PRELIMINARY BALANCE OF PAYMENTS OF ESTONIA FOR THE SECOND QUARTER OF 1999 (1)

(1) The adjusted balance of payments for the second quarter of 1999 and the preliminary balance of payments of the third quarter will be published at the Eesti Pank Web site on 20 December 1999 at noon.

SHORT OVERVIEW

The preliminary balance of payments of the second quarter of 1999 shows a considerable improvement in foreign balance.

According to preliminary data, the CURRENT ACCOUNT deficit is nearly 800 million kroons (see Table 1) which forms 4% of the expected gross domestic product (GDP) of the second quarter. The ratio of the current account deficit of the last four quarters against the GDP of the same period was the smallest of last years - 6.7% (see Figure 1).

Due to considerable decrease in investment demands, the balance of saving and investments has improved in the last quarters, which has resulted in a decrease of the current account deficit. The deficit of the foreign trade balance formed 2.9 billion kroons, which is by nearly 40% smaller than in the second quarter of 1998 but by 15% bigger than in the first quarter this year. Compared to the second quarter of 1998, exports decreased by 9% and imports by 17%. The most important foreign trade partners of Estonia were still Finland, Sweden, Germany and Russia. Compared to the same period last year, exports to Russia decreased by 55%, but increased by 6% to the countries of the European Union.

The surplus of the services balance formed 2.4 billion kroons and it covered 80% of the foreign trade balance deficit. Different from the export of goods, which both in the first and second quarter was considerably smaller than a year ago, the services export in the second quarter nearly reached the level of the same period of 1998. The recovery in the volume of export was the most influenced by the increase in income earned from travel services due to the increase in the number of tourists visiting Estonia. Compared to the same period last year, the services import increased by one tenth mostly due to the increase in the travel services import.

The negative balance of the income balance was the biggest of the last years, ie 732 million kroons. It was mostly due to the outflow of income in the form of dividends earned from direct investments and undivided profit (reinvested earnings).

The retarded currency inflow through the CAPITAL AND FINANCIAL ACCOUNT in the first quarter was again intensive in the second quarter and formed 2 billion kroons. The high level of inflow was caused by the increase in liabilities in the form of direct and other foreign investments made in Estonia. The increase in the inflow of capital was also due to the decrease of claims on non-residents.

The capital inflow in the form of direct investments in the period under observation was high and formed 1.2 billion kroons. Foreign investors brought into Estonia 1.4 billion kroons, one fourth of which in the form of share capital. The investments came from Finland, Sweden and the Netherlands and were made in transport and communication, trade and industry. At the same time, Estonian direct investments made abroad formed 0.2 billion kroons and were mostly related to the investments made in other Baltic countries by the financial sector, real estate and business activities sector.

The inflow of portfolio investment capital of the second quarter surpassed the outflow by approximately 150 million kroons, whereas the positions of residents in foreign countries and positions of non-residents in Estonia decreased. Claims decreased by 455 million kroons, which was mostly due to the realisation of debt securities (in the possession of Estonian residents) issued by foreign companies. The decrease in liabilities by 307 million kroons was the most effected by the redemption of debt securities by banks, which exceeded the increase in the liabilities of equity securities.

The first quarter was characterised by the extensive outflow of other investment capital, while in the second quarter there was a 700 million kroons inflow of the same type of capital into Estonia. This was mainly related to direct borrowing from abroad by other sector enterprises. The biggest part of this money was made up of long-term loans. Deposits of non-residents at Estonian banks increased too.

Capital inflow via the financial account in the second quarter exceeded the current account deficit due to what the gold and foreign currency reserves increased and the balance of payments as a whole was positive by 800 million kroons (see Figure 2).

CURRENT ACCOUNT

The current account deficit of the second quarter of 1999 was nearly 800 million kroons, which amounts to 4% of the expected gross domestic product (GDP) of same quarter. This ratio has been declining for the past six quarters in a row and can be compared to the respective indicators of other successful transition economies (the Czech Republic, Hungary, Poland). Although the current account deficit of the past four quarters made up 6.7% of the GDP of the respective period, it was the lowest ratio among the Baltic countries.

