Relatively low investment activity in Estonia

  • Relatively low investment activity meant that savings grew faster than debt liabilities did
  • Corporate profits have fallen and both resident and non-resident owners have increased dividend payouts
  • The income and savings of households have increased faster than their debt liabilities

The saving of Estonian households, companies and general government was more in the third quarter of last year than their investment 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 or returned there than were taken in from abroad. Relatively low investment activity meant that savings again grew faster than debt liabilities did

The debt liabilities of non-financial companies increased in the third quarter by around 2% over the year. Annual growth in short-term corporate loan liabilities remained relatively fast at around 7% a year. Growth was fast mainly because company inventories and the turnover of retail companies were growing. The liquid financial assets of companies, in the form of cash, deposits, short-term loan assets and securities, increased at the same time by around 7%.

Corporate equity has decreased slightly in recent years. Corporate profits have fallen and both resident and non-resident owners have increased dividend payouts. In consequence, reinvested earnings have shrunk, and the rapid growth in equity that followed the economic crisis has come to an end. The level of capitalisation in the Estonian corporate sector is still quite high in international comparison.

The income and savings of households are still increasing faster than their debt liabilities. Higher incomes helped the cash and deposits of households to increase by around 9% to 6.5 billion euros. Debt liabilities increased by 4.5% to 8.1 billion euros at the same time. Loan growth is mainly being led by growth in long-term housing loans, but there has also been an increase in the volume of car leases.

Source: Bank of Estonia

Author: Taavi Raudsaar, Economist at Eesti Pank

The net outflow of capital in 3Q

The net outflow of capital shown in the financial account of the balance of payments was 214 million euros in the third quarter of 2015 because of investments by pension funds and the general government in debt securities. The general government invested 125 million euros in foreign debt securities, and pension funds invested 104 million euros.

The net inflow of direct investment recovered as reinvested income was back to its usual level after the payouts of dividends in the second quarter, and it stood at 152 million euros as Estonian direct investment equity liabilities are substantially larger than assets.

The net inflow of other investment was 76 billion euros. Previously announced dividend payouts were made at the expense of a reduction in external claims. Liabilities to offshore countries related to deposits fell by 111 million euros.

The net international investment position1 at the end of the third quarter of 2015 showed that the external liabilities of Estonian residents exceeded their external assets by 7.9 billion euros, or 39% of the GDP of the previous four quarters. During the quarter the investment position moved in the direction of net balance by 82 million euros. A large part in this was played by direct investments abroad by other financial intermediaries and by increased general government investment in securities (see the International investment position).

The Estonian external assets position was 2.6% larger than a year earlier, but was down 1.4% or 27.4 billion euros from the end of the second quarter of 2015. Three quarters of this, or 20.7 billion euros, was in debt assets, equal to 102% of the GDP of four quarters. The position of assets was reduced by 0.2 billion euros because of the net flow, and by 0.2 billion euros by changes in prices and exchange rates.

The external liabilities position was 0.6% smaller than a year earlier, and 1.3% or 35.3 billion euros smaller than at the end of the second quarter. More than half of this, or 18.9 billion euros, was in debt liabilities, equal to 93% of the GDP of four quarters. The volume of external liabilities fell by 0.5 billion euros because of external transactions, but increased by 0.1 billion euros because of changes in prices and exchange rates.

At the end of the quarter, the debt assets abroad of residents were 1.8 billion euros larger than debt liabilities owed to non-residents2. The gap between the debt positions was 345 million euros larger than in the previous quarter. The reason for this was primarily that non-financial companies had increased their deposits abroad and the general government had increased its securities investments. Debt liabilities were reduced by non-financial companies paying off trade credit and by the general government reducing its other debt liabilities (see External debt). Unlike in the previous quarter, there was no major change in the intra-group debts of direct investment groups, but debt assets shrank by 36 million euros. The debt assets of the central bank fell as credit institutions reduced their deposits at the central bank.

Eesti Pank will release the statistics for the balance of payments and the external debt for the fourth quarter of 2015 and the full year 2015 together with a comment on 10 March 2016.

1 The international investment position is a consolidated balance sheet of the external assets and liabilities of all the institutional sectors of a country as at the balance sheet date at market prices.

2 Debt assets and debt liabilities are components of the international investment position that have a repayment obligation. The external debt does not include direct, portfolio or other investment in equity capital, reinvested earnings, financial derivatives, or the gold of the central bank reserves. The external debt does include the debt assets and liabilities between companies in a direct investment relationship.

