BALANCE OF PAYMENTS OF ESTONIA FOR THE SECOND QUARTER OF 1997

SHORT SURVEY

The current account deficit of the second quarter of 1997 was less than in the first quarter, ie EEK 1.2 billion. The current account deficit against the GDP decreased as well. The surplus of the financial account decreased and the reserves increased (see Table 1).

The CURRENT ACCOUNT deficit was still most influenced by the deficit of the foreign trade balance. As a result of high demand for imports due to the intensive capital inflow, the import of merchandise (compared to the first quarter +20%) grew more rapidly than export (+17%) and thus the deficit of the trade balance increased too.

Rapid growth of the Estonian economy had a positive impact on the export of merchandise of Estonian origin, which growth (20%) was quicker than the growth of total volume of exports. Exports of Estonian origin was led by timber which export grew by one fourth; it was followed by foodstuffs, clothing, footwear, headgear and products of chemical industry.

Investment goods formed one fifth from the total imports as before. High import of investment goods is characteristic to a small country with developing economy.

The most important merchandise for the domestic market were machinery, products of chemical industry, clothing, foodstuffs and transport vehicles.

65% of the deficit of the foreign trade balance was covered by the surplus of the services balance which increased, compared to the first quarter, by 37% and is the biggest so far. The volume of services sold to non-residents (mostly tourism services) increased more rapidly than the volume of services bought from them. A certain role was here played by the beginning of tourism season and the establishment of a visa free regime with Scandinavia. In respect of the two most important services -- transport and travel services -- there occurred a major change in favour of the latter: 64% of the surplus of the services balance formed travel services (44% in the first quarter). The positive balance of travel services exceeded the same figure of the first quarter two times and that of the second quarter of 1996 by one fourth. As a new phenomenon one has to mention the rise in the number of tourists in the total number of travellers and the geographical expansion of tourism (Great Britain, Germany, Switzerland, Sweden and Japan). As to the transport services, the volume of both the sold and bought services increased and therefore the positive balance of this service remained unchanged.

The deficit of the income balance decreased nearly five times as compared to the first quarter. The reason for that was the fact that the distribution of the 1996 profit of companies took place mostly in the first quarter.

The structure of the FINANCIAL ACCOUNT underwent significant changes: the proportion of direct investments decreased and the inflow of portfolio investments increased.

The positive balance of direct investments decreased but was still bigger than in the second quarter of 1996 when the balance was negative. The volume of direct investments made into Estonia decreased by more than two times and that mostly in connection with the low level of reinvested earnings (distribution of profits took mostly place in the first quarter). Direct investments into share capital were of the same order as in the first quarter and bigger than in any quarter of 1996. Direct investments abroad made by Estonian residents increased nearly two times as compared to the first quarter. Total Estonian direct investments made abroad in the first two quarters of 1997 exceeded the same figure of the whole 1996 by one fifth.

In the second quarter, intensive capital inflow took place in the form of portfolio investments (in the first quarter the inflow and outflow nearly balanced each other). This concerned mostly the issue of debt securities by the banking sector and other sectors.

As characteristic to last quarters, also in the second quarter, foreign capital inflow took place in the form of other investments. In the first quarter the surplus of other investments was formed mainly by credit lines of several commercial banks received from abroad, while in the second quarter foreign loans were taken in other sectors. At the same time, capital outflow in the form of other investments became over two times more active. In that the pace was set by the banks. The loans given by the banks to non-residents increased by nearly half a billion kroons in the second quarter and banks' deposits abroad by more than EEK 400 million.

The balance of payments RESERVES increased by EEK 380 million in the second quarter. This was mostly connected with the increase in demand for money resulting from the nominal growth of the economy and seasonal factors.

CURRENT ACCOUNT

The current expenses of Estonia's balance of payments in the second quarter of 1997 exceeded current income by less than 1.2 billion kroons. The deficit of the current account was caused by the foreign trade deficit which increased by nearly 0.8 billion kroons as compared to the first quarter of 1997 (see Figure 1). The state of the current account was improved by the increase in the surplus of the services and the transfers balance and by the decrease in the deficit of the income balance.

Export and Import of Merchandise

In the second quarter of 1997 Estonia exported 9.2 billion kroons worth of merchandise and imported 14.5 billion kroons worth. Exports increased by 12.3% as compared to the first quarter of 1997 and by 56.1% as compared to the second quarter of 1996; imports increased by 20.7 and 65.3%, respectively. The more rapid increase in imports led to the increase of the foreign trade deficit.

