PRELIMINARY BALANCE OF PAYMENTS OF ESTONIA FOR THE FIRST QUARTER OF 1998

SHORT SURVEY

The structure of the balance of payments for the first quarter of 1998 has considerably been changed compared to the earlier balances of payments. The EEK 1.8 billion deficit of the current account is approximately of the same size as the deficit in the first quarter of 1997, but 40% smaller than the deficit in the fourth quarter of 1997. Current account deficit against GDP has not essentially improved compared to the end of 1997 and exceeded 11%. Surplus of the financial account has decreased manifold compared to previous quarters and is nearly half of that in the first quarter of 1997 (see Table 1).

The CURRENT ACCOUNT deficit was mostly influenced by the foreign tradedeficit, the amount of which, compared to that of the first quarter of 1997, has somewhat increased. The more rapid increase in exports compared to imports that commenced in 1997, continued also at the beginning of 1998. In the first quarter, the export of goods increased 10 percentage points faster compared to the same period of 1997. The nearly 41% increase in the export of goods shows the international competitiveness of Estonia. The main export articles were machinery and equipment, foodstuffs and clothes. The main import articles were machinery and equipment, products of chemical industry and foodstuffs. Estonia's most important foreign trade partner was still Finland, followed by Sweden, Russia and Germany.

Nearly half of the foreign trade deficit was covered by services balancesurplus that reached nearly EEK 1.5 billion. Similarly to trend from 1997, the import of services increased more rapidly than their export and that in case of construction, transport and tourism services above all. The rapid increase in travel services import is caused by both the increase in the purchasing power of Estonian citizens and the visa-free regime established with all Nordic countries.

The nearly EEK 350 million deficit of the income balance is first and foremost caused by the accounting reinvestment of the current year profits by the businesses having direct foreign investments.

The FINANCIAL ACCOUNT reflects the approximately EEK 1 billion capital net inflow both for direct and portfolio investments. The outflow of other capital, however, exceeded the inflow by more than EEK 1 billion.

Foreign direct investments made into Estonia (EEK 679 million) were smaller than those in the first quarter of 1997, but greater than in the fourth quarter. Estonian direct investments abroad had a nearly EEK 300 million positive balance, for some large businesses significantly decreased their claims to their foreign subsidiaries (according to the balance of payments compilation method, a plus sign usually denotes the inflow of capital, in this case the decrease in non-residents liabilities to Estonian residents). As to economic sectors, the direct investments into Estonia were preferably made to the processing industry and trade. The main investors came from Nordic countries, as in previous years.

Regarding portfolio investments, the amount of equity and debt securities owned by non-residents increased by nearly EEK 1.1 billion. At the same time, the portfolio investments of Estonian residents made abroad, somewhat decreased. More active investors and investment mediators were still banks and leasing companies associated with banks.

Contrary to 1996 and 1997, there was a capital net outflow regarding other investments, first and foremost in the form of short-term loan capital. The biggest influence came from the banking sector and financial institutions associated with banks, as well as from certain peculiarities of their liquidity management in the first quarter. At the beginning of the year also the government sector strengthened its financial position, mostly due to the amounts transferred to the Stabilization Reserve Fund.

Balance of payments RESERVES decreased by more than EEK 1.1 billion in the first quarter of 1998. Thus, the overall balance was negative.

ADJUSTMENTS TO THE 1996 AND 1997 BALANCES OF PAYMENTS

Due to more precise data on foreign trade, the balances of payments for 1996 and 1997 have been adjusted, first and foremost the current accounts. Firstly, the State Statistical Office and the Customs Board adjusted the foreign trade figures for 1997 as a result of which imports increased by nearly EEK 2 billion and exports by EEK 700 million. Secondly, exports increased due to the re-assessment made by Eesti Pank in the course of which price transformations occurring for goods exported through customs warehouses and not reflected in the foreign trade statistics were accounted for. In 1996, these transformations formed more than EEK 300 million and in 1997 approximately EEK 2.1 billion.

