No 7 (222) 17 December 2001

Estonian Preliminary Balance of Payments for the Third Quarter of 2001

Due to the slowdown of the world economy, the external balance of the Estonian economy deteriorated somewhat, which can be seen from the decline in the export volumes of major industries. Although the surplus of the services balance increased due to seasonal factors, the deficit of the current account was larger than expected - 1.4 billion kroons or approximately 6% of the projected GDP of the third quarter (see Figure 1). The deficit of the last four quarters amounted to approximately 7% of the GDP of the period.

The main component of the CURRENT ACCOUNT deficit - the foreign trade deficit - was 3.8 billion kroons in the third quarter, being 1.2 billion kroons larger than in the third quarter of 2000 (see Table 1).

Due to the predominance of external liabilities, Estonia's net investment position at the end of the second quarter was negative by nearly 50 billion kroons, which accounted for 55% of the anticipated GDP.

With external demand diminishing, the annual growth of the goods export continued to slow down as seen most clearly in the subcontracting industry for machinery and equipment where the volume of export fell nearly two times compared to the same period last year. Although the annual growth of the export volumes also slowed down in the majority of goods unaffected by subcontracting, the end export was up 11% in the third quarter.

The total volume of export amounted to 12.3 billion kroons, up 22% against the second quarter but down 12% against the third quarter of 2000. A similar structural shift occurred also in the import of goods, the volume of which was 16.1 billion kroons in the third quarter, down 3% compared to the same period last year and down 15% compared to the second quarter of 2001. The significant decrease of the import of goods meant for processing was replaced by the growth of goods meant for domestic consumption by most commodity groups. The share of capital goods in import increased as well, accounting for 20%.

The share of the European Union countries in Estonian foreign trade was slightly under 75%.

The surplus of the services balance amounted to 3 billion kroons in the third quarter, up more than 10% against the second quarter of 2001 and the third quarter of 2000.

Unlike the decline of external demand on the goods market, the growth rate of the services export remained high also in the third quarter. Against the third quarter of 2000, export was up over 10% and amounted to 7.9 billion kroons. The growth was supported by favourable tourism circumstances and continuing transport of transit goods. The growth rate of the services import was similar to that of export and the volume of import reached 4.9 billion kroons in the third quarter.

Various business services became an important category of services besides transport and travel services.

The deficit of the income balance, which increased sharply in 2000, remained large also in the third quarter of 2001, amounting to 1.3 billion kroons. As before, the main reason for this was the increase of undistributed profit (reinvested income) in foreign-owned businesses. Dividend payments were insignificant in the period in question.

The surplus of the transfers balance amounted to 0.6 billion kroons in the third quarter.

The surplus of the CAPITAL AND FINANCIAL ACCOUNT turned out to be 1.3 billion kroons, influenced mostly by the inflow of direct investments. The net flows of portfolio and other investments, which moved in different directions, balanced each other out.

Foreign direct investments into Estonia exceeded direct investments made by Estonian residents abroad by 1,2 billion kroons, with the volume of both being large as it had been in the previous quarters.

Nearly 1.4 billion kroons were placed abroad as direct investments, 50% of this was spent on acquiring or increasing equity ownership. Lithuania and Latvia dominated among countries, finance, industry, transport and communications among the sectors of the economy.

Direct investments of non-residents into Estonia amounted to 2.6 billion kroons. Half of this was made up of reinvested income and a third was related to the increase of loan and other liabilities to parent companies. Finland, Great Britain and Sweden dominated among countries, real estate, transport and communications and trade among sectors.

The net inflow of portfolio investments amounted to 290 million kroons in the third quarter and was mostly related to the decline of debt security claims of credit institutions on non-residents. The decline was the result of Estonian residents buying bank shares from non-residents.

The balance of the flows of other foreign investment capital was negative by 230 million kroons in the third quarter, with foreign claims shrinking by 500 million kroons and foreign liabilities by more than 700 million kroons. The decrease of claims was mostly related to trade credit. The decrease of liabilities resulted mostly from the decrease of deposits of non-residents in Estonian credit institutions.

THE GOLD AND FOREIGN CURRENCY RESERVES of the central bank fell by 0.6 billion kroons in the third quarter, mostly due to the reform of the monetary policy operational framework . As a result, credit institutions were allowed to reduce the required reserves at Eesti Pank, which in turn decreased the supply of base money.

* * * * *

The adjusted deficit of the current account in the second quarter of 2001 turned out to be smaller than preliminary estimates and amounted to 550 million kroons (instead of the previously estimated 900 million kroons). This is 2% of the projected GDP of the second quarter. The deficit of the last four quarters amounted to approximately 6% of the GDP of the respective period.

The adjusted balance of payments for the third quarter of 2001 and the preliminary balance of payments for the whole year will be published at the web site of Eesti Pank at noon on 18 March 2002.

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 (%)