Andres Saarniit, Adviser of the Monetary Policy Department of Eesti Pank

In the light of a slowdown in the excess domestic demand growth Estonia’s current account deficit started to decrease already in the second half of 2007. In the first quarter of 2008, the adjustment has continued at an accelerating pace - the ratio of current account to GDP was 13.3% which is the lowest level in two years. Along with the slowdown in domestic demand growth the foreign trade deficit decreased by one fourth in the first quarter of 2008.

Estonian enterprises continue to be competitive in foreign markets

The growth rate of goods exports was slightly above 5% which reflects a decrease in re-export year-on-year. In terms of other goods, the export growth remained fast as usual and reached approximately 14% as measured in current prices, which is 3-4 percentage points faster than the average level in 2007. The growth rate of services exports followed a similar pace. A decrease in the exports of one group of goods or services has been offset by a stronger growth in the exports of other groups of goods and services. For example, on the services side, a decrease in the earnings from freight transport was observed, while the earnings from passenger transport and sales of tourism services increased. Accordingly, in the first quarter of 2008, there was an improvement of 1.5 percentage points in the ratio of services imports and exports to GDP, year-on-year.

The growth rate of profits of enterprises based on foreign capital moderated; however, it still accounted approximately up to 8% for the quarterly GDP. This resulted mainly from the contingent outflow of retained profits, i.e., investment income on direct investment.

The structure of capital inflow in the first quarter of 2008 has not changed much compared to the last year. Investment in equity capital and direct investment in the form of reinvested earnings to GDP were even bigger than a year ago and foreign exchange reserves continued to increase. It follows that a smaller inflow of foreign capital is due to a slower economic growth rather than limited financing.

External balance will continue to improve. In 2008, Eesti Pank forecasts an average current account deficit 10.2% of the GDP.