In the third quarter of 1996 the OVERALL BALANCE of the Estonian balance of payments was practically favourable and its structure reflects the characteristic features developed in recent years. Characteristic to the development of the Estonian economy is that the inflow of foreign capital continued and due to this the current account remained in deficit (see Table 1).
The balance of the CURRENT ACCOUNT was in deficit different from the third quarter of 1995 but more or less comparable with other quarters of 1996. The deficit of the current account was due to the large foreign trade deficit. The balances of the rest of the current account - services, income and transfers balances - were in surplus. The surplus of the services balance covered 60% of the trade deficit.
The deficit of the trade balance exceeded 3 billion kroons and was the biggest compared to earlier periods. While the increase in exports in the third quarter was low due to seasonal factors, the increase in imports was somewhat bigger than that of the earlier years. Considering mostly the spending of Finnish tourists when buying goods in Estonia, the actual exports could be higher by approximately half a billion kroons and the deficit smaller due to that. However, according to the international balance of payments compilation methods, these sums are reflected as travel services.
The surplus of services balance in the third quarter was the biggest of all times, reaching 1.8 billion kroons. At the same time, one can presume that the services balance surplus against the GDP, compared to the same period of 1995, did not change much. Seasonally, had travel services the biggest impact on the increase in the surplus. They were followed by transport services. The surplus of services balance was supported by construction and communication services. As to other services, more were bought from abroad than sold to non-residents.
The income balance continued to be in surplus, but its balance decreased many times. It was mostly connected with the decline in income received from foreign investments because the distribution of income in companies takes place in the first six months of the year. The decrease in surplus was also influenced by the payment of interests on foreign loans.
Transfers balance was in surplus by its 340 million kroons. The main reason for that was the foreign state assistance received. The surplus of private transfers remained on its former level.
The surplus of the CAPITAL AND FINANCIAL ACCOUNT in the third quarter was 580 million kroons which was smaller than in the first two quarters of 1996, but bigger than in the third quarter of 1994 and 1995. The balance of direct investments, which was in deficit in the second quarter, turned into surplus again: direct foreign investments made into Estonia exceeded by 340.7 billion kroons those investments made from Estonia abroad.
A significant impact on the structure of the capital and financial account was made by the fact that the surplus of portfolio investments in the second quarter turned into a sharp deficit in the third quarter. The reason for that was that the debt to resident investors replaced the foreign obligations of the government sector. Since a couple of transactions of high volume, which influenced the above result, were rather extraordinary by their character, this phenomenon does not reflect the tendency of a longer term. The replacement of foreign liabilities of the government sector by domestic debt is reflected by the more than a two-fold increase in the surplus of other investments, too.
RESERVES, reflecting the changes in Eesti Pank gold and foreign currency reserves, remained practically unchanged in the third quarter. Seasonally they were influenced by deferred demand for base money which is characteristic after the high demand for money in summer months.
The current expenditures of Estonia's balance of payment exceeded current revenue in the third quarter of 1996 by more than 850 million kroons, meaning the deficit was slightly bigger than in the second quarter but smaller than in the first quarter (see Figure 1).
In the third quarter the trade deficit was nearly 400 million kroons larger than in the second quarter since the export of merchandise remained practically the same while import increased. As compared to the third quarter of 1995, the export of merchandise increased by 12% (see Table 2 and Figure 2).(**)
(*)A more detailed survey of Estonia's foreign trade over the nine months of 1996 has been published in Eesti Pank Bulletin No. 8, 1996, pp. 25-39. (Editor's note.)
(**)The analysis below does not include the revisions made by the Eesti Pank Balance of Payments Department. Import is given in c.i.f. prices and according to the trading country. (Editor's note.)
Structure of Exports by Groups of Merchandise
Across different groups of merchandise, the export of chemical and mineral products increased the most in the third quarter as compared to the second quarter. At the same time, the export of timber, metals and metal products and transport vehicles decreased nearly by 9%. As before, the most important groups of export were clothing, footwear and headgear, foodstuffs, timber, machinery and equipment.
By customs procedures,the share of the so-called pure export and processing increased somewhat while the share of customs warehousing decreased (see Table 3).
Nearly 75% of foreign merchandise exported from Estonia after processing was made up of clothing, footwear and headgear, machinery and equipment. The main reason for the increase in the share of processed merchandise was the increase in the volume of processing of machinery and equipment. The processing of metals and metal products, which occupied the third place, decreased by nearly a quarter.
Estonian exports is greatly influenced by re-export (see Table 4). If we eliminate re-export from total exports, we get a different picture of the developments in the majority of groups of merchandise. Thus, without re-export, the most rapid growth in the third quarter was recorded in the export of mineral products and transport vehicles, while the export of machinery and equipment, metals and metal products decreased considerably.