Adjustments have also been made in some of the financial account figures. Such later adjustments are known to be made in the statistics of all countries, especially big they are in the balance of payments figures of small countries. According to the adjusted current account and GDP data, the current account deficit against GDP formed 9.1% in 1996 and 12% in 1997 (see Figure 1).

CURRENT ACCOUNT

The current expenditures of Estonia's balance of payments exceeded current income by EEK 1.8 billion in the first quarter of 1998. The deficit of the current account was caused by the deficit of foreign trade balance and income balance (see Figure 2). The state of the current account was improved by the surplus of the balances of services and transfers.

Goods

In the first quarter of 1998, the export of goods increased by 41% as compared to the first quarter of 1997, while import was up by 31% (see Figure 3).

The volume of goods stored into customs warehouses before exporting nearly tripled (mostly foodstuffs destined for Russia) which increased the share of customs warehousing in special export to nearly 14% (see Table 2). The re-export of goods processed in Estonia increased by 52% (mostly machinery and equipment) and their share in special export accounted for approximately 28%. The share of direct export declined and amounted to 58% in the first quarter. Direct export consisted mainly of machinery and equipment, foodstuffs, clothing, footwear and headgear and timber.

Import for free circulation increased by 30% and accounted for three fourths of special import. Import for free circulation consisted mostly of machinery and equipment, chemical products, foodstuffs and transport vehicles. The import of goods for processing increased by 40% and its share in special import amounted to 16%. As in previous periods, mainly machinery and equipment and clothing, footwear and headgear were processed in Estonia.

Exports increased in all groups of goods, with the only exception of mineral products.

The export of machinery and equipment increased the most among the ten groups of goods analysed and accounted for 20% of the special export (see Table 3). Export increased rapidly across all major customs procedures. The re-export of processed machinery and equipment was dominated by mobile phones to Sweden, mobile phone parts to Finland, Sweden, Great Britain and Germany and cables to Finland.

The export of foodstuffs increased by 60%. Exports grew mainly thanks to the increase in the volume of Estonian food products stored into customs warehouses and waiting to be exported. The bulk of foodstuffs was exported to Russia where mostly cream, butter, cheese, fish and fish preserves and confectionery was sold. Other major export partners were Latvia, the Ukraine and Lithuania.

The export of clothing, footwear and headgear increased by 19% over the year and dropped to the third place in the structure of special export. Processed goods were mostly taken to Finland and Sweden. Estonian-made goods were also sold to Germany, Great Britain, the Netherlands and Denmark.

The export of timber increased relatively rapidly, by 43% as compared to the first quarter of 1997. Timber was mostly taken to Sweden, Finland, Great Britain, Germany and the Ukraine.

Imports too increased for all groups of goods, with the exception of mineral products (see Table 4). The main five groups of imported goods were machinery and equipment, foodstuffs, chemical products, clothing, footwear and headgear and transport vehicles.

The import of machinery and equipment increased by half as compared to the first quarter of 1997. Import for free circulation accounted for 64% of the total and import for processing made up 32%. The most important import partner was Finland with 54%. From Finland, various electrical equipment was imported to Estonia. Mobile phones and their parts were imported from Sweden, as well as loading and lifting mechanisms. Various electronic components and semiconductor equipment was imported from Finland and Sweden for processing in Estonia.

The import of foodstuffs increased by 14%, or by only half the rate of the first quarter of 1997. Some 20% of foodstuffs were imported from the Netherlands (butter, animal fodder). Coffee, pork and margarine were imported from Finland, flour and rapeseed oil from Germany.

The import of chemical products increased by a quarter. Paints and varnishes were imported from Sweden and Finland, plastic products from Finland and Russia, medicines from Latvia, Germany, Lithuania, Finland and Denmark, cosmetics from Finland.

The import of clothing, footwear and headgear increased by nearly a quarter. A third of the clothing, footwear and headgear was imported from Finland -- clothes, footwear and travel bags for free circulation. Various clothing, footwear and headgear items were imported from Finland and Sweden also for processing in Estonia.

