A cooling of growth in the Estonian economy

Having grown strongly until the end of 2017, the euro area economy is now showing the first signs of weakening, and the European Central Bank has forecast slower growth ahead, said Eesti Pank economist Rasmus Kattai at a conference of Estonian food industry association. As exports provide around 80% of Estonian GDP, a cooling in the economy of the euro area would also affect the Estonian economy.

The Estonian economy grew by around 5% last year and this growth was driven by growth in the export-oriented industrial sector as well as by domestic demand. Slower economic growth in foreign markets could thus lead to slower growth in Estonia too. Growth will also slow because there will not be the same support as in earlier years from increased activity by people in participating in the labour market and higher employment, unused capacity or loose monetary policy. Slower growth is to be expected in any case, as the Estonian economy is already running at above its average sustainable level and it is not possible to be permanently above your own average level.

Source: Bank of Estonia
Author: Rasmus Kattai, Economist at Eesti Pank

Estonia stands out in Europe for its use of bankcards

In the first quarter of 2018 private individuals withdrew an average of 7.7 million euros a day from ATMs in Estonia and made an average of 11.3 million euros of card payments each day. Estonia stands out within Europe for these statistics. Research by the European Central Bank shows the only country where cash is used less at points of sale than in Estonia is the Netherlands.

Statistics on the use of cash and bankcards vary widely from country to country in the euro area. Residents of Malta make 92% of their purchases using cash, while people in Estonia use cash for only 48% of payments at points of sale. Other countries alongside Malta where cash is popular are Greece and Spain, while people in Finland and the Netherlands join those in Estonia in preferring card payments.

The number of ATMs in Estonia has fallen by a fifth in the past decade, but the number of cash withdrawals from ATMs has fallen even further, dropping by 31%. The turnover of ATMs has increased by 15% though, which means that larger amounts are being withdrawn at a time. The average withdrawal by private individuals was 56 euros in 2009, but in the first quarter of this year it had climbed to 94 euros.

The research also looked at how much cash people on average have on them. Residents of the euro area have an average of 65 euros in their wallet, with Germans carrying the largest sum of 103 euros, and the Portuguese the smallest at 29 euros. People in Estonia have 43 euros in their wallet on average. Men and older people carry more cash on them on average than others.

The research by the European Central Bank into the countries of the euro area can be found on the website of the European Central Bank.

See more on Bank of Estonia website

Author: Tiina Soosalu, Payment and Settlement Systems Department

Corporate debt shrank in 2017 and that of households increased

  • Corporate debt liabilities shrank as investment in fixed assets is low and companies can finance investments from their own funds
  • Domestic borrowing by Estonian companies increased while their borrowing from abroad decreased
  • Households are borrowing enthusiastically both to buy real estate and for consumption
  • Around one billion euros more was invested abroad in 2017 than was taken in from there

Corporate debt was down by around 1% in 2017. Debt liabilities shrank as investment in fixed assets is low despite increasing recently and companies can finance their investments and purchase assets using their own funds. Furthermore, companies have reduced the amount of short-term debt liabilities taken from foreign associated enterprises. Borrowing is still mainly from banks operating in Estonia, which reflects the relatively good access to bank loans in the country.

Households are buying a lot of housing and cars, and so their debt liabilities increased by 7% in the past year. Although the risks from credit growth have increased, they are softened by the growth in debt liabilities not exceeding that in savings or incomes. Banks became more active in the consumption loan market and the growth in the stock of loans and leases issued by them accelerated in 2017. The previously very strong growth in loans from other lenders, including instant loan providers, slowed.

The indebtedness of companies and households in the Estonian private sector, or the debt-to-GDP ratio, declined notably in 2017 to 116% at the end of the year. The decline was due to the fall in corporate debt and the rapid growth in nominal GDP. The debt burden of the Estonian private sector could have been considered excessive ten years ago and after the economic crisis, but its current level is much more in keeping with the core indicators, especially income levels. The indebtedness of the Estonian general government, which is still the smallest of any country in the European Union, declined a little last year and was 9.5% of GDP at the end of the year.

The Estonian economy was again a net lender to the rest of the world last year and the net outflow of financial assets grew by one billion euros to over 4% of GDP. Since 2009, Estonian residents have put more financial assets abroad than they have taken in from abroad. The difference with the past decade is primarily that Estonian households are saving more now and companies are investing less. The position as a net lender has meant the figures for the external debt and the international investment position have improved, but low investment also restricts the future capacity for growth of the economy.

For more details see the infographic.

Financial sector statistics and their publication calendar

Read more on the Bank of Estonia website

Author: Taavi Raudsaar, Economist at Eesti Pank

Central bank allocated a quarter of its profit to the state budget

  • The central bank has allocated one quarter of last year’s profit, or 1.1 million euros, to the state budget
  • Eesti Pank’s capital has increased by around 0.5 billion euros and the long-term goal is to increase its capital to 1.4 billion euros
  • Eesti Pank’s share of the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros

The Supervisory Board of Eesti Pank decided on April 3, 2018 to accept the proposal of the Executive Board to transfer one quarter, or 1.1 million, of the 4.3 million euros it made in profit last year to the state budget. The Supervisory Board allocated 3.2 million euros of last year’s profit to increasing the capital of the central bank.

Since 1992 Eesti Pank has allocated a total of 149.8 million euros to the state budget.

