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

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

Rakuten plans to run 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. 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, 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

Read more from here

Interview with DELFI shareholder Hans Luik

One of Estonia’s richest people and shareholder of DELFI, one of the biggest media groups in the Baltics, Hans Luik shares stories about getting into the media industry, doing business in Ukraine and challenges to free media raised by dictatorial governments as well as technological advances.

In 2007, you invested into DELFI and it was quite an expensive purchase – it still is the most expensive media transaction in the Baltic history. Do you consider it a successful investment?

I do indeed. Our company, Ekspress Grupp, was a publisher of magazines and newspapers with no future. We were profitable but not digital. I decided that we’d better take a big loan to dive into the digital future. Nobody knew that we were simultaneously diving into an international financial crisis.

As for today, we have recovered the loan. Meanwhile, I had to bring my personal guarantees and pledge my belongings in order to secure bank loans for the DELFI purchase. But we are number-one digital news company in the Baltics.

It was a forced situation with DELFI in 2007. DELFI belonged to an American fund called Texas Pacific. They had a 5-year investment horizon, and their five years came to an end. So in 2007 they were selling – either to us or our competitors.

There were a lot of interested parties: Norwegians, who started 15 Minutes afterwards, and Finnish publishers. At the time, when we paid over 50 million euros to Texas Pacific, they chose to invest into a real estate company called Washington Mutual. The financial crises began and Washington Mutual went bankrupt with a huge investment from Texas Pacific. It seems that big money made nobody happy in times of crisis…

Last year, the result of Ekspress Grupp was close to 9 million EBITDA profit. So the risk has been worthwile.

It has not been an all-lucky trip. The thing I regret is DELFI Ukraine. We had great expectations and we kept on investing for years. Editors and IT people from Lithuania and Estonia were helping to support DELFI in Kiev. But there is an oligarchic structure of Ukrainian media market with lots of middlemen. For an outsider, it was too hard to gain foothold in the advertising market. We made the hard decision to close down in Kiev.

Talking about innovation, we believe that there will be less direct mail in our postboxes, because it is not very accurately targeted advertising. We want to take information about retail discounts digital, at our new website We already have 60 Lithuanian retailers drawn to our idea.

Read more from


Russian company opens a factory in Narva

Estonia’s third largest city, Narva, has a new factory, with Russian paint manufacturer Emlak opening a three-million-euro plant, creating 80 jobs.

Head of the group, Mikhail Polovnikov, said that Narva was chosen due to its proximity to St. Petersburg and due to Estonia’s good business environment.

“Among other reasons, Estonia has a great environment for developing business – all problems are solved hastily. To be honest, in St. Petersburg we would not have been able to set up such a large factory in such a short time, taking into consideration the corruption, for example. It is like going on holiday when we come here,” he said.

He said that the current low point in EU-Russian relations has no effect on the plant as the Estonian subsidiary is an Estonian company and will produce for the European market.

Emlak is one of a number of new plants opened in Narva in recent months, mostly by Russian companies seeking to move or open production in Estonia.

Source: ERR via Estonian Review


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