The import of transport vehicles increased the most, growing by 63% as compared to the first quarter of 1997. Passenger cars, trucks and tractors were imported from Germany, Finland and Sweden, engines from the Ukraine.

The foreign trade balance was positive for timber, furniture and clothing, footwear and headgear. In most groups of goods the trade deficit increased (see Table 5).

As for the groups of countries, export to the European Union increased by 36% (see Table 6) while the share of the EU countries in Estonia's total export decreased somewhat and amounted to 58% in the first quarter. Export to the CIS countries increased by nearly 50% and accounted for approximately 20% of special export.

Special import from the EU countries also increased by 36% (see Table 7) and their share has increased, while the share of the CIS countries has decreased.

Services

According to preliminary data, the surplus of the services balance was nearly EEK 1.5 billion in the first quarter and covered 44% of the foreign trade deficit. Although this is less than in the first quarter of 1997, it is more than in the fourth quarter of 1997 (see Table 8). The surplus of the services balance has decreased against both the first and the fourth quarter of 1997.

The surplus of the services balance has decreased mainly due to the decline in the surplus of the balances of transport and construction services (see Table 9). A remarkable change is the deficit of the business services balance being replaced by a surplus. The size of the surplus of the services balance is strongly influenced by seasonal factors (see Figure 4). In the first quarter, the surplus declined mostly due to the more rapid increase of import (by EEK 1 billion, while export increased by EEK 850 million).

There were no major changes in the structure of the services export (see Table 10). As in earlier periods, transport and travel services dominated. Worth mentioning is the slowdown of the increase of the transport services volume, particularly in the case of freight transport. In 1997, the total volume of transport services increased on the account of export, while in the first quarter of 1998 most of the increase derived from import (see Figure 5). In passenger transport the rapid increase of export continued. Among services with a smaller share of the total, the export of business services displayed a remarkable 51% annual increase.

In the structure of services import (see Table 11) bigger changes took place over the year: the share of transport services increased considerably (the volume of transport services import increased by nearly two times), particularly freight transport. The import of services has increased evenly across all categories of transport -- sea transport was up two times, road transport increased 2.2 times. The import of construction services has also increased rapidly. The import of government services decreased in the first quarter.

The surplus of the travel services balance increased by 13.8% in the first quarter of 1998 as compared to the first quarter of 1997, with export up by 19% and import, by 39% (see Figure 6). The interest of non-residents towards Estonia increases at a moderate rate (the increase of the volume of export is partly also caused by the domestic price increase since prices in the open sector have increased by 10% over the past year), while the increase of import points to the continuing growth of wealth among Estonian residents.

The export of travel services increased mainly due to the increase of foreign visitors' spending in Estonia and thanks to the widening of the geography of the home countries of one-day visitors. The number of visitors from the Nordic countries increased by 40%, the number of visitors from the CIS countries, Latvia and Lithuania grew by 29%, and 2.3 times more visitors came to Estonia from the EU countries.

The number of tourists using the services of travel agencies decreased by 13%, mainly due to the smaller number of Finnish tourists (down by 20%), while the total number of visitors from Finland remained stable. The decline in the number of Finnish tourists was not compensated for by more tourists arriving from the Scandinavian countries, Western Europe and the CIS countries. In money terms, the growth of the travel services export was achieved thanks to tourists staying for a longer time (the number of overnight stays increased by 24%) and thanks to the increasing number of one-day visitors, particularly from the Nordic (up by 40%) and the CIS countries (up by 12%).

The import of travel services offered by travel agencies increased by 75% in the first quarter. The number of tourists visiting foreign countries was up by 48%, while the number of visits to Finland increased by 88%. As the number of tourists visiting other countries increased only insignificantly or even decreased (the CIS countries and Lithuania), the total import of travel services increased by more than a third.

