More signs of optimism

1. Baltic Household
More signs of optimism
Outlook

2. Edmunds Rudzitis
General Trends
SEB Latvia

3. Economic growth continues
In 2013, wage growth in the Baltic countries
Unemployment (job-seekers) rate* (%)
21
will be more broad-based
18
Average gross wages and salaries (%, YoY)
15
15%
12
10%
9
5%
6
0%
3
-5%
2Q0 8
3Q0 8
4Q0 8
1Q0 8
2Q0 9
3Q0 9
4Q0 9
1Q0 9
2Q1 0
3Q1 0
4Q1 0
1Q1 0
2Q1 1
3Q1 1
4Q1 1
1Q1 1
2Q1 2
3Q1 2
4Q1 2
12
1Q
-10%
Latvia Lithuania Estonia
* Persons aged 15-74 -15%
Source: National Statistics
1Q 8
2Q 9
3Q 9
4Q 9
1Q 9
2Q10
3Q 0
4Q 0
10
2Q 1
3Q11
4Q 1
1Q 1
2Q 2
3Q 2
4Q 2
12
0
0
0
0
0
1
1
1
1
1
1
1
1
4Q
1Q
Estonia has a single digit unemployment Latvia Lithuania Estonia
rate for the first time since late 2008 Source: National Statistics
3

4. Moderate improvement in purchasing power
Real wages (% , YoY) In 2012, the real earnings of employed
4%
persons increased in Estonia and Latvia. In
Lithuania wage growth was slower than
0% inflation
Despite the latest improvements the real
-4%
wages still are below the pre-crisis level in
all Baltic countries. Compared to the last
quarter of 2008, real earnings have
-8%
decreased by approximately 13 per cent in
Lithuania. In Latvia and Estonia, real wages
-12% are lower by approximately 10 and 4 per
cent, respectively
10
10
10
10
11
11
11
11
12
12
12
12
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
1Q
2Q
3Q
4Q
Latvia Lithuania Estonia Real wage growth rate is expected to
Source: National Statistics accelerate in 2013
2013-04-11 4

5. Are labour taxes in the Baltic countries low or high?
Tax wedge on labour (%, 2011)
EU-27
Lithuania
Estonia
Latvia
36 37 38 39 40 41 42 43 44 45
Tax wedge for single 67% of AW earner
Tax wedge for single average wage earner
Source: Eurostat
In Latvia, the tax wedge on labour is above the EU average - approximately 4 percentage
points higher compared to Lithuania and Estonia
2013-04-11 5

6. Tax burden issues
Gross and net salaries (EUR)
1000
total labour costs - 1000 EUR
805
800 746 763
596 584
600 560
400
200
Latvia Estonia Lithuania
Gross salary Net salary
Source: SEB calculations
Latvia has the largest difference between gross and net salaries
2013-04-11 6

7. The tax wedge is decreasing again
Tax wedge of single 67% of average wage earner (%)
44
42
40
38
36
34
2008 2009 2010 2011 2012
Latvia Estonia Lithuania
Source: Eurostat, SEB estimates
Since 2008, the tax wedge for average and low income earners has only decreased in
Lithuania, while in Latvia and Estonia the tax wedge has increased
In 2013, the tax wedge is lower both in Latvia (PIT cut) and Estonia (cut in unemployment
insurance tax)
2013-04-11 7

8. Financial assets: Julita Varanauskiene
longer-term view SEB Lithuania

9. All the countries still in the asset accumulation mode
Financial assets (2008=100) Financial liabilities (2008=100)
Latvia Lithuania Estonia Latvia Lithuania Estonia
150 110
140
100
130
90
120
80
110
70
100
90 60
2008 2009 2010 2011 2012 2008 2009 2010 2011 2012
• Households are accumulating savings and deleveraging at the same time
• The growth of assets is conditioned by still insufficient reserves for extraordinary events and
by not making any decision yet on use of the funds
• Asset volume in Latvia might be positively influenced by a decision on entering the Eurozone
9

10. Bigger and smaller winners in asset accumulation race
Financial assets per capita (EUR)
Deposits II pillar pension III pillar pension
6000
Measures selected for asset
5000
accumulation or keeping depend:
4000 1) on the level of income
2) on economic phase
3000
3) on the legal and tax environment
2000 4) on the confidence in the financial
institutions
1000
5) on trends in the securities markets.
0
2008 2012 2008 2012 2008 2012
Estonia Latvia Lithuania
Source: Central banks, SEB estimations
• Value of the financial assets in Estonia per capita is the largest
• In Latvia, the ratio of assets in Pillar II and Pillar III pension funds to deposits is the highest
• Lithuanians have the largest Pillar III savings
10