 

Source: Bank of Estonia

Foreign countries owe more in debt to Estonia than Estonia owes abroad

The Estonian economy was a net supplier of external finance in the second quarter of 2015 for the fifth consecutive quarter. The outflow of capital reflected in the financial account of the balance of payments was 345 million euros as assets abroad increased by 245 million euros, with Eesti Pank continuing the purchase of euro-area sovereign bonds that had begun in March with the aim of keeping inflation in the euro area close to 2% over the medium term, while liabilities shrank by 100 million euros as companies paid one-off dividends and other financial intermediaries paid back long-term loans.

The net international investment position1 at the end of the second quarter of 2015 showed that the external liabilities2 of Estonian residents exceeded their external assets2 by 7.6 billion euros, or 38% of the GDP of the previous four quarters. Assets abroad were equal to 79% of liabilities, and the movement in the direction of balance continues (see International investment position).

Foreign countries owe more in debt to Estonia than Estonia owes abroad: the total net debt showed that the debt assets of residents were 1.2 billion euros larger than their debt liabilities2. This gap shrank by 1.1 billion euros over the quarter, as the intra-group loan liabilities of companies increased. Liabilities were also increased by one-off dividends that were announced but not paid out. The debt assets of the central bank were 3.4 billion euros larger than its debt liabilities and the intra-group debt assets of companies were 0.5 billion euros larger than the equivalent liabilities (see External debt). The surplus in the debt assets of the central bank mostly increased because banks deposited additional resources at the central bank and the central bank made purchases of bonds.

The Estonian external assets position was 1% larger than at the end of the first quarter of 2015, and 8.7% larger than a year earlier, at 28.5 billion euros. Three quarters of this, or 21.4 billion euros, was in debt assets, equal to 106% of the GDP of four quarters. The assets position increased by 0.24 billion euros because of external transactions, but it was reduced by 0.16 billion euros because of changes in prices and exchange rates.

The external liabilities position was 0.3% smaller than at the end of the first quarter, and 2.4% larger than a year earlier, at 36.1 billion euros. More than half of this, or 20.2 billion euros, was in debt liabilities, equal to 100% of the GDP of four quarters. The volume of debt liabilities was reduced by 0.1 billion euros because of the net flow of liabilities, and by 0.5 billion euros by changes in prices and exchange rates.

Eesti Pank will release the statistics for the balance of payments and the external debt for the third quarter together with a comment on 9 December.

Debt assets and debt liabilities

1 The international investment position is a consolidated balance sheet of the external assets and liabilities of all the institutional sectors of a country as at the balance sheet date at market prices.

2 Debt assets and debt liabilities are components of the international investment position that have a repayment obligation. The external debt does not include direct, portfolio or other investment in equity capital, reinvested earnings, financial derivatives, or the gold of the central bank reserves. The external debt does include the debt assets and liabilities between companies in a direct investment relationship.

 

Source: Bank of Estonia (see graph here)

Japanese retail giant buys Estonian co Fits.me

The Japanese retail and wholesale group Rakuten has acquired 100 percent of Fits.me, a startup founded in Estonia and now headquartered in London that develops “virtual fitting rooms,” Techcrunch reported.

Rakuten plans to run Fits.me as a standalone business, where it will continue to develop its technology, grow its business and work with existing clients. The latter includes Thomas Pink, Hugo Boss and home shopping channel QVC.

James Gambrell  will stay on as CEO of the 65-person company, which still lists co-founders Heikki Haldre and Paul Pallin as active employees.

Fits.me offers two-way technology that lets online buyers who cannot physically try something on better visualize how those items might fit them, and lets retailers collect more information about the preferences and interests of visitors to their sites.

“Not only does the virtual fitting room provide customers with a more realistic shopping experience, it also empowers merchants with the valuable data they need to continually improve their service,” Rakuten’s CEO and founder Hiroshi Mikitani said in a statement, describing the acquisition as a natural complement to Rakuten’s growing portfolio of e-commerce and marketing services.

Techcrunch said Rakuten has been on a buying and investment spree in the last couple of quarters, which most notably included a 530 million U.S. dollar round of funding for Lyft in March and the launch of a share offering in June to raise 1.5 billion dollars to help finance some of that activity.

Prior to Rakuten buying Fits.me, the company, founded in 2010, was in the process of raising a round of funding specifically looking for strategic investors to complement the 14.3 million U.S. dollars it had already received from Gambrell, Conor Venture Partners, Entrepreneurs Fund, SmartCap and a number of others.

With consolidated sales of 598.6 billion yen (4.36 billion euros) and a net profit of 70.6 billion yen (515 million euros) in 2014, Rakuten ranks as one of the biggest retailers globally.