Like in earlier quarters, the current account deficit mainly decreased due to the shrinking of the foreign trade deficit (by 36% against the same period of 1998). The trade deficit was down due to the decline of imports that outpaced the decline of exports. The deterioration of the terms of trade (2) that caused the decline of Estonian exports in the first quarter continued in the second quarter. According to the real effective exchange rate of the kroon (REER) the competitiveness of Estonian goods increased as compared to the first quarter but was by 12% down against the second quarter of 1998. In current prices the export of goods was by 8% less than in the second quarter of 1998.

(2) Terms of trade denote the ratio of the export and import price indices.

Like in the first quarter, the current account deficit was fully covered by the surplus of direct investments of the financial account. The developments of the current account are characterised in Figure 3, Figure 4 and Figure 5.

Goods (3)

(3) Imports are given in cif prices and analysed by the trading country.

Data for exports and imports differ from those published by the State Statistical Office (SSO) because instead of the general trade system used by the SSO, Eesti Pank relies on the special trade system combined with the amendments made by Eesti Pank. This means that exports do not include the re-export of goods previously imported into customs warehouses and goods used for provisioning sea vessels and aircraft. Imports do not include customs warehousing of imported goods but do reflect deliveries of goods from customs warehouses into free circulation and for processing. Exports include possible price distortions in the course of export through customs warehouses not reflected in the SSO’s foreign trade statistics.

All comparisons in foreign trade analysis are against the second quarter of 1998, unless stated otherwise.

In the second quarter of 1999, the export of goods amounted to 8.9 billion kroons and import to 11.8 billion kroons, bringing the foreign trade deficit down to 2.9 billion kroons (see Figure 6). Exports declined less against the second quarter of 1998 than imports, by 8.7% and 17.4%, respectively. The foreign trade deficit decreased by 1.6 billion kroons, ie by 36% and amounted to 33% of the exports (46% in the second quarter of 1998).

The export of goods accounted for 61% of the total export of goods and services, the import of goods made up 81% of the total import of goods and services (see Table 2).

In the second quarter of 1999, the reexport of goods processed in Estonia remained practically on the same level as in the second quarter of 1998 (see Table 3) and accounted for 29% of the special export (27% in the second quarter of 1998). The export of goods of Estonian origin decreased by 13% against the same period of 1998. The most important export articles were timber, food products, clothing, footwear and headgear and furniture that combined accounted for 65% of the special export. Mainly machinery and equipment, clothing, footwear and headgear and metals and metal products were processed in Estonia, accounting for 93% of the reexport of processed goods.

In the second quarter of 1999, theshare of goods imported for free circulation decreased to 78%, ie by 4.6 percentage points, while the import of goods for processing was up by 4.6 percentage points. Goods meant for free circulation mainly consisted of machinery and equipment, chemical products, clothing, footwear and headgear and food products. For processing, mostly machinery and equipment and clothing, footwear and headgear was imported.

Across the groups of goods, export of the majority of goods decreased, with the exception of timber and furniture. The five most important groups of export were timber, machinery and equipment, clothing, footwear and headgear, food products, metals and metal products.

The specialexport of machinery and equipment was down by 1.2% against the second quarter of 1998 and by 1% against the first quarter of 1999 (see Table 4). Reexport of processed machinery and equipment increased by 3.2% against the second quarter of 1998 but the export of goods of Estonian origin decreased by 13.1%. Processed machinery and equipment accounted for three fourths of the total export of this group of goods. The most important export partners were Sweden and Finland where processed mobile phones and their parts and electrical communication equipment was exported. Of goods of Estonian origin, cables were exported to Finland and Sweden.

The export of timber increased by 8.7%. The most important export partners were Sweden, Finland, Germany and Great Britain.

The export of clothing, footwear and headgear decreased by 1.5%, with the export volume of processed goods remaining on the level of the second quarter of 1998 and their share amounting to 49% of the total export of this group. The bulk of clothing, footwear and headgear were sold to Finland, Sweden, Great Britain and Germany. To Finland and Sweden, men’s and women’s processed clothes were exported, of goods of Estonian origin cotton cloth was sold to Germany, Finland and Great Britain and linen cloth to Great Britain.

