Estonia has received more direct investment than many other newer members of the EU

  • Estonia’s foreign direct investment position* at the end of 2015 put it behind only Hungary in volume among the newer European members from Central and Eastern Europe
  • The Estonian current account in 2015 posted its largest surplus since independence was regained
  • Both exports and imports of goods and services were down last year, but imports by more
  • The current account was affected by large dividends paid out by the banking sector

Adjusted data show that the current account of the Estonian balance of payments had a surplus of 447 million euros in 2015, the largest since independence was regained. This does not reflect the strength of Estonian exports however, so much as a general decline in the trade of goods. Although both exports and imports of goods and services were down, it was the faster decline in imports that led the surplus in goods and services to grow. The surplus on the current account increased because the outflow of investment income slowed as large-scale extraordinary dividends were paid out by the banking sector in the middle of the year, and the income tax paid on these dividends to the Estonian state principally slowed the outflow. A little more was received from the European Union Structural Funds for infrastructure development than in 2014. The outflow of capital from the financial account was one billion euros larger than the inflow and the main channel for the outflow was portfolio and other investment.

Estonia was behind only Hungary for the foreign direct investment position among the newer European members from Central and Eastern Europe, and at the end of 2015 the direct investment position in Estonia was almost the same as the GDP of the year.

* Direct investment data for Estonia cover the period 1993-2015.

Figure. Direct investment position in Central and Eastern European countries at the end of 2015 as % of GDP
Direct investment position in Central and Eastern European countries at the end of 2015 as % of GDP

Sources: Eurostat, Eesti Pank

See better graph here

Long-awaited investment growth is starting to take off

Statistics Estonia revised second-quarter annual GDP growth 0.2 percentage points up to 0.8%. Regular revision of last four years was also published and led to changes in real growth rates of previous years. 2012-2014 GDP growth was revised down 0.9 to 0.1 percentage points whereas last year’s GDP growth was revised up by 0.4 percentage points to 1.4%.

Private consumption still contributed the most to GDP growth in the second quarter, although at a decelerating pace. Investments, which have had a negative influence on growth for the past two years, have started to improve. The recovery originates from private households, who invest into dwellings, as well as non-financial enterprises. The growth of non-financial enterprises’ investments has accelerated from 0.7% in the first to 5.5% in the second quarter. Compared to the second quarter of 2015, non-financial enterprises’ investments into transportation equipment have doubled. On the other hand, investments into machinery and equipment, the key to future growth, are still lagging.

Export and import growth of goods and services gained momentum in the second quarter. The growth of these has been very broad based with goods and services having almost equal growth rates. Import growth exceeded export growth and therefore the negative contribution from net exports to GDP increased.

ITC and agriculture sector had the largest positive and energy production the largest negative contribution to GDP growth in the second quarter of 2016. It is noticeable that the value added of transportation and storage activities has started to increase after being in a decline for three years. Also the value added in manufacturing sector has started to grow. As manufacturing sector makes up the largest piece of value added in the Estonian economy, it is assuring that the growth there is broad-based and more than half of the economic activities of manufacturing had positive growth rates.

According to our estimates, investments will continue to support GDP growth while the influence of private consumption will decrease. We expect the economy to grow 1.5% this year and 2.5% in 2017 due to increasing support from investments and export.

 

Source: Swedbank

Estonian investments in Q1 2016

The financial account of the balance of payments shows that investment in Estonia was 126 million euros larger in the first quarter of 2016 than investment abroad from Estonia. The net inflow of capital was caused by direct investment in non-financial corporations and foreign aid from the European Union to the general government. The Estonian economy was last a net borrower in the first quarter of 2014.

  • The net inflow of direct investment was 127 million euros, most of which came as growth in the intra-group debt liabilities of non-financial companies. The inflow of equity investment was smaller than usual, as the banks paid out dividends in the first quarter.
  • The net outflow of portfolio investment was 517 million euros, and Eesti Pank invested the most in foreign countries, as before. The central bank invested 400 million euros in foreign securities, and other sectors invested 87 million euros. Since 2015, Eesti Pank’s investments in foreign securities have increased by 1.8 billion euros as part of the asset purchase programmes of the European central banks.
  • The net inflow of other investment totalled 563 million euros, of which 114 million euros was money received from the European Union’s Structural Funds. The purchases of securities by Eesti Pank within the asset purchase programme also had a notable impact on the net inflow, as did the settlements transferred by the other sectors to the rest of the world, which reduced the other investment assets of the central bank by 1.2 billion euros1.

