Andres Saarniit, Adviser of the Economics Department of Eesti Pank

As expected, Estonia's current account deficit has been declining since the second half of 2007, when domestic demand growth started to withdraw. The deficit continued to shrink in the second quarter of 2008 with the ratio of the current account deficit to GDP dropping to 10% from the previous year's 16%. The size of the current deficit is comparable to that of 2005.

Like in previous quarters, the decline in the current account deficit was chiefly driven by the drop in the foreign trade deficit, supported by the fast growth of transport services and the continually rapid increase in the tourist and construction services exports growth pace. The ratio of the deficit on the merchandise exports account to GDP fell to 12% and the surplus on services rose to 9%.

The drop in the current account deficit was not supported by the decline in the investment income inflow. Owing to some extraordinary transactions, the outflow of foreign investors' imputed profits remained by and large at the previous year's level and accounted for 14% of GDP, whereas the profitability of the investments made abroad by Estonian investors fell and the income inflow dropped to 6%.

Looking at the financing side, the net inflow of foreign direct investment remained at its usual level, making up about a third of the current account deficit. This meant the debt burden continued to rise, though at a lower speed than before. The ratio of foreign debt to GDP stood at approximately 114% at the end of June. Meanwhile, the ratio of the net external debt (i.e., the difference between assets and liabilities) to GDP has been 35% of GDP throughout the year, reflecting also the start of the slowdown in the growth rate of bank loans.

Eesti Pank expects the 2008 average ratio of the current account deficit to GDP to be 10%. Estonia's current account deficit continues to narrow also in the next years.