Table 2 gives a survey of Estonia's foreign trade categorized by the customs procedures. The so-called pure export increased quicker in the second quarter of 1997 than total exports and its share exceeded 50% of total exports. The re-export of merchandise processed in Estonia increased little while re-export from customs warehouses decreased slightly.

Exports increased in case of a majority of groups of merchandise (see Table 3). The export of chemical products decreased slightly due to the decline in re-export from customs warehouses while the export of transport vehicles nearly doubled, mainly thanks to the increased re-export from customs warehouses.

The export of merchandise of Estonian origin increased by 20.8% in the second quarter of 1997 as compared to the first quarter (see Table 4). At constant prices the increase was 19%. The increase concerned all groups of merchandise. The most important export articles were timber, foodstuffs, clothing, footwear and headgear and chemical products. The increase was the steepest in case of machinery and metal products.

Imports increased across all major customs procedures. The imports meant for the local market is made up of two parts: the merchandise imported for free circulation (see Table 2) and the movement to the local market of merchandise stored at customs warehouses as imports to be re-exported. The latter cannot be recorded as imports meant for domestic use because this would mean recording the same imports twice. In the second quarter, 925 million kroons worth of merchandise was taken to the domestic market from customs warehouses. The total worth of merchandise added to customs warehouses and waiting to be re-exported was nearly one billion kroons. The bulk of it was foodstuffs (cocoa beans), timber products (newsprint from Russia) and transport vehicles (mostly passenger cars manufactured in Russia).

The most important import articles were machinery, foodstuffs, transport vehicles, chemical products and clothing, footwear and headgear (see Table 5). The import of timber doubled (approximately 400 million kroons worth of newsprint from Russia was stored in customs warehouses) and the import of transport vehicles increased by 86% (passenger cars stored in customs warehouses as well as meant for the local market).

The trade balance was positive in case of timber and furniture, with the surplus of the timber trade decreasing and the surplus of the furniture trade increasing (see Table 6). The previous surplus of the clothing trade turned into a deficit while the deficit of the majority of other groups of merchandise increased.

Analyzing foreign trade by the end consumption, we can see that the share of food and consumer goods in exports decreased while the share of transport vehicles increased (see Table 7). In imports, the share of raw materials decreased. The share of capital goods in total imports has remained stable at around 20%.

Export increased into all major partner countries, with more than one billion kroons worth of merchandise exported to Finland, Russia and Sweden. Export increased the most to Germany (see Table 8).

Export to Finland and Sweden consisted mainly of machinery and clothing processed in Estonia but also of Estonian timber. Estonian-made metal structures and furniture was also sold to Finland. To Russia, transport vehicles, foodstuffs, chemical and mineral products were exported, both from customs warehouses as well as in the form of pure export. Latvia received Estonian chemical products, foodstuffs and machinery (the latter also from customs warehouses) as well as fuel from customs warehouses. To Germany, mainly Estonian-made furniture and timber items were exported as well as metal products and clothing, footwear and headgear.

Import increased, too, from all major trading partners, with Finland, Russia, Germany and Sweden at the top of the list (see Table 9).

A third of the merchandise bought from Finland was made up of machinery imported for both local consumption as well as for processing. Also, transport vehicles and chemical products for free circulation were imported and clothing for both the local market and for processing. Mineral and chemical products were imported from Russia for the local market and for customs warehousing, and timber products and transport vehicles for customs warehousing. The merchandise bought from Germany (transport vehicles, machinery, chemical products, foodstuffs) was mostly meant for free circulation, while transport vehicles were also stored into customs warehouses. Machinery and clothing was imported from Sweden for the local market as well as for processing, transport vehicles, foodstuffs and chemical products were mostly meant for free circulation.

Estonia had a trade surplus with Latvia, the Ukraine, Lithuania and Great Britain (see Table 10). The first quarter trade surplus with Sweden turned into a deficit in the second quarter and in case of other partners the trade deficit increased (with the exception of Denmark).

Services

The surplus of the services balance amounted to 65% of the total foreign trade deficit in the second quarter of 1997 (the respective figure was 61% in the first quarter of 1997 and 60% in the second quarter of 1996; see Table 11).

The seasonal increase (36%) in the surplus of the services balance in the second quarter of this year was smaller than it had been in 1996 (51%) because the comparison basis was considerably lower last year (see Figure 2).

The annual increase in the surplus of the services balance was slightly down as compared to the first quarter but still remained high at 36%. The surplus of the services balance mainly derived from the surplus of the travel and transport balances (see Table 12). In earlier years the surplus of the construction services balance too has contributed significantly to the second quarter overall services surplus, while in 1997 it was smaller than in the second quarter of 1996 as well as in the first quarter of 1997.