Structure of Imports by Groups of Merchandise
In the third quarter of 1996, the import of merchandise increased by 4.5% as compared to the second quarter, and by one third as compared to the third quarter of 1995 (see Table 5).
As compared to the second quarter of 1996, the import of mineral products and metals and metal products increased considerably in the third quarter. In the latter case, an important role was played by the increased volume of metal products sent to Estonia for processing. Imports decreased by a few per cent in case of a number of groups of merchandise. Machinery and equipment, foodstuffs, products of chemical industry, clothing, footwear and headgear were still the most important groups of imported merchandise.
In the third quarter of 1996, Estonia's trade deficit amounted to 56.1% of exports (the respective figure for the second quarter was 49.9% and for the third quarter of 1995 - 32.3%).
Out of the ten groups of merchandise analyzed, only timber and furniture had a trade surplus (see Table 6). Trade deficit was the biggest for machinery and equipment. The main reason for the increase in the overall trade deficit was the increase of the deficit in trade with mineral products, metals and metal products.
Foreign Trade Partners
Although the total volume of exports remained more or less the same as in the second quarter, there were several changes across the major export partners. Thus, for example, export to Belarus increased by nearly 25%, export to Latvia was up by 20% and over 10% to the Netherlands and Norway (see Table 7). The increase in export to Belarus derived from livelier trade in chemical products. More mineral products were sold to Latvia, more animal products to the Netherlands and more timber and textile products to Norway.
Export to Belgium decreased by nearly 30% (mostly animal and mineral products and timber) and over 25% to the Ukraine (foodstuffs). Since export to Finland increased by 8% and export to Russia decreased by 5.1%, Finland replaced Russia as Estonia's export partner No. 1.
For a long time, the five most important export partners of Estonia have been Finland, Russia, Sweden, Germany and Latvia whose combined share in total exports in the second and third quarter of 1996, as well as in the third quarter of 1995, was 62-63%.
Import increased the most from Lithuania, Denmark, Latvia and Norway (see Table 8). From Lithuania more machinery and equipment was bought, from Latvia more animal and vegetable products, machinery and equipment and textile products, from Denmark more metals and metal products and foodstuffs, from Norway more animal products, machinery and equipment.
The sharpest decline occurred in import from Belarus which dropped by 34.1%, concerning mainly transport vehicles. Import from the USA, the Netherlands and Great Britain also declined significantly: from the USA less machinery and equipment and textile products was bought (the import of animal products increased), and from the Netherlands and Great Britain less foodstuffs was imported.
Estonia had a trade surplus with five out of its 15 major trade partners: Latvia, Lithuania, the Ukraine, Belarus and the USA. Unlike in the second quarter, trade balance was negative with Russia in the third quarter (see Table 9).
The main reason for the growth in the overall trade deficit was the increasing deficit in trade with Finland and Denmark, the surplus turning into a deficit in trade with Russia and the considerable decrease of the trade surplus with the Ukraine.
The surplus of the services balance increased markedly in 1996, reaching a record 1.8 billion kroons in the third quarter. The export of services increased by 14% as compared to the second quarter, and import was up by 8%. These levels were also record high (see Figure 3).
The main contribution to the increase in the export of services came from the rapid growth of transport and travel services rendered to non-residents. Import increased mainly due to the increase in the volume of travel services bought from foreign countries.
The structure of the export and import of services (see Figure 4) did not change as compared to the second quarter. The surplus of the services balance was mostly affected by the positive balance of the travel and transport services. There was a surplus also in construction and communication services. In case of other services, imports outstripped exports (see Table 10).
The total turnover of services increased by 12% as compared to the second quarter and amounted to over 5.7 billion kroons. The turnover of services has been increasing more than the foreign trade turnover: in the third quarter of 1996 the turnover of services accounted for nearly 40% of the total foreign trade turnover (approximately 30% in previous quarters). Like in previous quarters, transport and travel services had the largest turnover (each accounting for approximately 40%).
The export of transport services was at a record high level in the third quarter, amounting to 1.5 billion kroons. As compared to the second quarter, exports was up by 18%. The volume of transport services import remained on the same level as in the previous three quarters, being 0.8 billion kroons. The growth in exports was also the reason for the biggest ever surplus in transport services - 0.7 billion kroons (see Table 11).
Over half of the total turnover of the transport services came from freight transport. The export of freight transport services reached the highest level of the past two years, and the 20% increase against the second quarter derived from sea and road transport. Nearly 60% of freight was transported by sea and 40% of the turnover came from road transport. The share of air transport was insignificant.
Passenger transport accounted for 17% of the total turnover of transport services. There were no major changes in either exports or imports as compared to the second quarter, although the share of non-resident shipping lines was expected to increase. Sea transport accounted for 70% of the turnover of the passenger transport, 27% of the turnover came from air transport and 3% from road transport.