Chair of the Supervisory Board Mart Laar said, “The long-term goal of the Supervisory Board is to create a large enough reserve that the central bank would be able to help the state if problems were to arise. The loose monetary policy of the euro area central banks of recent years and the large volume of assets that have been purchased in connection with it have increased the financial risks faced by Eesti Pank, and that risk is likely to increase in the years ahead”.

The ratio of Eesti Pank’s increased capital to the assets used for monetary policy is one of the lowest of any of the central banks of the euro area. The comparison with the other central banks of the euro area is important, as the balance of risks to capital of the central banks of the euro area and the European Central Bank as a whole is considered when joint monetary policy decisions are made.

For this reason the Supervisory Board set a long-term goal in 2012 of increasing Eesti Pank’s capital ratio to the average level of the central banks of the euro area. This means it is necessary to raise the level of capital from the current level of half a billion euros to 1.4 billion. The central banks of the euro area have purchased a total of 1.5 trillion euros of assets for monetary policy purposes and the income and risks from them are shared equally, and Eesti Pank’s share of that is 4 billion euros.

Eesti Pank received 32.7 million euros last year in income from the joint monetary policy and currency issuing of the Eurosystem, up from 30.5 million euros the year before. Eesti Pank’s operating expenses were 19.8 million euros last year, which was 2.1 million euros more than a year before.

The net income was reduced by a general risk provision of 7.5 million euros to cover risks, which was the same amount as last year. In the past five years Eesti Pank has built up a risk provision of 45 million euros in total. Risk provisions are the first line of defence against losses on top of the reserves already held at the central bank.

Risks to Eesti Pank in monetary policy
The risks to Eesti Pank under the currency board came from the investments of the central bank and from the banking system. When Eesti Pank became a euro area central bank, it also took on the risks of the joint activities of the euro area central banks, which mainly stem from monetary policy loans and asset purchases.

The euro area central banks divide the income and costs of the single monetary policy, so that the income earned from monetary policy loans to commercial banks, or the costs from them, is divided among the national central banks to match their participation in the European Central Bank. This participation is called the capital key of the European Central Bank, and since the start of 2015 Eesti Pank’s capital key has been 0.274%.

The total volume of assets bought by the central banks of the euro area in their monetary policy transactions stood at 3.2 trillion euros on 23 February this year. Of this, 1.5 trillion euros is in monetary policy assets where the risks and income are shared among the euro area central banks using the capital key. Eesti Pank’s share of all the assets purchased by the central banks of the euro area for monetary policy purposes is 4 billion euros

Hedging of monetary policy risks
To hedge against the risks of the monetary policy loans, the central banks of the Eurosystem have the right of claim against banks that have taken loans. The content of the collateral is the equity of the bank that has taken the loan. The euro area central banks only give out loans if collateral is provided, meaning that if the bank cannot pay back its loan to the central banks, then the central banks can instead take the collateral. If even this is not enough, the credit risks for the central banks are reduced by the national authorities and their desire to recapitalise their insolvent banks.

The SMP is backed by the promises of governments to meet all their obligations in full, meaning that if governments fail to meet their obligations fully or partially, including their obligations to the central banks of the euro area, then the euro area central banks suffer the loss.

The capital of central banks and its importance
In this case, the capital of Eesti Pank and the other central banks that is meant is the wider sense of the part of the reserves and capital that the bank can use to cover losses.

The level of capital of the central bank is important because a central bank that has little or negative capital can cause two sorts of public concern. The first is the question of the central bank’s independence, if the bank needs to ask the government for additional capital. The second is the question of how much the central bank really wants to meet its inflation targets, which will then cause increased public expectations of inflation. The result of both these concerns is a loss of trust and of public faith that the central bank will be able to keep inflation under control successfully.

Source: Bank of Estonia (Estonian central bank Eesti Pank)

Estonian inflation fell further in March

  • Inflation slowed from 3.1% to 2.8% in March
  • Inflation for primary goods affects poorer households particularly
  • Economic growth in the external environment is gathering momentum and this will lead to higher inflation

Data from Statistics Estonia show the consumer basket was 2.8% more expensive in March than a year earlier. The price level did not change from the previous month.

Food price inflation reached 5.1% in March, and 1.7 percentage points of that came from the higher excise rates on alcohol that came into force this year. Although food price inflation has slowed a little in Estonia in recent months, its rate is still one of the fastest in the euro area. Food prices in the euro area rose by only 2.2% in March. Food price inflation affects poorer households particularly as primary consumption goods make up a larger share of their consumer basket. Food products fill 36% of the consumer basket of households in the first income quintile, who have the lowest incomes, while the richest households spend only 24% of their income on food.

Housing costs are the second largest share of the consumer basket and inflation for them accelerated to 4.2% in March. Housing costs were pushed up by a rise of 8.5% in rents and of 10% in the price of electricity. Inflation has been restrained somewhat in this heating season by the level of heat energy prices, which has remained broadly stable. Data from the business survey of the Estonian Institute of Economic Research indicate that services could start to contribute more significantly to inflation in the coming months.

Economic growth in the external environment has gained momentum since the last year, posing a risk of accelerating inflation. Some of the largest central banks outside the euro area have already decided to raise their monetary policy interest rates. Economic activity has also picked up in the euro area countries, but this has so far had only a weak impact on prices. The price of the consumer basket in the euro area was up 1.4% in March according to initial estimates.

Inflation in Estonia and euro area

Source: Bank of Estonia

Author: Sulev Pert, Economist at Eesti Pank