The export of foodstuffs was down by 45%. The most important destinations were Russia, Latvia, Lithuania and the Netherlands. Russia accounted for 31% of the total export of food products (48% in the second quarter of 1998). Fish preserves and dairy products were sold to Russia, mineral water, fish preserves, confectionery, beer and butter to Latvia, fish preserves, mineral water and beer to Lithuania, fish fillet and milk powder to the Netherlands.

The export of furniture was up by 13.7%. The main export partners were Germany, Finland, Denmark and Sweden.

The export of mineral products was down by 37.5%, due to the decline of electricity sales to Russia.

Imports decreased across all major groups of goods (see Table 5). The five most important import groups were machinery and equipment, chemical products, clothing, footwear and headgear, food products and transport vehicles.

The import of machinery and equipment was down by 10% against the second quarter of 1998. Imports for processing accounted for 43% of the total special import. The main import partners were Finland, Sweden and Germany. From Finland, mobile phones and their parts were imported as well as electronics parts and cables. From Sweden, mobile phones and their parts were imported, from Germany, computers and their parts, as well as farm machinery.

The import of chemical products was down by 8.9%. The bulk of chemicals were bought from Finland, Germany, Sweden and Latvia. Medical supplies were imported from Latvia, Germany, Switzerland, Sweden and Finland. From Finland, also plastic products, paints, varnishes and cosmetics were imported.

The import of foodstuffs decreased by 17%. Coffee, beer, bananas, tobacco products, ice cream and confectionery was imported from Finland, sugar, flour, confectionery and wine from Germany, fruits, vegetables and animal fodder from the Netherlands.

The import of clothes, footwear and headgear decreased by 6.8%. The most important import partners were Finland, Sweden, Germany and Latvia. The share of goods imported for processing amounted to 52% of the total special import of this group.

The import of transport vehicles was down by 48% and their share accounted for 10% of the total import.

The foreign trade balance of special export and import was positive in trade with timber and furniture. The trade balance of other groups of goods was negative. The trade surplus increased in the second quarter against 1998 in case of timber and furniture, the deficit decreased in trade with transport vehicles, machinery and equipment, metals and metal products, clothing, footwear and headgear and mineral products (see Table 6).

Across the groups of countries, exports to the European Union increased by 5.7% (see Table 7). Exports to the CIS countries decreased by 53% due to the economic difficulties of Russia. Exports to Central and Eastern Europe was down by a quarter. The share of the European Union in Estonia’s exports has increased to 70%, ie by nearly 10 percentage points due to the decline in the share of the CIS countries.

The import of goods from the European Union was down by 18% and from the CIS countries by 20% (see Table 8). Imports from the European Union accounted for three fourths of the total import.

Services

According to preliminary data, the surplus of the services balance was nearly 2.4 billion kroons in the second quarter of 1999 which covered 82% of the foreign trade deficit, that is, considerably more than in the same quarter of last year (63%). The second quarter is traditionally characterised by a small trade deficit and seasonally increasing surplus of the services balance but this year the surplus of the services balance grew faster against the first quarter than in 1998 (see Table 9 and Figure 7). The higher growth rate of the services export against the first quarter as compared to 1998 points to the relative enlivenment of the economy, although the volume of the services export was smaller in current prices than in 1998.

The considerable decline in the surplus of the services balance, by 440 million kroons against the second quarter of 1998, was mainly caused by the growing import of travel services (see Table 10).

The export of services, which nominally remained approximately on the same level as in 1998, changed little also in structure (see Table 11). The share of construction services declined slightly against the same period of 1998, while the share of business services increased. Although the share of transport services was unchanged, the volume of freight transport was down by 310 million kroons against the same period of 1998, which was compensated by the price increase of other transport services.

Changes were more substantial in the structure of the import of services. While the volume of imported transport services decreased by 140 million kroons, ie by 10 percentage points and the volume of construction services by 15 million kroons, the volume of other categories of services increased by 13-66% (see Table 12), bringing the share of travel services to 25% of the total volume of services import.

In transport services (see Figure 8) a proportional decline occurred in both export and import of the freight transport services, while the import of passenger transport increased by 27% against 1998. The increase was particularly rapid in passenger transport by sea (up by 38%) and by road (up by 69%). The export of other transport services grew the fastest in the case of road transport (by 37%).

