Andres Saarniit, Advisor to the Monetary Policy Department of Eesti Pank

The 2010 first-quarter balance of payments data confirm that external demand is on a slow mend. The trend has been visible since the first half of 2009. Goods export growth has been picking up speed, whereas services export growth has been slowing. All in all, changes in Estonia's external trade were not very extensive. Goods turnover was considerably livelier than a year ago, but this was mostly due to goods delivered here to be processed.

The current account surplus was almost in the same magnitude as a year ago, accounting for 0.4% of the quarterly GDP. Compared to end-2009, the surplus has decreased mostly due to seasonal factors. The imputed inflow of investment income also contributed to the current account surplus. Namely, reinvested earnings were in the first quarter more than twice larger than in 2009 on average. This refers to increasing profitability in most fields of activity. Here it needs to be stressed that there occurred no actual outflow of money. Nearly half of the reinvested earnings is attributable to banks and was used to write down loans.

Looking at capital inflows, the only clearly distinguishable trend was an increase in current and capital transfers from the EU budget. The rest consisted in the exchange of shares for debt securities (caused by the wish to hedge risks) and decrease in debt to parent banks. The latter, in turn, refers to small credit demand and growth in domestic saving. For instance, the first quarter's money outflow (through the financial account) was smaller than the increase in deposits in Estonia's banks over the same period.

The current account surplus shows that external debt continued to contract. This will start to reflect in the debt-to-GDP ratio. The latter dropped below 125% and net debt to 34%. Owing to reserves accumulated in good times, the government is still a lender. The predominance of claims accounted for 1% of annual GDP.

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