The turnover of other transport services (port, airport, navigation, stevedore, storage, bunker, etc. services) amounted to one third of the total turnover of transport services in the third quarter, thus remaining on the same level as in previous quarters. Since the export of other travel services increased considerably while import decreased, the surplus grew by nearly one third and reached the highest level ever. Sixty per cent of the turnover of other transport services came from sea transport, 30% from road transport and 10% from air transport.
Travel services continued to play an important role in the services balance. The turnover of travel services increased by 25% in the third quarter as compared to the second quarter, and was record high. The export of travel services increased by 20% (see Figure 5) and travel services were the major export article of services in the third quarter, just like it had been in the second quarter. The export of services provided by travel agencies accounted for approximately 6% (106 million kroons) of the export of tourism services. The rest came from the spending made by tourists and one-day visitors in Estonia.
The increase of Estonian residents' travels abroad that began with the start of the tourist season continued in the third quarter. The import of travel services exceeded 500 million kroons and increased by 40% as compared to the second quarter. Imports has increased at a much higher rate than exports: while in the first half of 1996 the import of travel services amounted to barely 25% of the volume of export then in the third quarter it increased to one third. Of total travel services import, package tours bought by travel agencies accounted for 6% (32.8 million kroons), the rest was the spending made by Estonians abroad.
The turnover of business services (mainly leasing, consultations, advertising and marketing services) accounted for 8% of the total turnover of services. The volume of business services export and import has changed little over the past quarters, but in the third quarter the balance was negative.
The share of construction services in total turnover of services has been stable, accounting for approximately 5%. The third quarter volume of export was the largest in 1996, while import remained on the level of previous quarters. The balance of construction services was positive.
Four per cent of the total turnover of services came from government services. Due to the big share of imports, this category of services had a deficit of 190 million kroons. The reason was foreign aid provided by non-residents in the form of services, which in the balance of payments is put down under government services.
Unlike in earlier years, the income balance did not develop a deficit in the third quarter of 1996, although the surplus decreased as compared to the second quarter (see Table 12). The decline was mainly caused by the decrease in income from direct investments, because no profits were divided in the third quarter. The payment of interests on state loans also increased in the third quarter like in previous years.
The deficit of the income balance was avoided by the increased income of banks in the category of other investments. Income from portfolio investments also had a surplus.
In the third quarter of 1996, transfers continued to bring in more money to Estonia than was sent out of the country. The sum of money received as foreign aid remained on the level of previous years. Private transfers, too, remained on the level of the second quarter.
CAPITAL AND FINANCIAL ACCOUNT
The 580 million kroon surplus of the capital and financial account was smaller than in the first and second quarter of 1996, but bigger than in the third quarter of 1994 and 1995.
The sum of money that moved through the capital account consisted mostly of subsidies paid to people who left Estonia to settle in some other country. A total of 3.8 million kroons was taken out of Estonia through the capital account. 1.2 million kroons worth of capital transfers was made into Estonia.
The 582.6 million kroon surplus of the financial account mostly derived from the direct investments made into Estonia and the influx of other capital into the country. Portfolio investments took more money out of Estonia than brought in.
In the third quarter of 1996, the negative balance of direct investments of the second quarter turned into a positive one (see Table 13).
In the third quarter non-residents invested a total of 440 million kroons into their associated companies or subsidiaries in Estonia, which is the highest level over the past four quarters. One third of direct investment capital was share capital,60% was loans from direct investors and 7% was the reinvested income of foreign shareholders (see Figure 6).
Investments into share capital more than doubled in the third quarter as compared to the first half of 1996. Ninety-five per cent of it went to already existing companies, the rest was invested into new, partially foreign-owned ventures. A total of 216 million kroons of share capital was invested into Estonia in the third quarter. However, the sum was reduced by 75 million kroons through the sale of shares back to residents or the reduction of share capital.
Like in the second quarter, reinvested income (in the form of capitalization issue, equity capital reserves or free equity) did not increase in the third quarter, since in most companies profits of the previous year had been distributed already in the first quarter of the year.
Loans from direct investors continued to play a significant role in the direct investment capital and their volume reached nearly 270 million kroons in the third quarter.
Liabilities to direct investors increased considerably in the third quarter. The bulk of the growth resulted from short-term loans (40%), trade credit (25%) and long-term loans (25%).
Simultaneously with the increase in liabilities, claims on direct investors increased as well, mainly in the form of trade credit claims but also short-term loans.
The majority of the third quarter direct investments made into Estonia came from Finland (see Table 14). Other major investor countries were Denmark, the Netherlands and Sweden. The share of other countries was small.
