Viljar Vald, Financial Sector Policy Division of Eesti Pank, Specialist in Charge

Corporate financial behaviour has been prudent in 2011. Sales turnover has steadily recovered owing to economic activity and, in particular, to strong external demand, and companies have increasingly taken short-term credit to finance their activity. The turnover of long-term investment loans has, at the same time, risen modestly since new investments have been more financed by corporate profits rather than by new loans. Foreign-owned companies have raised funds from abroad, so the share of foreign debt has grown to the pre-boom level of 26%.

Irrespective of notably better labour-market situation and consumer confidence, households have been cautious in their consumption in 2011. Consumption has not been amplified by new loans. Moreover, the money left over after primary consumption has been saved in bank accounts. This year, new loans have been taken to finance car and higher-quality and more expensive real estate purchases.

The capitalisation of the Estonian banking sector is strong and there are enough domestic funds to issue new loans. Cash flows from loan repayments and growing deposits are sufficient for supporting new lending volumes that are significantly higher than the present level. Interest margins have fallen faster than expected. At the same time, there is a serious risk of banks starting to raise interest margins due to the worsening financing situation in the euro-area debt crisis.

The corporate and household indebtedness has shrunk markedly in 2011. By the end of the second quarter, corporate debt relative to GDP declined to 115% and household debt to 51%. Loan repayments are expected to exceed new lending in 2012 as well, thus the decline in the loan stock is will continue.

Lending Review No 2/2011 will be published on the web page of Eesti Pank.

The Lending Review is a biannual publication Eesti Pank releases to provide an overview of the real sector’s financing needs and borrowing. It includes banking and leasing statistics, an analysis of financial accounts, and credit demand and supply.