Source: BNS

April saw a reduction in Estonia’s activity in foreign markets

The flash estimate1 put the Estonian current account at 20 million euros in surplus in April 2015. Almost all the components in the current account were down, as exports and imports of goods and services and income from direct investment were less than in April last year. As the fall in imports was larger than that in exports however, the current account moved into surplus.

The sum total of the current and capital accounts was also positive in April. This means that the Estonian economy was a net lender to the rest of the world, so the country as a whole invested more resources abroad than it received from there.

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. From January 2015 Eesti Pank is accompanying the publication of the flash estimate with a short comment. The statistics on the second quarter of 2015 will be published with a comment on 8 September.

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.

Read more from Bank of Estonia website

The rapid rise in labour costs may restrict investment opportunities

The long-awaited acceleration in economic growth materialised in the second half of 2014, but unfortunately labour productivity grew more slowly than in the first half of the year. Growth accelerated mainly as additional labour was employed, while the contribution of capital to growth declined.

After a long period of sluggish economic growth the growth in labour costs started to slow down in the first half of the year, but accelerated again in the second half. Employment growth picked up in the second half of the year. Although the average wage grew notably more slowly in 2014 than in 2013, companies were able to recruit additional labour in the second half of the year at the cost of faster wage growth.

The shortage of labour due to long-term factors is preventing any reduction in wage pressure. Demographic processes mean that the number of working age people is falling by around 0.8% a year and in the coming years the smaller birth cohorts will be leaving higher education facilities. Although the net migration balance improved for the second consecutive year, Estonian employers are still having to compete in the labour market with foreign employers. The workers going abroad who get a relatively bigger wage boost by doing so are those who would be earning a relatively low wage in Estonia. Not only is the flow of new entrants to the labour market shrinking, but the utilisation of labour is already high: the share of the working age population that was employed climbed higher in the second half of 2014 than it was at the peak of the economic boom.

The faster rise in labour costs than in productivity raised the labour share in GDP, while profits decreased. This may threaten the competitiveness of exporting companies as it will put them under pressure to raise prices. If competition makes it impossible to raise prices, then their lower profitability may push companies to reduce employment in Estonia. Nominal unit labour costs have risen by 17.5% in the last three years, which is more than twice the 9% level where the alert mechanism of the European Commission’s assessment is triggered.

There was no increase in corporate financial difficulties in the second half of 2014 and early 2015. Redundancy payments remained at about the same level as in the previous years, as did the number receiving compensation because their employer had gone bankrupt, and the number of unemployed who had lost their job through redundancy or through their employer closing down. Companies are able for now to cover the rapid rise in labour costs from their own profit buffers, and this will probably be aided by expectations of a recovery in foreign demand and favourable financing conditions. The ability to increase labour costs at the expense of profits will inevitably be reduced in the longer term. Reduced profits also threaten the ability of companies to invest in higher productivity and in the human capital needed for more complex and higher-value work. The key question in the development of the Estonian economy is whether value added can be created with a smaller labour force than before but through increased human capital.

Source: Bank of Estonia

Authors: Orsolya Soosaar and Natalja Viilmann; Economists at Eesti Pank

Modest growth of sales expected in 2015

• Profitability stable despite stagnant turnover
• Investment volumes a bit larger outside the energy sector
• Modest growth of sales expected in 2015

Profitability stable despite stagnant turnover
In 2014, enterprises’ turnover and costs in Estonia stayed at the previous year’s level. While the level of total costs did not change, labour costs increased; therefore, the share of personnel expenses to total costs rose from 12% in 2013 to 13% in 2014. Despite no change in turnover, total profits grew by 3%. Profitability, measured as the ratio of total profits to turnover, has been at the same level for three years.

Investment volumes a bit larger outside the energy sector
Business sector investments increased by 2%, excluding the energy sector. Compared with 2013, investments in land, acquisition of buildings, and computers increased. Other investments decreased, with the biggest decline registered in investments in equipment and machinery, due to smaller investment volumes in the energy sector.

Modest growth of sales expected in 2015
The growth of sales and profits will probably remain limited this year. Sentiment indicators have worsened in recent months. Operating capacity in the manufacturing sector hit the seasonal average of recent years in January, but the volume of orders has been declining during the last few months. Exports to Russia have been hit, but the volume of total exports of goods was still growing, at least in January. According to the recent Swedbank survey of Estonia’s manufacturing sector, 64% of polled industrial enterprises planned to increase their turnover (by 3.0%, on average), and 44% of companies expected an increase in their profitability in 2015.

Source: Swedbank

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