If we rank countries on the basis of equity investments we get a somewhat different list. In the third quarter nearly half of equity investments came from Sweden, although Sweden ranked only fourth as to the total volume of investments into Estonia (see Table 14). Significant equity investments also came form Denmark and the USA.
The bulk of direct investments went into transport, storage industry and communications and processing industry, as far as both the volume of equity investments and the total volume of direct investments is concerned (see Table 15). Considerable investments were also made into wholesale and retail trade.
Estonia's direct investments abroad were also considerable in the third quarter, amounting to 100 million kroons. Seventy-five per cent of it came from the increase in the claims of parent companies on their daughter companies and subsidiaries abroad. Half of the claims was trade credit and the other half was long-term loans.
Investments into equity capital of foreign companies did not increase much and amounted to 16% of total direct investments abroad.
The more than 400 million kroon deficit of portfolio investments was the biggest over recent years in this category of investments. This was first and foremost caused by the decrease in liabilities of the government sector.
The biggest change concerned the government bonds so far owned by non-residents and later purchased by residents. The Estonian Savings Bank bought the bonds the Estonian government had issued to finance the arms deal with Israel, and residents have also acquired part of the Tallinn municipal bonds issued in the spring of 1996. At the same time, liabilities of Estonian banks and companies to non-residents increased as far as securities are concerned, both through deals at the Tallinn Stock Exchange and through Estonian investment funds.
Unlike in earlier periods, banks decreased the share of foreign securities in their investment portfolios.
In the third quarter more money was invested abroad by residents through investment funds than was brought back to Estonia.
The surplus of other investments was larger in the third quarter than it had been in the second quarter. This was due to long-term loans granted to Estonia, the increase of liabilities in the form of cash and deposits in the banking sector and the decrease of deposit claims on non-residents in other sectors. The surplus was reduced by the increase in the banks' claims abroad.
The government disbursed 110 million kroons worth of foreign loans in the third quarter (including state-guaranteed foreign loans). The bulk of it was spent on financing various energy saving programmes, but also on environmental projects, health care, border surveillance equipment, etc. The state repaid 34 million kroons worth of foreign loans.
Like in the third quarter of 1994, reserves decreased also in the third quarter of 1996 but the gold and foreign currency reserves only declined by 14.6 million kroons. Thus, Estonia's balance of payments was practically balanced.
Estonia's international net investment position
Since 1996, the Eesti Pank Balance of Payments Department has, in addition to the balance of payments, been drawing up Estonia's quarterly international investment position (IIP), another important document reflecting the country's financial situation besides the balance of payments. The international investment position is a country's consolidated balance sheet of external financial assets and external financial liabilities at a certain fixed date, and including all sectors of the economy (i.e. the central bank, the government sector, the financial sector and the rest of the private sector, including households).
As inter- and intra-sector assets and liabilities are mutually reduced in the process of consolidation, the IIP only reflects external assets and liabilities of a country as a whole. The investment position differs from a traditional balance sheet in that it does not reflect the real property and equity of residents located in Estonia. This is also the reason why the IIP is not balanced.
If external assets exceed external liabilities, the country's net investment position is positive and it indicates that the rest of the world has net debt to that country. A negative net investment position points to the country's net debt to other countries. The structure of the IIP is similar to that of the financial and reserve accounts of the balance of payments, with the IIP reflecting the positions, while the balance of payments shows changes in those positions.
The net investment position is not comparable to the country's external debt (i.e. net external debt of residents of Estonia), since external assets and liabilities include such assets and liabilities that are not a debt by their nature (i.e. do not have to be repaid). The latter include mainly investments into equity (equity capital in the form of direct investments and investments into securities, equity reserves and reinvested income).
By the end of the third quarter of 1996, external liabilities of Estonian economic sectors exceeded external assets by 635 million kroons as compared to the end of the second quarter. On 30 September 1996, Estonia's international net investment position was -5.5 billion kroons (see Table 16). In the third quarter, external assets increased by nearly 360 million kroons due to transactions within the balance of payments, differences in the exchange rate and prices and due to other adjustments. External liabilities increased by nearly one billion kroons.
Net external debt of residents of estonia
As in the third quarter the increase in external liabilities, which have to be repaid, was more rapid than that of external assets, the net external debt (assets minus liabilities) of the residents of Estonia to the rest of the world increased by 487 million kroons in a quarter and reached 0.7 billion kroons (see Table 17). The debt of the government sector to non-residents decreased and reached 2.8 billion kroons.
After additional information was received, the calculations of the second quarter were retroactively adjusted. It became evident that Estonia had net external debt at the end of the second quarter too. As of the end of the first quarter of 1996, Estonian economic sectors as a whole had no net external debt.
Eesti Pank Balance of Payments Department