Current account remains in surplus with backing from strong exports

  • The current account was unusually in surplus in the first quarter
  • More was paid back in debt liabilities to investors than was received as new investment in the country
  • The threat of external imbalance in the economy receded and the economy is close to the limits set by the European Commission

The surplus on the current account was 99 million euros in the first quarter, or about 2% of GDP of the same quarter. The current account was in surplus in the first quarter for the first time since 1993. The balance was more positive than usual mainly because of fast and quite broadly based growth in services exports and an unusually small net outflow of income. Estonia’s trading partners are doing well and so the demand for Estonian goods and services has increased. Sectors like transport services and oil production that had earlier been a drag on export growth are either approaching the bottom or have already reached it and are now starting to grow again. On the income side, the outflow of investment income was reduced primarily in the banking sector, but an important role was also played by one-off factors like fines paid to the Estonian state.

New direct investment of 188 million euros was made in the first quarter into the equity capital of foreign-owned companies, which is double the average of the past five years. At the same time, earlier direct investment was reduced by 177 million euros, meaning that the net sum was a modest inflow of new money into the country. Overall the total amount of direct investment in Estonia still declined, as more was paid back in debt liabilities to investors than was received as new investment. Estonia’s direct investments abroad increased slightly, and also at the expense of debt investments.

Estonian assets abroad grew more in the first quarter overall than external liabilities, so Estonia was a net lender. The net international investment position, which is the difference between external assets and external liabilities, continued to improve and climbed to -36% of GDP. This means Estonia is very close to the minimum set by the European Commission of -35%1. The Estonian economy is currently in a position where external demand has recovered and so the confidence of companies is relatively high. As further economic growth can mainly be achieved through investment and increased productivity, it is probable that net lending to the rest of the world cannot continue to this extent.

The European Commission looks at the net international investment position as one of the indicators of possible imbalances in an economy, and it has set the threshold for where the threats appear at -35% of GDP.

Source: Bank of Estonia

Author: Kristo Aab, Economist at Eesti Pank

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