Andres Saarniit, Adviser of the Economics Department of Eesti Pank

The current account developments of the third quarter 2007 are in line with Eesti Pank's autumn forecast. Economic growth slowed mainly on account of domestic demand, i.e., private consumption and investments, while the growth rate of merchandise exports remained robust. The export of services increased also rapidly, supported by transport enterprises extending their activities outside Estonia.

The current account deficit of the first nine months of 2007 constitutes 16% of GDP. Eesti Pank expects the average annual deficit to be 15% of GDP. Compared to the previous year, the deficit has not improved much, since the imputed outflow of investment income, which depends on the profits of foreign investors, has increased drastically. The profit growth derives partly from domestic price rises, which have been characteristic of 2007 up to the recent months. Eesti Pank expects the imputed outflow of investment income to inhibit and, in conjunction with this, the current account deficit to decrease. The goods and services account deficit has already improved by 4 percentage points, constituting 7% of GDP at the end of the third quarter, owing to the slowing domestic demand growth. The balance of goods and services will presumably not improve so rapidly in the near future and the decline in our current account deficit will be more dependent on investment income.

The inflow of foreign direct investment was still above the recent years' average and the quarter-on-quarter increase in foreign exchange reserves has been the largest of the decade. This provides favourable preconditions for investments and economic restructuring.