Income

As compared to the previous periods, the deficit of the income balance decreased (see Table 12), but this decline was caused by the introduction of a new calculation methods at the beginning of 1997. In the first quarter of 1997, the large deficit of the income balance contained the 1996 total income and the 1997 first quarter expected income from equity, while the income of the first quarter of 1998 only contains the income predicted for the first quarter. Thus, it is more appropriate to compare this year's data with the fourth quarter of 1997.

There were no major changes in the structure of the income inflow (see Table 13). The inflow decreased by 9% as compared to the fourth quarter of 1997, mainly due to the decline in income from direct investments and other investments. Income from portfolio investments increased.

The structure of the income outflow changed more (see Table 14). The nearly 10% decrease of the outflow as compared to the fourth quarter of 1997 was caused by the twofold decrease of income from portfolio investments, while income from direct investments increased by 36%. The biggest growth was recorded for income from equity, the bulk of which was the book profit from direct investments (reinvested earnings).

Transfers

The surplus of the transfers balance was EEK 383.5 million in the first quarter. The balance of transfers has had a stable structure for some time and the small increase (4%) of the surplus as compared to the first quarter of 1997 derived from the 27% increase of the credit of private transfers.

CAPITAL AND FINANCIAL ACCOUNT

The surplus of the capital and financial account decreased considerably as compared to previous quarters and remained under EEK 1 billion.

The turnover of the capital account was insignificant, as usual. The EEK 10 million surplus of the capital account was mostly linked with the EU financed capital investments into Estonia's infrastructure.

Significant changes took place in the structure of the financial account which will be described below. The inflow of foreign capital through the financial account decreased by several times (see Figure 7 and Figure 8).

Direct Investments

The direct investments of the first quarter of 1998 are characterized by the surplus of both in- and outflow, which totals nearly EEK 1 billion. A third of this sum was made up of the direct investments of Estonian companies abroad (see Figure 9). The balance of the direct investment flows outstripped the surplus of the financial account by EEK 3.6 million in the first quarter.

The volume of direct investments into Estonia by foreign companies increased, exceeding the corresponding figure of the fourth quarter of 1997 by a third, but was considerably smaller than the volume of direct investments in the first quarter of 1997. The balance of in- and outflow of the share capital was relatively modest in the first quarter as compared to earlier periods. Although foreigners invested over a quarter of a million kroons into Estonian stocks, nearly EEK 150 million returned across the border. The reinvestment of profits earned by companies with foreign involvement increased by more than a half as compared to the fourth quarter of 1997, amounting to 29% of the total volume of direct foreign investments made into Estonia. Over half of long-term investments made into Estonia by non-residents was loan capital, in case of which the increase of external liabilities outstripped the increase of external assets. Two thirds of the increase of liabilities was made up of short-term and one third of long-term debts to foreign owners (see Table 15).

Major investors still came from Finland and Sweden, accompanied by the USA in the first quarter. Nordic investors preferred industry and transport, inventory management and communications. Direct investments from the USA were mainly targeted into wholesale and retail trade.

The surplus of long-term financial investments abroad was in the first quarter caused mainly by changes in the assets of just a few companies and meant the decrease of claims on affiliated (related) companies. The balance of the in- and outflow of investments into the share capital remained on the same level as in the fourth quarter of 1997, although the volume of capital flows was considerably smaller. The profits and losses of the affiliated companies abroad was more or less in balance in the first quarter, which explains the modest share of reinvested earnings in the total share of direct investments into foreign countries (see Table 16).

In the first quarter of 1998, the preferred areas in terms of direct foreign investments abroad were finance, real estate, leasing and business services, just like in previous periods. Among countries, Latvia and Lithuania dominated.

Portfolio Investments

Regardless of the complicated situation of the financial market, the inflow of capital in the form of portfolio investments continued (see Figure 10). In the fourth quarter of 1997, the record balance could be attributed to several bond and share issues of the banking sector, while in the first quarter of 1998 the portfolio investment capital mostly moved into companies of the other sectors, among which traditionally the most active were the leasing companies of the banks. The banking sector attracted portfolio investment capital mostly through GDR issues. As the banks invested capital into debt securities and at the same time redeemed debt securities issued earlier, the inflow of portfolio investments was balanced and the banking sector had no significant impact on the balance of the portfolio investment capital. The impact of the government sector was limited as well since the opportunities of the government sector have been relatively modest in the case of portfolio investments (see Table 17).

