18 September 2012 Lecture to senior officials of the European Commission

1. Features of Estonian Economy
Peeter Luikmel
Eesti Pank
Lecture to senior officials of the European Commission
18 September 2012
Autor – Esitluse nimetus

2. Brief statistics: a small and open economy
• GDP about 16 billion EUR in (nominal,
estimate for 2011)
• GDP per capita, PPP adjusted is 65% of EU
average
• Population ca 1,34 million, labour force is
ca 700 000 (agriculture 5%, industry 34%,
services 61%);
• Average monthly gross salary 839 EUR
(2011)
• Unemployment: 10,2% (Q2 2012)
• Budget balance: (+1%, 2011)
• Country rating: A1 (Moodys), AA- (S&P)
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3. Introduction: Where we are?
6%
Lithuania
5% Estonia
Ireland
Poland
Turkey
Hungary
Average GDP growth 1996-2011
Latvia
4%
3%
2%
Germany
1%
0%
0 5000 10000 15000 20000 25000 30000 35000 40000
GDP pps per capita 1995-2010 average, Europe

4. High growth was boosted by rapid credit growth
Loan growth (yoy, in national currency)
70%
60%
50% 2004
2005
40%
2006
30% 2007
2008
20%
10%
0%
Poland Romania Bulgaria Hungary Lithuania Slovak Czech Latvia Estonia
Republic Republic
Source: IMF International Financial Statistics Database

5. But there are also other reasons for rapid growth
The link between the level of education and GDP growth appears to be stronger in case of transition
countries
Source: EBRD Transition Report 2008

6. Tax environment is different across the region
CY
MT
LU
CZ
ES
SE
FI
PT
BE
DK
NL
SI
Corporate income tax IE
BG
as % of GDP IT
UK
RO
FR
SK
PL
HU
LV
AT
LT
EL
EE
DE
0 1 2 3 4 5 6 7 8
Source: Taxation Trends in the European Union (2009)

7. Fall in GDP during the crisis was
impressive as the previous boom
Fall in GDP volume 2009 Q2 vs 2008 Q2
Czech
Lithuania Latvia Estonia Slovenia Romania Hungary Republic Slovakia Bulgaria Poland
5
0
-5
-10
-15
-20
-25
Source: Eurostat

8. Internal imbalances and vulnerabilities have declined
compared to the boom years
140
120
100 Households savings/disposable income, %
80
Current account/GDP, %
15%
60
40 10%
20
5%
0
I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV I II III IV
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 0%
Real compensation per employee, index Productivity per labour, 2005=100
60% -5%
50%
40%
-10%
30%
20%
10% -15%
0%
-10% -20%
-20% 2005 2006 2007 2008 2009 2010 2011 2012 2013
-30%
-40%
-50%
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
Private sector credit growth Private consumption, nominal growth Source: Bank of Estonia, Statistics Estonia
Investments, nominal growth

9. Productivity has improved fast in
Estonia
European enterprises have delivered jobs, productivity, and exports
(performance of European subregions and benchmark countries, 1995–2009)
EFTA 1.3 1.4 50.2
EU15 1.3 1.0 49.4
EU12 0.4 3.0 57.5
Estonia 0.3 5.7 71.2
Latvia 0.1 4.2 43.4
Lithuania -0.3 4.3 54.8
EU candidates 0.6 3.6 31.2
Eastern partnership -0.1 6.6 38.7
United States 1.2 1.6 11.2
Japan -0.1 1.2 13.4
China 1.0 7.8 26.7
East Asia 1.7 2.0 64.0
Latin America 2.4 0.4 23.2
-1 0 1 2 3 0 2 4 6 8 0 20 40 60 80
Employment growth, percent Productivity growth, percent Exports, percentage of GDP, 2009
Source: World Bank
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10. The key for successful recovery from crisis is
flexibility of economy
Share of collective bargaining agreements is low
Perhaps not the best from the workers’ perspective but certainly good for making
necessary adjustments in economy during crises
1.200
1.000
0.800
0.600
0.400
0.200
0.000
Share of firms having firm-level bargaining agreements
Share of firms having higher level bargaining agreements
Source: Wage Dynamics Network, ECB (2009)

11. Labour market has recovered faster than
expected
Source: Statistics Estonia

12. Favorable employment recovery
The pattern of recovery by field of activity
• The rebound in employment was based on industry
• Domestic employment in construction fell sharply during the crisis, has not significantly
grown yet
Source: Statistics Estonia

13. Despite recent fall in economic activity,
the recovery in Estonia has started fast
Estonian annual economic growth rate, %
Source: Statistics Estonia

