Savings continue to grow faster than debt liabilities

  • As investment activity remained quiet, savings continued to increase faster than debt liabilities
  • Around one billion euros more was invested abroad in 2015 than was taken in from there
  • Domestic borrowing by Estonian companies increased while their borrowing from abroad decreased
  • The indebtedness of the Estonian private sector is around the international average level, while general government indebtedness is small

The saving of Estonian households, companies and general government in the fourth quarter of last year and in the year as a whole were more than their investments, and so the Estonian economy as a whole was a net lender to the rest of the world. This means that as in the past six years, more funds were invested abroad than were taken in from there. The net outflow of financial assets became faster in 2015 and reached around one billion euros, or 5% of GDP.

Weak investment activity meant that corporate debt liabilities grew only a little. Debt liabilities increased by less than 1% over the whole year. Liabilities from Estonia increased by around 3% and foreign liabilities decreased by 6%. The decrease was mainly because companies reduced their short-term intra-group loan liabilities. Despite lower sales revenues, reduced investment in fixed assets has increased the liquid assets of companies. The deposits held both in banks operating in Estonia and abroad increased in 2015 by around 12%.

The income and savings of households are still increasing faster than their debt liabilities. The rate of growth in debt liabilities increased on the back of loans for real estate investment and car leases to 5% by the end of last year, and loan liabilities stood at 8.2 billion euros. The relatively rapid growth in incomes and the high savings rate helped the cash and deposits of households to increase by around 9% over the year to 6.7 billion euros. Despite the rapid growth, the financial savings of Estonian households in relation to incomes are still below the European Union average.

The European Commission treats the indebtedness of companies and households in the private sector and the general government, or the debt-to-GDP ratio, as an indicator that can reveal potential imbalances in an economy. The threshold where there is a risk of imbalance is set at 160% for the private sector1 and 60% for the general government. The indebtedness of the Estonian private sector declined slightly in 2015 to 128% at the end of the year, which is around the average level for the European Union. The indebtedness of Estonian companies and households is relatively large compared to that in countries with a similar income level. The general government debt level also shrank slightly last year, and it stood at 9.7% of GDP at the end of the year, which is still the lowest figure in the European Union.

1 The threshold is 160% for unconsolidated data and 133% for consolidated data. The consolidated debt level of the Estonian private sector was put at 116% of GDP at the end of 2014 by Statistics Estonia.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank


Over 70,000 online purchases are made per day

An average of one million domestic payments were made each day in the first quarter of 2016 in Estonia, with a total value of 352 million euros. The number of payments was 5.3% higher than in the first quarter of last year, but the turnover was 4.7% smaller. About 64% of all domestic payments are made by card at the point of sale. As card payments are used for small sums however, they account for only 3% of the total turnover.

There has been a notable increase recently in the number of online purchases made using a bank link or a bank card1. Bank links were used 49,000 times a day to make payments in the first quarter of 2016. Eesti Pank has been collecting statistics on the use of bank links since 2012, when they were used for 30,000 purchases a day. Bank links can only be used for purchases from Estonian online stores, of which the Estonian E-Commerce Association estimates there are around 2000. It is also possible to pay by bank card in many online stores, but only 1000 card purchases are made each day in Estonian online stores, which is many fewer than the number of purchases by bank link.

Purchases from foreign merchants by bank card were made an average of 20,000 times a day in the first quarter of 2016, which is three times as much as in 2012.

The average payment by bank link was for 51 euros in the first quarter of 2016, and the average online card payment was for 49 euros. Card purchases in Estonian internet stores averaged 66 euros, which is notably more than the average bank link payment. There is also a difference in the size of payments made with debit and credit cards, as the average debit card payment was 43 euros and the average credit card payment 59 euros.

Online transactions in Q1 2016 (daily averages)
number of payments (thousand) turnover (thousand euros) average purchase (euros)
Total 71 3 525 50
purchases from Estonian online stores 50 2 546 51
of which by bank link 49 2 487 51
of which by bank card 1 59 66
purchases from foreign online stores by bank card 20 979 48

The rapid growth in online shopping is also reflected in the data from Statistics Estonia. The number of retail merchants was 3% higher in 2015 than a year earlier, but the turnover of companies whose main business is retail by post or online increased by 35%. Their turnover still remained small as a share of total retail turnover at 2.6% in 2015, up from 2% the previous year. The most active online shoppers in the European Union are to be found in the United Kingdom, where internet purchases are estimated at 15% of total retail turnover. Estonian residents are also active users of internet stores from the United Kingdom, making 9000 purchases a day from them. This is around 40% of all the online purchases made by Estonian residents from foreign countries.

