Private and government sector debt burdens unchanged

Growth in corporate debt has been restrained by the modest level of investment and the reduction in lending between companies.There was a rapid increase of 8% in 2016 in the stock of loans and leases taken from banks operating in Estonia. Borrowing from abroad by companies remained at about the same level throughout the whole year but lending between companies and borrowing from holding companies contracted substantially. This meant that corporate debt liabilities increased by only 0.2% during the whole of 2016.

The loan liabilities of households increased last year at the same rate as incomes, but a little more slowly than savings. Rising wages, low unemployment and low interest rates on loans all encouraged increased demand for loans from households, and their loan liabilities increased by 6%. Both housing and consumption loans from banks and loans from other lenders increased in volume. The rapid growth in incomes and the high savings rate helped the cash and deposits of households to increase by more than 8% over the year. There was also growth of more than a quarter over the year in the value of tradeable securities held by households. Despite the rapid growth, the financial savings of Estonian households are still below the European Union average in relation to incomes.

The indebtedness of households and companies in the Estonian private sector did not change substantially in 2016, and was 127% 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 indebtedness of the Estonian general government, which is still the smallest of any country in the European Union, declined very little last year and was 9.7% of GDP at the end of the year.

The Estonian economy was again a net lender to the rest of the world in the fourth quarter of last year and in the year overall. Since 2009, Estonian residents have put more funds abroad than they have taken in from abroad. This is because Estonian households and companies have started to save more and investment in the Estonian economy has declined. Increased saving and the position as a net lender have led to an improvement in the figures for the external debt and the international investment position, but low investment also restricts the future capacity for growth of the economy.

Source: Bank of Estonia (read more here)

Author: Taavi Raudsaar, Economist at Eesti Pank

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