As compared to the second quarter of 1996, the share of transport services increased in the structure of services export while the share of travel services decreased somewhat (see Table 13). This was due to the increasing volume of freight transport services export (20% increase in sea and 23% increase in road transport). The volume of passenger transport by sea increased too, by 126%.

The increase in the transport services balance was slowed down in the second quarter by the 65% increase in the import of transport services (see Table 14 and Figure 3). The import of transport services increased the most -- 114% -- in the category of road transport, which indicated that mediation firms have stepped up their activities.

The beginning of the tourist season nearly doubled the surplus of the travel services balance as compared to the first quarter (see Figure 4) and by 26% as compared to the second quarter of 1996. The great increase was mainly due to the export of travel services growing faster (22%) than the import of travel services which was up by only 6.3% against the second quarter of 1996.

Estonian travel agencies sold 83% more services to non-residents than they did in the second quarter of 1996 and the number of overnight tourists increased by 88%. At the same time, the number of same-day visits decreased by 11% and the number of travellers buying package cruise tours dropped by 44%.

The number of overnight stays increased the most in case of tourists from Finland (up 49%) although the number of travelling days decreased. The geography of tourism widened significantly: the number of tourists from Great Britain, Germany, Switzerland and Latvia more than doubled as compared to the second quarter of 1996. The number of tourists from Sweden increased by 34% and from Japan, by 61%. However, the number of visitors from the USA and Norway went down.

The amount of travel services bought from non-residents increased by 51% as compared to the first quarter. The number of Estonian tourists going abroad through travel agencies increased by 51% as compared to the second quarter of 1996, mainly due to visits to Swedenincreasing 2.5 times and to Finland, by 61%. Estonians' visits to the CIS countries and Turkey also increased significantly (3.4 and two times, respectively) while the number of visits to Latvia and Lithuania decreased.

The number of people going abroad without the mediation of travel agencies decreased -- according to the border guard statistics, the number of border crossings has decreased by 11% in the past year, despite the fact that visa free travel was introduced between Estonia and the Scandinavian countries from 1 May 1997.

Income

In the second quarter of 1997, the deficit of the income balance decreased by nearly five times as compared to the first quarter (see Table 15, Table 16 and Table 17). The deficit decreased due to the fact that most of the companies distributed the 1996 profit in the first quarter which boosted the outflow of income earned by non-resident investors. Since the volume of direct investments by non-residents into Estonia is considerably larger than the volume of direct investments from Estonia abroad, the outflow of income earned from direct investments exceeded their inflow into Estonia.

The situation was the same for the income from other investments, that is, interests paid on loans and received from loans: due to the large volume of foreign loans the outflow of interests was higher than the inflow in case of the central bank, the government as well as other sectors. In case of banks, the interests earned and paid were more or less in balance.

The balance of the income from portfolio investments that had been negative in the first quarter turned positive in the second quarter. Income from portfolio investments accounted for 77% of the total inflow of income. The outflow of income was dominated by income from direct investments.

Transfers

The bulk of the turnover of the balance of transfers was made up of foreign aid which in the second quarter of 1997 remained on the level of previous periods. The surplus of the transfers balance increased slightly due to the increase in the volume of private transfers and the decrease in the volume of transfers abroad made by the government. In the latter, a big share was made up of membership fees in various international organisations that are usually transferred in the first quarter of the year.

CAPITAL AND FINANCIAL ACCOUNT

The surplus of the capital and financial account decreased by 15% in the second quarter of 1997 as compared to the first quarter and amounted to nearly 1.4 billion kroons. The structure of the financial account underwent considerable changes: the share of direct investments decreased while the share of portfolio investments increased.

Direct Investments

The volume of direct investments into Estonia, which had been on the increase since the second quarter of 1996, declined in the second quarter of 1997. The balance of the in- and outflow of direct investments decreased by more than eight times as compared to the first quarter (see Figure 5).

Direct investments into Estonia decreased by nearly 2.5 times, mainly due to the drop in reinvested earnings (see Table 18). Investments into share capital remained on the same level as in the first quarter and were larger than in any quarter of 1996. Direct investments into Estonia by non-residents amounted to 482 million kroons in the second quarter, while investments by Estonian residents into foreign countries stood at 376 million kroons (see Table 19). The latter is the biggest ever amount of investments made by Estonian residents into foreign countries within a single quarter. Thus, the balance of direct investments was still positive in the second quarter, amounting to 4% of the surplus of the financial account.

