No 1 (216) 19 March 2001

Comments on the Estonian Preliminary Balance of Payments
for the Year 2000

By quarters the current account balance varies subject to seasonal factors. During the first three quarters the current account deficit was contained at a relatively moderate level (3.9–5.6% of GDP) whereas in the fourth quarter it underwent a traditionally sharp leap, mostly due to the increased demand for imported goods (see Figure 1).

The capital net inflow exceeded the current account deficit by about 2 billion kroons. Thus, the overall balance of payments was positive and reserves increasing (see Table 1). The leaping export and import of goods have led to the foreign turnover of goods and services exceeding GDP twofold (in previous years by 1.6 times). This manifests the extensive openness of Estonia's economy.

The negative foreign trade balance, 13.5 billion kroons,was again responsible for most of the CURRENT ACCOUNT deficit. Exceeding by 0.6 billion kroons the 1999 level, it remained significantly below the years of 1997 and 1998. In 2000 the export of goods was 56 billion kroons, growing by 20 billion kroons, ie 55%, during one year. The volume of import of goods was 69.5 billion kroons whereas the annual growth was significantly lower, about 42%. The seasonally growing domestic demand fed foreign trade deficit in the fourth quarter of 2000.

The remarkable growth in the export of goods was due to the doubled re-export of processed goods (mostly machinery and equipment, clothes, footwear and headgear imported to Estonia for processing). Increasing exports of timber and timber products, furniture, metal products and products of chemical industry have also contributed to the growth. The main lever of growth in imports has also been the importation of processed goods as well as a pre-Christmas boost in the imports of consumer goods. Estonia's major foreign trade partners were the EU countries (73–74% of both exports and imports). Their share in Estonia's imports has been stable for several years, growing steadily in exports.

In 2000 the surplus of the services balance grew by 1.4 billion kroons, to about 10 billion kroons. The surplus of the balance of services covered 73% of the trade balance deficit. Both the export and import of services increased by 15%. Only a third of the growing surplus was due to transport and travel services, responsible for 77% of the turnover of services. The surplus balance found support in other services such as construction, computer, IT, communication and financial services.

The income balance has traditionally been in deficit whereas its negative balance was record high – 3.7 billion kroons, ie 2.5 times above the 1999 level. As the inflow of income has not significantly changed over the last few years, the growing owner's earnings from direct investments in Estonia have been the main source of growth of the negative balance. Income on direct investments was responsible for 60% of foreign investors' earnings, 57% of which was reinvested in Estonia (accounted for as FDI inflow) and 41% was disbursed as dividends.

The surplus of the CAPITAL AND FINANCIAL ACCOUNT was 7.6 billion kroons, ie a fifth, above 1999. The positive balance of direct investments was responsible for 54% of the surplus. The balance of portfolio and other investments was in surplus as well.

The balance of direct investments was positive by 4.1 billion kroons. The net inflow of FDI covered 73% of the foreign trade deficit. Non-residents invested 6.8 billion kroons in Estonia and Estonia's direct investments abroad grew by 2.7 billion kroons.

Investments in share capital composed more than half of the FDI in Estonia. It is remarkable that reinvested income (retained earnings) grew by 2 billion kroons against 1999. Most of the FDI inflow originated from Finland and Sweden, as usual.

Direct investments abroad by Estonian businessmen were the largest ever, reflecting Estonia's active foreign economic activities. Short- and long-term loans to affiliated and associated companies abroad were responsible for 80% of the outflow. Domestic financial intermediaries placed the most significant share of strategic investments in Latvian economy.

The net inflow of portfolio investments reached 1.7 billion kroons. Most of the capital inflow came from debt securities: residents' investments in foreign debt securities decreased by 451 million kroons and liabilities in debt securities increased by 1.8 billion kroons. The capital outflow through equity securities reflects mainly the replacement of non-resident portfolio investors with strategic ones.

The positive balance of other investments reached 1.5 billion, remaining below the level of 1999. The positive balance was sustained by increasing commercial credit liabilities due to rapidly growing imports as well as by the growth of non-residents deposits in Estonian credit institutions, by 1.3 an 2 billion kroons, respectively. Investments flew in mostly as short-term capital. The outflow of other capital was due to loans issued by credit institutions and repayment of loans. The government sector decreased its loan commitments, too.

The reserves of the balance of payments grew by 2.3 billion kroons in 2000, being among the highest growth in the recent years.

International and Public Relations Department of Eesti Pank

PS Please acknowledge the source when publishing or citing.

Ants Kaasik
Executive Editor

Table 1. Estonia's balance of payments (EEK mn)⁽¹⁾

⁽¹⁾ After additional information is received, data of the earlier periods have been updated accordingly.

Figure 1. Current account balance against GDP (%)