The current account of the Estonian balance of payments was in surplus in October

The flash estimate1 put the Estonian current account at 29 million euros in surplus in October 2015. The deficit on the goods account narrowed as imports fell faster than exports. Exports and imports of services also shrank, as turnover of travel services increased slightly but the figures for transport services and all other types of services were down. Investment income was less than a year earlier, reflecting lower profits and low interest rates. Payments to the European Union budget were larger than a year ago, but investment and other support from the European Union Structural Funds increased.

Structure of the current account in the flash estimate

Eesti Pank is publishing the flash estimate of the balance of payments monthly for the last month but one. Eesti Pank will publish the balance of payments for 2015 on 10 March 2016.

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.

See the graph on the Bank of Estonia website

The growth in the surplus on the current account slowed in 3Q

The current account surplus stood at 159 million euros in the third quarter of this year, which was equal to around 3% of the GDP of the quarter. The surplus was 67 million euros larger than in the third quarter of last year, but the growth that has been seen in the surplus since the second quarter of 2014 slowed down. The surplus on the current account has recently been caused by low investment activity levels and a reduction in the outflow of investment income. The surplus will be hindered from growing in future by weak foreign demand and a recovery in investment that mean some reduction in the surplus can be expected in the near future.

External assets grew faster than external liabilities in the third quarter year on year, but the net international investment position, showing the difference in external assets and liabilities, did not change as a ratio to GDP and remained at -38%. The Estonian net investment position has in recent quarters moved towards -35% of GDP, which the European Union considers as indicting balance. Despite this, the European Commission noted in its latest alert mechanism report that one possible source of danger for Estonia is that the net external liabilities are too large. It should be remembered in the Estonian context that more than half of the external liabilities are direct investments in the country, which are considered as a method of financing that has a lower risk of creating imbalances. With the current account close to balance, no continuous rapid improvement in the net investment position is foreseeable.

For more on the European Commission report see the Eesti Pank website (Estonian only).

Source: Bank of Estonia

Read also: The services account in external trade was substantially in surplus in the balance of payments in the third quarter

Border guards receive 159 new vehicles

The Ministry of the Interior will give the Police and Border Guard (PPA) 3.6 million euros to buy 96 patrol cars and 63 all-terrain vehicles.

The new vehicles will mostly be used to strengthened border security, replacing 82 older models.

The all-terrain vehicles will include 10 UTVs, 23 snowmobiles and 26 mountain bikes.

A procurement deal will be signed in February and the first vehicles should arrive in April 2016.

Source: ERR

 

Estonian state budget 2016

The planned expenditures of the draft state budget for 2016 are 8.9 billion euros, a growth of 4.2 percent or 358 million over the 2015 budget. The general government budget is projected to reach a structural surplus of 0.6 per cent of GDP.

Defense expenditures will reach 2.07 per cent of forecast GDP. This means an increase of 37.1 million euros, or 9 per cent over 2015. The national defense budget of 451 million euros will ensure the development of defense capabilities.

Read more from the report of the Estonian Ministry of Finance here

EC: government aid to Estonian Air was illegal

The Estonian national airline will fold following a decision by the European Commission that funding given to the company by the Estonian government was not in line with EU regulations. The company, founded in 1991, does not have the funds to pay back the state and will declare bankruptcy.

The Commission began an investigation into Estonian state aid to the company in 2013, with Estonian authorities waiting for a decision ever since.

Today, on November 7, the Commission ruled that the around 90 million euros given by the Estonian government to the company, gave the company an competitive advantage over others. This means the government must demand the full amount, plus interest, back from Estonian Air. The state had also earmarked a further 40 million euros, which would have been given to Estonian Air in case of a positive decision. That money will now go to the Nordic Aviation Group.

Commissioner Margrethe Vestager, in charge of competition policy, said: “Companies should compete based on a sustainable business model rather than relying on continued support by the State to stay in the market. Estonian Air has repeatedly received public subsidies over the past five years but did not carry out the necessary restructuring to become viable as a business. It would not be a good use of taxpayer money to keep Estonian Air in the market artificially – nor would it be fair to competitors, which have to compete without such support.”

