No 3 (218) 18 June 2001

Comments on the Estonian Preliminary Balance of Payments for the First Quarter of 2001

Regardless of the slowdown of the world economic growth favourable external demand continued, which is confirmed by the increase of the export of goods and services by more than one fourth as compared to the first quarter of 2000. As a result of increased investment demand the import of goods and services also increased by more than a quarter. Given that the absolute volume of import is larger than that of export and the deficit of the income balance increased, the external balance of the economy deteriorated somewhat. The deficit of the current account amounted to 1.5 billion kroons in the first quarter or approximately 7% of the expected gross domestic product (GDP) of the same period (see Figure 1). As compared to the first quarter of 2000 the deficit was up by nearly half in absolute terms.

The bulk of the CURRENT ACCOUNT deficit traditionally resulted from the foreign trade deficit (see Table 1). The foreign trade deficit stood at 3.1 billion kroons, being 1.8 billion kroons smaller than the deficit of the fourth quarter of 2000, but slightly larger than that of the first quarter of 2000. The import as well as export of goods increased by nearly 32% against the respective period of 2000. In both cases the increase was higher for machinery and equipment, transport vehicles and food products. The share of goods imported for processing in Estonia made up 38% of imports and nearly half of exports and their share has been constantly on the increase. Estonian major foreign trade partners were the European Union countries.

The dynamics of the services balance was seasonal by nature. The surplus of the services balance increased by nearly a quarter against the respective period of 2000 due to the growth rate of the services export exceeding the growth rate of their import. The highest absolute growth in the services export was manifested by construction and business services, while more important categories of services - transport and travel services - increased but slightly. The structure of the import of services changed little and the volumes remained on the level of the year 2000. Due to the faster development of foreign trade the share of services in the turnover of the export and import of goods and services has decreased since 1999 and accounted for 26% of export and 17% of import in the first quarter.

The deficit of the income balance that made a sudden jump in 2000 remained large also in the first quarter of 2001, amounting to nearly one billion kroons. The main reason for this was the high level of owners' income from direct investments made into Estonia. The bulk of it was linked to income reinvested into companies (undistributed profit). Dividend payments were insignificant in the first quarter.

Although the inflow of direct and portfolio investments was large in the first quarter, the balance of the FINANCIAL ACCOUNT was 1.1 billion kroons in the red. This was due to the reform of the monetary policy operational framework, which allowed credit institutions to replace part of the reserve requirement previously kept at the central bank with foreign assets.(1) This was also the main reason for the decrease in the balance of payments' reserves by 2.5 billion kroons.

The growth of the direct investments inflow continued and reached nearly 3 billion kroons in the first quarter. Approximately half of this was invested into share capital. The level of reinvested income continued high, touching nearly 0.9 billion kroons. The rest of the direct investments inflow consisted of capital movements between parent and daughter and associated companies or other companies within concerns. Major foreign investors came from the Netherlands, Finland and Sweden and capital mostly moved into the energy, gas and water supply, communications and manufacturing sectors.

The net inflow of portfolio investments amounted to 1.6 billion kroons in the first quarter and was mostly related to the increase of credit institutions' liabilities resulting from additional debt security issues worth more than one billion kroons. Capital inflow was also affected by the realisation of foreign equities held by the banks and the sale of debt securities issued by the other sector to non-residents.

The balance of other investment capital flows was negative by 5.7 billion kroons in the first quarter. This resulted mostly from the increase of the foreign assets of Estonian credit institutions due to the above-mentioned change in the reserve requirement regulations. Foreign assets of the banks increased by a total of 4.1 billion kroons, of which three fourths was made up of deposits abroad and one fourth of loans to non-residents. The increase of trade credit claims of the other sector and decrease of liabilities also contributed to the deepening of the deficit of the other investment capital balance, by 0.9 billion kroons.

The adjusted deficit of the year 2000 current account was 5.4 billion kroons, which amounted to 6.5% of the GDP of the same period. The respective figure was 4.8% in 1999 and 9.2% in 1998.

(1) As of 1 January 2001 credit institutions are allowed to meet 25% of the reserve requirement with euro denominated highly rated debt securities. This enhances the smooth and efficient functioning of the financial system within the currency board arrangement. Up to then, the entire reserve requirement had to be met with the kroon deposits at the central bank.

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The adjusted balance of payments for the first quarter of 2001 and the preliminary balance of payments for the second quarter will be published at the Eesti Pank web site at noon on 17 September 2001.

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 (%)