External debt started to decline in 2009
Andres Saarniit, Eesti Pank, economist
According to the balance of payments published on 11 March, the 2009 current account surplus as a ratio of GDP was 4.6%. In contrast, the current account was in a deficit of more than 9% in 2008.
Both the exports and imports of goods contracted last year due to the low level of domestic and foreign demand. The goods account deficit of 2009 was nearly four times smaller on 2008. Foreign demand was stronger as regards services, with the exports of some business services even increasing compared to 2008. Thus, the offsetting impact of the balance of payments of services was larger than in previous years. The goods and services account was in a surplus of around 6% as a share of GDP. Nearly half of it may be attributed to a decrease in end-products and other stocks.
As regards domestic demand, the positive balance of goods and services refers to growing domestic savings. Since savings exceeded investments, there was no need for external financing and it was possible to pay back the external debt. The latter shrank by 25 billion kroons compared to end-2008. However, the ratio of debt to GDP, an indicator often used to assess indebtedness, did not increase as a result of the economic downturn, and stood at 127% at the end of 2009.
In addition to trade balance, the second factor with the strongest impact on the current account balance has been the inflow and outflow of investment income. The capital income of foreign investors was more than twice bigger compared to the income earned by Estonian residents abroad, because the volume of capital invested in Estonia and from Estonia abroad differed to a large extent. As a result of shrinking profitability, investment income both in Estonia and abroad decreased nearly by half compared to 2008 and the net outflow of investment income dropped to some 4% of GDP. All in all, around three-quarters of the changes in the current account balance in 2009 can be attributed to the improvement in the balance of the goods and services account and a quarter to the contraction in the outflow of investment income. Neither of the developments is sustainable in the longer term.
As is characteristic of a period of global crisis, capital flows were at a very low level. The only permanent exception were current and capital transfers from the EU budget, which nearly doubled.
Direct investments were characterised by the fact that in the case of majority holdings both here and abroad, parent companies increased the equity capital to cover both actual and potential losses. Thus the stock of the equity capital of direct investment in Estonia was even larger at end-2009 than a year earlier. Foreign investors also acquired minor holdings in Estonia's companies, but to a lesser degree.
In general, the financial account was dominated by intra-group cash flows of multinational banking groups and the reduction of liabilities to parent banks. These consisted mostly in the return of precautionary reserves transferred to Estonia at the peak of the global financial crisis. As a result, also the external debt contracted. The surplus deriving from external economic activities and the funds received from the EU budget offset the negative balance of the financial account. The gold and foreign currency reserve of the balance of payments remained almost at the same level as in 2008.
Public Relations Office
Telephone: +372 668 0745, +372 527 5055
E-mail: viljar.raask [at] eestipank.ee