The crunch question for the Commission was whether a private investor would have acted the same was as the Estonian state, pouring in as much money on the same conditions – if the state aid corresponded with market conditions.

The Commission ruled that Estonian Air received support three times, although EU regulations allow state aid to be given only once a decade. The Commission also ruled that the company did not have a credible restructuring plan and that measures aimed at limiting the distortions of competition were not sufficient.

The end

The government has set up two companies, which will begin to take over from Estonian Air. One (Nordic Aviation Group) will manage Estonian Air’s routes, while the other (Transpordi Varahaldus) will take on lease contracts.

Economy Minister Kristen Michal said on Friday that if a negative decision is made, then the Estonian Air fleet will be grounded from Sunday.

He said those at their destinations will be flown back home and those with tickets for future flights, will receive compensation. Those with an Estonian Air ticket have been asked to go to www.estonianair.ee or call +372 605 8888 for more information.

The board of Estonian Air today decided to halt all business activity from Sunday, November 8.

The company serviced around 500,000 people annually in the last few years, giving employment to 200 people.

History

It is a sad ending for a company, which became a symbol for newly re-independent Estonia at the beginning of the 1990s.

The company was founded during turbulent times but helped Estonia establish connections with the West. In 1995, the company purchased two brand new Boeing aircraft, giving a boost to a nation trying to rebuild from over 50 years of occupation.

Between 1996 to 2010 the state relinquished controlling shares in the company, and only purchased the company back in 2010 to ensure it did not go bankrupt.

Since 2009, the government has handed around 135 million euros into the company in capital injections, state aid and restructuring aid. The last time the company earned a profit was in 2005.

In 2012, losses amounted to over 50 million euros, from a turnover of less than 100 million. Until then, and after, losses were far smaller. The reasons for 2012 losses were in the company’s drive to expand. In 2011 the state hired Tero Taskila, a Finnish expert who came with a much criticized 30,000 euros per month salary, to take the company to another level. Yet, the plans to expand the company failed. Estonian Air was also hit by higher fuel prices, troubles with aircraft and salary increases.

In 2013, the company embarked on a large-scale restructuring path, cutting its fleet and the number of destinations. Staff numbers were halved.

Source: ERR

Estonia rocked by corruption scandal

The Internal Security Service KAPO on Sept.22, 2015 detained Tallinn Mayor Edgar Savisaar as a suspect for repeatedly accepting bribes.

The Center Party chairman is suspected of repeatedly accepting bribes in 2014 and 2015 in assets and favors for himself as well as for a third party with a total value of several hundred thousand euros.

Read more from BBN

The increase in the current account surplus- reasons

The surplus on the current account of the balance of payments increased in the second quarter of this year to equal 6% of GDP. Corporate income tax was the cause of the large change, as it is calculated separately for large dividends. External sector statistics treat exceptionally large dividends as a reduction in a company’s equity, and so it is not the size of the dividend that affects the calculation of the current account, but rather the income tax applied to it. In technical terms this meant a reduction in the outflow of direct investment, and this in turn increased the current account surplus.

On top of corporate income tax receipts, the current account surplus increased due to a reduction in the outflow of investment income that stemmed from lower profitability for foreign owned companies and an increase in the surplus on the goods and services account. Unfortunately this increase came not from increased growth in the exporting sector, but from a reduction in imports of goods. This reflects the low level of investment activity and may prove an obstacle to GDP growth in the near term.

Given a current account surplus, it is to be expected that external assets grew faster than liabilities. This growth continued in the second quarter of this year, and by the end of June the Estonian net international investment position, which shows the gap between assets and liabilities, had dropped to -38% of GDP. Estonia’s external liabilities have not been so small in net terms in the past 15 years.

Source: Bank of Estonia

Author: Andres Saarniit, Economist at Eesti Pank

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