The net international investment position2 at the end of the first quarter of 2016 showed that the external liabilities of Estonian residents exceeded their external assets by 8.5 billion euros, or 41% of GDP. As external assets decreased by more than external liabilities did during the first quarter, the negative net investment position increased by 254 million euros. Of this, 151 million euros was transactions with financial assets and liabilities, 39 million euros was price changes, and 64 million euros was from changes in exchange rates (see the International Investment Position).

Statistics for the external debt show that at the end of the first quarter, the debt assets of Estonian residents from non-residents were 1.8 billion euros larger than their debt liabilities3. Debt assets were 0.5 billion euros less than in the previous quarter and stood at 75% of all external assets at the end of the quarter, with a value of 20.8 billion euros, or 101% of GDP. The volume of debt liabilities decreased by 0.2 billion euros over the quarter to stand at 19 billion euros, or 92% of GDP, which is 52% of all external liabilities (seeExternal Debt).

1 The inflow and outflow of capital for the central bank is affected by the activities of other sectors in which payments made or received move through credit institutions as settlements between central banks of the euro area through TARGET accounts. If the balance of Eesti Pank’s account in the TARGET system is reduced by settlements between euro area central banks, it means that money is going from Eesti Pank to the other central banks and the assets of Eesti Pank are equally decreasing. In the opposite case, money flows in and the assets of the central bank increase.

Securities bought within the asset purchase programme increase the portfolio investment assets of the central bank but reduce the other investment assets by the same amount because of the settlements transferred out of Estonia, so net external financing is not affected.

2 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.

3 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.

The debt assets and debt liabilities position

 

See a better graph on Bank of Estonia website

A simplified tax operation for foreign undertakings

The Tax and Customs Board shall offer to foreign undertakings a simplified application form for registration as a person liable to value-added tax which is accessible both in English and in Russian and which makes application for a value-added tax identification number simpler.

“We will contact, when needed, the undertaking who has submitted an application in order to clarify some aspects concerning business activities. We offer consultation to undertakings as well in order to clarify the information concerning the Estonian tax system, how to find information from our web site, how to choose transaction partners not to be involved in fraud schemes and wherefrom to seek further advice,” Monika Jõesaar, the head of the service division of  the Tax and Customs Board, explained.  She encourages everyone to use advisory services so that doing business in Estonia would be simple and comprehensible already from the very beginning.

You will find the English application form for VAT identification number here and in Russian here

Source: The Tax and Customs Board

Weak export demand behind the sluggish economic growth

According to the flash estimate of Statistics Estonia, GDP grew by 0.7% yoy in Estonia in 4Q 2015. The growth rate met our expectations. Compared to the previous quarter, GDP grew by 1.2% (seasonally and working day adjusted). In 2015, GDP grew by 1.2% in real terms, according to the preliminary calculations. 

Decrease in exports inhibited GDP growth the most 

According to the flash estimate, export of goods decreased by 4% yoy in the fourth quarter. The major share of the drop in exports came from the Russian market. Decrease of exports to the Russian market was broad based. The increase of exports to many European countries did not compensate the decrease on the Russian market. Although export dropped in the fourth quarter, the decrease slowed down in the last two months of the year.

Decrease in investments are expected to recede 

The accelerated growth of import of capital goods indicates the possible improvement of investments in the fourth quarter of the last year and the beginning of 2016. However, improved demand, as well as an increase in prices, is a precondition for a recovery of investments without a decrease in business sector profits and profitability. We expect that the very low interest rate environment will persist in 2016-2017, supporting lending for investments. In 2016, the government is expected to use more EU funds in its investments, while household investments in dwellings should continue its moderate pace.

Slow down of the growth of purchasing power is expected to limit the growth of private consumption 

Robust growth of retail sales refers to the ongoing fast growth of private consumption in the fourth quarter. However, the growth of net wages in real terms are expected to slow in this year, as prices will start growing and labour taxes will be lowered less than in 2015. We expect the robust growth of private consumption to slow gradually, and this will set some limits to growth in retail trade, as well as in other domestic services. However, the financial situation of households remains relatively strong. A rise in pensions, children’s allowances, and other social benefits will further support private consumption, especially of those with lower earnings, and prevent it from slowing drastically.

We expect improvement of economic growth in this year, but downward risks are considerable 

Helped primarily by the recovery of exports and investments, GDP growth in Estonia is expected to accelerate to 2.3% this year. The economies of Estonia’s main trading partners are expected to improve in 2016. This should offer more possibilities to expand exports for enterprises dependent on foreign demand. However, we expect only a modest recovery of Estonian exports. This year should offer better possibilities to export more to the European markets, while enterprises dependent on the Russian market and on global oil prices should not expect considerable improvement. There are considerable downward risks for the improvement of foreign demand. In addition, the expected decline in employment, as well as the reduced investments and labour productivity over the last few years, will afford less capacity to grow in the medium term

Source: Swedbank

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