Andres Saarniit, Adviser to the Economics Department of Eesti Pank

The current account gap of the Estonian balance of payments practically closed in the first quarter of 2009. The balance of payments indicators show domestic demand continued its rapid adjustment in the first months of the year, thus the exports of goods and services exceeded the imports. A surplus of the goods and services account is rather extraordinary in a small and open economy like Estonia, where the need for capital will continue to outbalance the value of domestic savings for quite a long time, referring to a low in investment activity, which is caused by the global financial crisis. Such surpluses appeared in single quarters also in the course of the Asian-Russian crisis.

The capital formation to GDP ratio declined due to low investment demand, not because of financing problems. For instance, the amounts received from the EU budget make up 2% of GDP, so these would have sufficed to cover a moderate current account deficit. In spite of that, the direct investment made in Estonia in the first quarter of 2009 was relatively large, accounting for more than 3% of quarterly GDP.

When looking at the general movement of capital, bank transactions prevailed. On the one hand, assets invested abroad were withdrawn, but on the other hand, liabilities were reduced, mainly to parent undertakings. Since reducing liabilities predominated, Estonia's external debt turned out smaller than recorded in the last months of 2008. To sum up, the first quarter’s balance of payments largely reflects the private sector’s relatively high tendency to save.

According to Eesti Pank’s spring forecast the current account will post a small surplus by end-2009.