. The median household, which is where half of households have smaller financial buffers and half have larger, has sufficient resources to cope for about a month, while the median household in the euro area has sufficient assets to last for a little over two months.

Overall the structure of the assets and of the net assets of Estonian households is similar to the structures in other Central and Eastern European countries in the euro area. In comparison to the situation in those countries however, the net assets of households in Estonia are more unequally distributed despite the high share of home ownership. From a financial stability standpoint, the loan burden of Estonian households is smaller than in other euro area countries, but Estonian households are vulnerable because of their modest financial buffers.


1 The Gini coefficient is a measure of inequality that ranges from zero to one. The closer it is to one, the more unequal is the distribution of assets. If the Gini coefficient is zero, assets are equally distributed, while a value of one indicates perfect inequality. The Gini coefficient for net assets in Estonia in 2013 was 0.69, and the Gini coefficient for incomes was 0.36.

The Household Finance and Consumption Survey is carried out regularly every three years in the countries of the euro area. It is a comprehensive survey that covers all the countries of the euro area and allows the financial positions of households to be compared across countries. The survey was carried out in Estonia in 2013 and 2220 households were interviewed for it. The next household survey in Estonia will be carried out in 2017.

Source: Bank of Estonia

 

 

Economic growth in 2015 was the slowest of the past 6 years

  • Real household incomes and sales by companies in the domestic market have increased rapidly, but goods exports declined further
  • The fall in corporate profits over several years indicates that the economy will have to adjust through faster productivity growth or slower wage growth
  • The monetary policy decisions of the European Central Bank are keeping financing conditions for investment favourable

Economic growth in Estonia slowed in 2015 and was the slowest of the past six years, remaining below the long-term potential of the country. Growth slowed mainly because of weaknesses in the economies of neighbouring countries and this restricted opportunities for exports, though sales in the domestic market grew rapidly as household incomes and purchasing power increased. Income growth has been spurred by a rise in the minimum wage, wage agreements in education and health, and more generally by the decline in the working age population and in available labour resources.

Estonian exports of goods have dropped in the past two years and Estonian exports lost market share in target markets in 2015. The latest foreign trade data indicate that exports continued to fall at the start of this year. As the fall in exports has been accompanied by a reduction in company profits and a rise in wage costs, the issue of competitiveness in the economy has been to the fore. Possible problems in competitiveness and the risk that the economy is out of balance were also highlighted last year by the European Commission.

Faster Estonian growth will depend a lot on the performance of target markets. In the first months of this year the economic figures in the euro area have proven weaker than expected and the March forecast of the European Central Bank concluded that growth in 2016 will be lower than was earlier forecast. The spluttering recovery in growth in the euro area means that the stimulus to growth in the Estonian economy provided by external demand will be modest.

Energy prices have been falling for several years by now, and this has significantly reduced inflation. Consumer prices have been falling in Estonia for about two years now, and in February inflation in the euro area turned negative again. For this reason the Governing Council of the European Central Bank decided at its meeting in March to ease monetary policy even further, which means that financing conditions will continue to be very favourable in Estonia and in the euro area.

Source: Bank of Estonia

Prices have declined because energy is cheaper

  • Prices are mainly lower than a year earlier because energy is cheaper
  • Inflation for manufactured goods remains low because prices for raw inputs and levels of economic activity are both low
  • Rises in food prices reflect the rise in alcohol excise
  • Surveys show two-year expectations for Estonian inflation have remained relatively stable

Data from Statistics Estonia show the annual change in consumer prices to have been negative again, and prices were 0.2% lower than in the previous March. However, the price level was 0.8% higher in March than in February, and 0.7% higher in February than in January.

Energy costs for households came down further in the first months of the year as prices fell for heating and for natural gas. Energy prices were 8% lower in March than a year before, though motor fuels have gone up by around 6% from February because the excise rate was raised. A small contribution to inflation was made by the monthly rise in the global oil price.

Food prices were 1.7% higher in March than a year earlier, and they were also affected by higher excise rates. Alcohol should become 8% more expensive because of the rise in excise, and most of this rise had already been passed on into prices in March. Without the effect of alcohol excise, food prices rose in March by 0.5%, mainly because of fruit and vegetable prices.

Estonian core inflation, which is inflation without energy and food, was 1.1% in March. Rises in prices for services were somewhat more modest in March than in the fourth quarter of last year. Slower rises in prices for transport services have been helped by the indirect effects of the earlier fall in the price of oil, which were seen in the prices of road and maritime transport services. At the same time, rents and prices for leisure services have risen consistently by 4-5%, which is normal for Estonia and is a consequence of rising wages. Furthermore, the prices of air tickets have risen in recent months despite the fall in fuel prices.

Inflation for manufactured goods remained low at 0.1% in March because prices for raw inputs and levels of economic activity are both low. No sign of increasing price pressures has yet been seen, as producer prices of consumption goods fell by an average of 1.8% in the first two months of this year. However, the low exchange rate for the euro since the start of last year has raised the import prices of consumption goods. The euro fell by more than 10% against the dollar in 2015, but in the first months of this year it has been strengthening against the dollar again.

Surveys show two-year expectations for Estonian and euro area inflation have remained relatively stable at close to 2%. Analysts have still corrected their inflation forecasts for 2016 slightly downwards though.

Source: Bank of Estonia

Author: Rasmus Kattai, Economist at Eesti Pank

 

Estonian current account was in deficit in February

The flash estimate1 put the Estonian current account at 42 million euros in deficit in February 2016. This was mainly because the deficit on the goods account was larger than in February 2015. Although exports of goods were some 2.5% up on a year earlier, imports were up 5.6% over the same period. The small increase in the surplus on the services account was not enough to offset the deficit on the goods account. Total spending by Estonian residents on foreign travel in February was more than spending by non-residents visiting Estonia, meaning that the balance on the travel services account was negative. Flows of transport services declined further, while exports of all other services increased and imports fell. The positive balance on the capital account meant that the total of the current and capital accounts was positive, which was not the case in January.

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for 2016 on 9 June 2016.

1 The quarterly balance of payments is compiled from a combined system of representative primary data sources, including surveys of companies, while the monthly balance of payments draws from a considerably smaller database. Although the monthly report uses as much data available for the month reported as possible, including administrative data sources and reports on international payments, it is subjective to a certain degree, which is why it is called an estimate. Once the quarterly balance of payments is released, the monthly balances of payments are adjusted accordingly.

Source: Bank of Estonia (see graph here)