11. Lithuania is currently most sensitive to pension problem
Main purposes for savings Average (net) salary and pension (EUR)
Rainy day Sense of security Retirement age Average (net) salary Average old age pension
729
Estonia 38% 37% 20%
490 501
316
Latvia 37% 39% 22% 271
236
Lithuania 39% 59% 42%
Estonia Latvia Lithuania
Source: Mindshare, National statistics
• Pension savings in Lithuania seem to be more important for the residents as compared
with Latvia and Estonia
• Average retirement pension in Lithuania is the lowest
2013-04-11 11

12. Prospects are alarming in all three countries
Old age dependency ratio Old age dependency ratio projections
2012 2040 (2040)
43%
42% Ireland
40%
Cyprus
Iceland
Luxembourg
28% 27% Slovakia
26% Norw ay
United Kingdom
Hungary
Poland
Czech Republic
Malta
Sw eden
Estonia
Romania
Belgium
Estonia Latvia Lithuania Lithuania
Denmark
Source: Eurostat Latvia
Finland
France
EU (27 countries)
Factors increasing dependency ratios: Sw itzerland
Bulgaria
Slovenia
• Late marriages Spain
Portugal
• Low birth rates Austria
Netherlands
Greece
• Emigration Italy
Germany
• Tax evasion 0 10 20 30 40 50 60
2013-04-11 12

13. Preparation for retirement : most favourable institutional
conditions in Latvia, economic - in Estonia
Contributions to II pillar pension funds
(% ) • In the long-term, PF II instalment (rate)
Estonia Alternative (EST) Latvia
in all countries will be similar
Lithuania Alternative (LTU) • In Latvia, the total instalment is
transferred by the government
9
• In Estonia, instalment is the largest due
8
to the highest income
7
6
• The stability criterion is rather important
for the successful functioning of Pillar II
5
pension funds
4
3
• According to LIPFA survey, the largest
2
part of current II pillar participants will
1
choose the (dotted ) alternative
0
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Source: National pension systems
13

14. Households see several alternatives to increase
retirement income
What are the most appropriate solutions to increase retirement pension?
Estonia Latvia Lithuania
Working as long as Working as long as Working as long as
43% 48% 45%
possible possible possible
Investments in real estate 40% Family children 32% Investments in real estate 33%
Savings in the III pillar Savings in the III pillar
Family children 32% 32% 27%
pension funds pension funds
Guaranteed saving 23%
22% Investments in real estate By working abroad 27%
(deposits)
Source TNS (SEB)
14

15. Household Triin Messimas
Liabilities SEB Estonia

16. In household borrowing signs of recovery starting to
emerge
The speed of deleveraging
has slowed down in Estonia
and Lithuania where the
housing loan volumes
decreased by -0.6 per cent
and -1 per cent, respectively,
in 2012. In Latvia, housing
loan volumes continued to
decline at such high level as -
11 per cent in 2012
• The issuing of new housing loans has activated in Estonia, the first positive signs are also
seen in Lithuania
• Latvia has not reached the bottom of housing loan volumes yet
2013-04-11 16

17. Households are cautious about consumer loans
The stock of consumer and
other credits is continuing
to decrease at the rate of:
The effect of
• -5% in Lithuania
Bank Snoras
disappeared • -10% in Estonia
• -18% in Latvia
• The awareness of the costs of borrowing has increased
• Households are more reluctant to finance their consumption by borrowing
2013-04-11 17

18. Households benefited from low interest rates in 2012
In 2012, average interest
rate of housing loans
made the biggest
downward jump. Within a
year it decreased:
In Estonia by 0.9%
In Latvia by 0.7%
In Lithuania by 1.2%
Lithuania had the lowest
average interest rate on
housing loans in January
2013
2013-04-11 18

19. Foreign currency borrowing in the Baltic States
• Foreign currency borrowing has been most popular in the Baltic states among Central and
Eastern European countries
Households face high exchange rate risk in the countries with floating exchange rate
Estonia has eliminated the exchange rate risk by adopting euro
2013-04-11 19

20. Indebted households are more vulnerable to income
shocks
Households’ sector
debt-to-income ratio in 2011:
In Euro area 99.4%
In Estonia 88.1%
In Latvia 66.1%
In Lithuania 41.2%
Since 2000, household indebtedness has substantially increased in all Baltic countries but
also in other European countries
Indebted households have higher level of compulsory expenses (i.e. debt servicing),
which they have to cover compared to households without liabilities
Indebted households need either higher buffer stocks or insure themselves against
negative income shocks
2013-04-11 20

21. Thank you