Businesses have a poor opinion of the borrowing environment, as interest rates have risen and the economy is weak. The estimates of the borrowing environment reflect the performance of the different sectors of the economy, as opinion has deteriorated the most at companies in transport and manufacturing, while construction companies also remain downbeat. The opinion of Estonian companies about their options for financing are about as good as those of European companies, but their opinion of the willingness of banks to lend has deteriorated the most. This is partly because the widespread use of floating interest rates in loan contracts means that the rise in base interest rates has had a more direct and faster impact in Estonia than in many other countries in the euro area. The rise in interest rates has by now almost entirely been passed on in Estonia into the costs for borrowers, while this is yet to happen in a lot of other countries.

Higher loan interest rates than in other countries in the euro area is particularly a problem for exporting companies in Estonia. The interest rates on similar loan products have been around a percentage point higher in Estonia in recent years than the average in the euro area. Nominal economic growth and inflation have generally been higher in Estonia than elsewhere in the euro area, meaning that the nominal return on projects financed with borrowed money is also higher, real interest rates are generally lower, and loans are easier to repay. There may be more of a problem for the competitiveness of exporting companies, as Estonian companies have to compete in foreign markets with companies that often have some advantage in the cost of financing.

Although interest rates on loans are high, access to corporate and housing loans in Estonia is not worse than in other countries. This is indicated by survey data and by the faster growth in loans than in the euro area. The good capacity of the banks to lend is aided by their strong profitability, high levels of capitalisation and low levels of problem loans. Lending standards and conditions were tightened in 2022, but they have not generally been tightened any further in 2023 despite the recession dragging on. The share of applications for corporate loans that were rejected was a little larger last year than a year before, but the share of housing loan applications approved was higher than before.

Interest rates have probably peaked and may be expected to come down over the coming years, which may encourage companies and households to make more investments and use more equity and debt capital. Uncertainty about the outlook for the economy and the rapid rises in prices and interest rates made many companies and households cautious about deciding to invest or borrow last year, and growth in borrowing slowed. Inflation falling and interest rates stopping rising will restore confidence. The Eesti Pank December forecast expects that the stock of loans to companies and households will grow by around 5-6% a year in the coming years.

Additional information:
Hanna Jürgenson
Communications Specialist
Eesti Pank
Tel: 5692 0930
Press enquiries: [email protected]