46% of the direct investments made into the Estonian economy in the second quarter of 1997 were investments into share capital, with the net inflow totalling 297 million kroons. Residents bought back 74 million kroons worth of shares in local companies.

The sharp decline in the volume of direct investments can be put down to the nearly eightfold decrease in the income reinvested by non-residents as compared to the first quarter. This in its turn was caused by the fact that companies usually distribute their profits in the first quarter, as well as by some methodological changes in recording reinvested investments.

The balance of loan capital accounted for 35% of the total volume of direct investments. In the first quarter loans were mainly paid back to non-residents, while in the second quarter lending exceeded borrowing by 100 million kroons. The growth of liabilities mainly derived from the increase in the trade credit received from direct investors.

The bulk of investments in the second quarter came from Finland and Denmark. Among the economic sectors, industry, wholesale and retail trade and the financial sector dominated (see Table 20). 36% of investments into the share capital were made by Swedish investors.

Direct investments from Estonia into foreign countries nearly doubled in the second quarter as compared to the first quarter, mainly due to the capital invested into shares, which accounted for 63% of the total capital invested abroad.

Since 1996, long-term claims of residents on daughter companies abroad have been increasing constantly.

As before, resident investors still preferred the neighbouring countries such as Latvia, Lithuania and Russia, and among economic sectors areas such as industry, finance, real estate, leasing and business services (see Table 21).

Portfolio Investments

In the first quarter of 1997 the inflow and outflow of portfolio investments was nearly balanced, while in the second quarter the inflow considerably exceeded their outflow. Like in the fourth quarter of 1996, the surplus of the portfolio investments accounted for one third of the total surplus of the financial account (see Table 22). The rapid increase in portfolio investment claims in the first quarter can be attributed to the popularity of Russian and Baltic securities which by now has subsided. As a result, the turnover has remained modest in this category of investment. The inflow of capital mainly took the form of growing debt securities claims in the banking and other sectors. In the banking sector, it was the debt securities issue by one specific bank, just like it had been the case in the first quarter of this year.

Other Investments

In the second quarter of 1997, the inflow of capital in the form of other investments decreased and the surplus of these investments accounted for 36% of the total surplus of the financial account (see Tables 23 and Table 24). Like in the first quarter, the inflow of other investment capital in the second quarter was mainly long-term by nature (loans and deposits).

In the first quarter the bulk of the other investments surplus derived from foreign credit lines received by several Estonian banks, while in the second quarter other sectors also borrowed actively from abroad. The outflow of capital in the form of other investments more than doubled in the second quarter, with banks taking the lead in this sphere. The mostly long-term loans granted to non-residents grew by nearly half a billion kroons in the second quarter and the deposits of Estonian banks abroad increased by more than 400 million kroons.

RESERVES

The reserves of the balance of payments increased by 380 million kroons in the second quarter of 1997, that is double the increase recorded in the first quarter. The increase was mostly connected with the increase in demand for money due to the nominal growth of the economy and seasonal factors.

ESTONIA'S INTERNATIONAL INVESTMENT POSITION AND EXTERNAL DEBT

By 30 June 1997, Estonian residents had 22.9 billion kroons worth of claims on non-residents. The total amount of liabilities of the residents exceeded the amount of claims by nearly two times, amounting to 39.2 billion kroons. Thus, Estonia's net international investment position was negative by 16.3 billion kroons, up by 7% as compared to the first quarter. However, the short-term position was still positive, although the surplus decreased by 14% as compared to the first quarter. Foreign assets and liabilities increased at the same time by approximately 12%, due to the balance of payments transactions and changes in the exchange rate.

The structure of assets and liabilities did not change in the second quarter (see Table 25). The assets consisted mainly of the reserves of the central bank and other investment capital while liabilities were made up of direct and other investment capital.

The size of external assets was considerably increased by the growth in the reserves of the central bank, deposits kept in foreign banks and long-term loans granted to non-residents. External liabilities increased mainly due to the growing deposits of non-residents in Estonia, long-term loans taken by Estonian residents and trade credit debts payable.

Approximately 90% of external assets was capital that has to be repaid, while in case of external liabilities the capital of a debt nature accounted for approximately 62%. If we consider only debts under external claims and liabilities, we get the net external debt of the Estonian economy 4.2 billion kroons which is 34% higher than in the first quarter of 1997 (see Figure 6). The growth is due to the increase in the volume of trade credit debts payable and long-term loans.

Eesti Pank Statistics Department