Data from Statistics Estonia show online purchases are used most for travel and accommodation services, concert, cinema and theatre tickets, and clothes and sporting goods. Online purchases were made by 568,000 people in 2015, which is two and a half times as many as in 2012, and 59% of people aged 16–74 have made purchases over the internet.

Source: Bank of Estonia

Author: Tiina Soosalu, Eesti Pank Payment and Settlement Systems Department

Risks to financial stability are small

  • The risks to financial stability in Estonia in the near future are small
  • The ability of households to repay their loans remains good and is supported by rapid growth in incomes
  • The ability of companies to repay loans may deteriorate in future if profitability continues to decline
  • The rapid growth in loans and real estate prices in Sweden has not been reduced despite the efforts of the authorities
  • Rising real estate prices in Sweden pose risks to the Estonian economy and the banks operating here
  • The capital buffers of the banks may change as it is planned to require the commercial banks to hold systemic buffers of 1% rather than 2% from August
  • It is planned to apply an additional systemically important bank buffer of 2% to Swedbank and SEB

The risks to Estonian financial stability in the near future are small. Although there is a lot of uncertainty coming from the external environment, the risks to the functioning of the financial sector are reduced by the financial buffers of companies, the relatively good finances of households, and the high levels of own funds in the banking sector.

The international financial environment became less confident at the start of 2016. The uncertainty about the outlook for global growth led to falls on international securities markets. The banking sector in the European Union is facing a large share of bad loans, weak economic growth and low monetary policy interest rates. The risks are made worse by the large debts of many European countries and by the possibility that the United Kingdom might leave the European Union.

Estonian economic growth in 2015 was the slowest of the past six years. Growth mainly slowed because of the economies of several neighbouring countries were weak and there were fewer export opportunities. The acceleration of Estonian economic growth will depend a lot on how the  target markets for exports perform. Despite the slower growth, the ability of Estonian companies and households to repay their loans remains good. For households this was supported by faster growth in incomes while indebtedness remained at the same level. The profitability of companies was reduced by weak foreign demand and rapidly rising labour costs. If profitability continues to decline, the ability of companies to repay their loans may deteriorate in future, and this could worsen the loan quality of the banks.

Although Sweden has taken measures to reduce the risks related to rising real estate prices, rapid growth continued in loans collateralised by real estate and in real estate prices. The high debt level of Swedish households poses the danger that a fall in real estate prices or an increase in loan servicing costs could reduce household consumption. This would affect economic development in the Nordic and Baltic region and lower demand for the output of Estonian companies. It could also increase the liquidity risks of banks operating in Estonia and the risk to the financing of the economy, as the liquidity management of the biggest banks in Estonia is tightly integrated with their parent groups.

Real estate prices rose more slowly in Estonia in 2015 but low interest rates and relatively fast wage growth mean that the risk of excessive growth in real estate prices and in lending remains. To reduce the risk of a credit boom in the future, Eesti Pank took precautionary steps last year by introducing limits on the issuing of housing loans. Eesti Pank stands ready to tighten the current requirements in future and to restrict the use of exceptions if there is a significant decline in the down payments of borrowers and if risks should increase.

To ensure the functioning of the financial system, Eesti Pank has introduced additional capital buffer requirements for the banks. Since 2014 they have been subject to a systemic risk buffer of 2%. The buffer is intended to increase the resilience of the banks so that they could cope with a sharp drop in the economy, and to reduce the risks that come from the concentration of the structure of the banking sector. Eesti Pank plans to change the principles behind the systemic risk buffer from August this year. All the banks operating in Estonia will have to hold a systemic risk buffer of 1%, rather than the current 2%, to mitigate the risks of a sudden economic downturn, which arise from Estonia having a small and open economy. The two systemically important banks, Swedbank AS and AS SEB Pank, will have to hold an additional buffer of 2% to hedge against the risks that come from the concentration of the banking sector. After the change, the two biggest banks operating in Estonia will have a total capital requirement of 13.5%, and all the other banks will have a requirement of 11.5%.

Source: Bank of Estonia