Developments on the stock markets of Eastern Europe and Russia have reduced the investment interests of residents into foreign instruments. The increase of the security assets has been declining over the past three quarters and in the first quarter of 1998 amounted to just EEK 34 million. The stocks of non-residents sold back through banks and other sectors fetched EEK 147 million more than stocks were bought for.

Although the other sectors behaved the same way with debt securities, Estonian banks invested into foreign debt securities. As a result, the debt security assets of residents increased by a total of EEK 181 million.

Like in 1997, Estonian businessmen managed to raise portfolio investment capital also in the first quarter of 1998. The security liabilities increased by more than EEK 1 billion (over EEK 3 billion in the fourth quarter of 1997). Besides the banking sector's GDR issues mentioned above, approximately EEK 300 million worth of the shares of the other sectors was sold to non-residents through the Tallinn Stock Exchange more than was bought back.

The debt security liabilities increased by just EEK 43 million in the first quarter. The money flows from the additional security issues by the other sectors and the simultaneous repurchase of securities by the banking sector were roughly in balance.

Other Investments

The flow of other foreign investment capital was negative in the first quarter of 1998 with more than EEK 1 billion (see Figure 11). This was mostly due to the banking sector which paid back earlier taken short-term loans and provided short-term financing to non-resident credit institutions. The outflow of capital was also increased by the sums deposited abroad in the framework of the government's Stabilization Reserve Fund (see Table 18 and Table 19).

The claims in the form of other investments made abroad increased by a total of EEK 2.3 billion. Nearly half of it came from the banking sector and nearly a third from investments by the government sector. The debit debts of non-residents (trade credit) increased as well.

The increase of liabilities to non-residents was considerably smaller than in the previous three quarters, amounting to nearly EEK 1.3 billion. The increase of the debt burden accounted for just 25% of the total. The short-term loan capital moved mostly to companies listed under the other sectors, the sums paid back by the banking sector outstripped new loan liabilities. Over half of the increase of liabilities derived from the increase in the entry marked 'Other'. This was due to the increase of subordinated liabilities, deferred debts, etc in the banking sector. Despite the increase of interest rates in the Estonian banking system, the increase of the volume of non-resident deposits was the smallest over the past four quarters. The increase of deposits amounted to approximately 7% of the increase of total liabilities and the increase of trade credit liabilities accounted for approximately 15%.

RESERVES

For the first time in the entire post-monetary reform period, the overall balance of Estonia's balance of payments was strongly negative in the first quarter of 1998, which in the conditions of a currency board points to a certain stabilization of the balance of payments. The gold and foreign exchange reserves of the central bank decreased by EEK 1.1 billion, ie 9.6% (see Figure 12). As a result, the volume of the base money decreased by approximately the same amount.

ESTONIA'S INTERNATIONAL INVESTMENT POSITION AND FOREIGN DEBT

By the end of the first quarter of 1998, claims of Estonian residents to non-residents amounted to EEK 31.6 billion. Total foreign liabilities of Estonian residents formed EEK 56.3 billion. Thus, Estonia's international net investment position was negative by EEK 24.7 billion (see Table 20).

Approximately 90% of foreign claims was capital subject to repayment, while the share of capital with debt nature among foreign liabilities was approximately 70%. Including only items with debt nature among foreign claims and liabilities, the net external debt of Estonian economy was nearly EEK 11 billion. Compared to the fourth quarter of 1997 the external debt was by 13% bigger, ie the growth of debt in the first quarter decreased (see Figure 13). The net external debt of the government sector has reduced and formed EEK 1.8 billion of the total debt.

Total net external debt of residents formed 17% of GDP of 1997, in case of the government sector the respective figure was only 2.8%.

Eesti Pank Statistics Department