Financial Stability Review 2022/2

Falling demand, high inflation and rising costs for servicing loans pose a threat to the ability of companies and households to repay their loans. Economic activity has declined in the second half of this year in Estonia and in Estonia’s main trading partners. High inflation is reducing purchasing power and the capacity to service loans. Central banks have started raising monetary policy interest rates sharply to combat inflation, and the impact also increases the cost of servicing loans. The September forecast from Eesti Pank expects the economy to shrink this year by around 0.5%, and to grow next year by 1%. Geopolitical instability means, however, that there is more uncertainty than usual about the near-term future. Improved corporate profitability in 2021 and the financial buffers built up in recent years allow the hope that short-term problems with loan repayments will be coped with. The ability of households to repay their loans depends largely on whether unemployment starts to rise. The Eesti Pank September forecast expects that demand for labour and employment will both start to decline in the second half of this year, but unemployment will only rise a little. The forecast is that overdue loans will only increase a small amount next year, from 0.2% of the loan portfolio of the banks in September 2022 to 1%.