14. Manufacturing of Baltic countries has
revovered to pre-crisis levels

15. Trade with Sweden and Finland constitutes
about 1/3 of our goods exports
Share of trade partners in Estonian exports, % (2011)
Source: Statistics Estonia

16. Structure of exports
Structure of exports in 2010, by SITC
OTHER Food, drinks and tobacco
Raw materials Mineral fuels, lubricants and related materials
Chemicals and related products, n.e.s. Other manufactured goods
Machinery and transport equipment
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
Finland Estonia Latvia Lithuania

17. Turnover of exports is well correlated with
our main trading partners
Source: Eurostat

18. Medium term perspective: substantial cost advantage is still on our side
[average gross wages in euros]
Source: national statistics offices

19. Banking sector has survived the crisis, initial loan loss
provisions were made higher than the actual outcome
Profits of Estonian Banking Sector, M EUR
Source: Bank of Estonia

20. Banks’ loan and leasing portfolio has declined
18% from the peak in 2008
Lending stock
18
16
14
12
EUR billion
10
8
6
4
2
0
2006 2007 2008 2009 2010 2011 2012
other household loans housing loans corporate loans

21. Residential real estate market recovering after the
bust: prices and volumes have been increasing
Number of transactions with apartments in Tallinn and
median price
1 800 1800
1 600 1600
1 400 1400
1 200 1200
1 000 1000
800 800
600 600
400 400
200 200
0 0
2004 2005 2006 2007 2008 2009 2010 2011 2012
number of transactions(l.s) median price (EUR/m2, r.s)
Data: Land Board

22. Affordability in Tallinn residential real estate market has
remained relatively good
3,0
2,5
2,0
1,5
1,0
0,5
1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4 1 2 3 4
2004 2005 2006 2007 2008 2009 2010 2011
Tallinn price/gross wages Helsinki price/Finland gross wages
Riga price/gross wage
*affordability – average price per m2 / monthly average gross wage

23. Due to the fiscal surpluses in earlier years and conservative fiscal
policy Estonian government debt to GDP ratio is moderate
Debt/GDP, % (2010)
Source: Eurostat

24. Fiscal developments in 2011
• The surplus of the general
3,0%
government balance increased to
1% of GDP, the outcome was 2,0%
better than projected:
1,0%
– quite favourable macro conditions
– some large CO2 emission trade
% of GDP
0,0%
related investment projects where -1,0%
postponed
-2,0%
• The debt burden remained at very -3,0%
low level, close to 6% of GDP -4,0%
2006 2007 2008 2009 2010 2011
GG balance without CO2 emission trade
• The general government retained GG balance
its position of a net-lender

25. Estonian inflation has been higher due to the larger share
of energy and food in Estonian consumer basket,
the impact of introduction of Euro remains moderate (approx. 0,3 pp)
Source: Statistics Estonia

26. The global economy is facing
unfavourable conditions in 2012
• Growth will slow in most regions and global trade along with it
• Global inflation is under control, though monetary policy continues to
be lenient
• Additional support by monetary policy is more restricted this time
• The euro-area economic situation is not easy, but the current
difficulties can be overcome
– Growth impetus is waning, because some euro-area economies
have to make adjustments that have so far been postponed
– Problems springing from general government debt and imbalances
will not disappear before their root cause is eliminated
– It is essential to avoid economic damage arising from uncertainty
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27. Estonian economy's resistance to deterioration in
the external environment has improved
• Vulnerability has decreased
– The current account is in surplus now
– Expectations are more subdued
– The private sector's debt burden has shrunk
• The restoration of profits has also reduced vulnerability
• Reduction in the gap between wages and productivity
has improved economic competitiveness
• Unemployment has declined and problems with
employment structure have eased
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28. Conclusions
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29. The current complicated situation
includes also opportunities
• Monetary policy supports the economy in both Estonia
and the euro area
– The monetary policy of euro-area central banks creates
favourable conditions for companies to use investment
opportunities
– Eesti Pank provides to banks operating in Estonia monetary
policy loans with interest rate of 0,75%
• The sufficient capitalisation of banks operating in
Estonia and the improved loan-to-deposit ratio provide
a good basis for financing households and companies
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30. Economic forecast by key indicators
2012 2013 2014
Nominal GDP (EUR bn) 17.0 18.1 19.4
GDP, chain-linked volume change (%) 2.6 3.6 4.1
HICP inflation (%) 3.9 3.2 2.7
Budget balance (% of GDP) -1.5 -0.5 0.0
Source: Eesti Pank

31. Thank you!
http://www.eestipank.ee
info@eestipank.ee
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