The surplus of the travel services balance (see Figure 9) decreased by 355 million kroons, ie by 20% against the respective period of 1998. At the same time the export of travel services decreased by 29 million kroons, mainly due to the fall in the number of one-day tourists. The number of visitors using the package tours of travel agencies and their spending in Estonia were up for tourists arriving from the neighbouring countries (Finland, Scandinavian countries, Latvia, Lithuania and the CIS countries) but down for tourists coming form other European countries and farther off.

The import of travel services was up by 66% against the second quarter of 1998. In previous years Estonian residents spent considerably less abroad than foreign visitors in Estonia, while by now spending are approximately the same. Also, Estonians are taking longer trips than before. Estonian residents used the services of tourist agencies by 7.5% more than in 1998. Besides Finland and Sweden, Spain has gained popularity among Estonians (2.5 times more visits) as well as Greece (2.3 times more), the CIS countries (1.9 times more) and Latvia (two times more). The USA has also become a popular destination, with the number of visits doubling against 1998.

Income

The income balance changes seasonally, just like the services balance (see Figure 10). The deficit reaches the highest level in the second quarter, particularly in the case of income from direct investments because June is the deadline for completing the annual reports of the previous year and this is also the period of paying dividends.

The deficit of the income balance amounted to 732 million kroons in the second quarter of 1999, being 27% larger than in 1998. The structure of income was similar to that of the previous year (see Table 13).

The inflow of income (see Table 14) was just by 5.8% higher than in 1998 but in the second quarter of 1999 an important role was played by income from direct investments (13%) besides portfolio and other investment income. As compared to the previous year, income from other investments was up by 23%, while income from portfolio investments was down by nearly an equal amount.

The outflow of income increased by 18% as compared to 1998 (see Table 15). Income from direct investments was up by 200 million kroons, ie by 37%; income from portfolio investments was down by 73 million kroons, ie by 36%. The latter category of income was down for the second consecutive quarter; the increase of income from other investments amounted to the average increase of income outflow. The rapid increase of income from direct investments points to the development of foreign-owned companies in Estonia.

Transfers

The surplus of the transfers balance was 449 million kroons in the second quarter, ie by 19 million kroons bigger than in the first quarter and by 98 million kroons smaller than in the second quarter of 1998. Changes mostly concerned private transfers the surplus of which doubled against the first quarter. In the second quarter of 1998 the surplus of private transfers was even higher.

CAPITAL AND FINANCIAL ACCOUNT

The inflow of money through the capital and financial account that had slowed down in the first quarter, was accelerated again in the second quarter, amounting to more than 2 billion kroons.

The turnover of the capital account was minimum and remained on the same level as in the previous quarters, reflecting mainly transfers into the private sector.

The inflow of capital through the financial account accelerated. Changes in the structure of external sources of finance can be seen from Figure 11 and Figure 12.

Direct Investments

The net inflow of direct investment capital accounted for 57% of the surplus of the financial account of the balance of payments in the second quarter of 1999. Direct investments into Estonian economy increased by nearly 1.4 billion kroons, direct investments from Estonia abroad grew by more than 0.2 billion kroons. The surplus of direct investments was 1.2 billion kroons, like in the first quarter (see Figure 13 and Table 16).

More than 0.6 billion kroons of direct investments poured into Estonia in the form of equity capital and an equal amount in the form of loans. Non-residents invested an additional 0.5 billion kroons into the equity capital of already working companies. Unlike in the first quarter, when reinvested income was negative, foreign-owned companies returned into the red in the second quarter and reinvested profit accounted for more than a fifth of the total volume of direct investments. 40% of the inflow of net loan capital was long-term (see Figure 14).

The bulk of direct investments into the Estonian economy still came from Finland and Sweden in the second quarter. Investments from the Netherlands increased significantly (see Figure 15). The preferred branches of the economy were industry, wholesale and retail trade as well as transport, storage and communication (see Figure 16).

Unlike in the first quarter when direct investments from Estonia abroad were modest, the surplus of financial investments into affiliated/associated companies amounted to 0.2 billion kroons in the second quarter, mostly due to the financial sector. Nearly 90% of direct investments were in the form of equity or share capital. Like in the first quarter, the balance of reinvested income was again negative, outstripping the respective figure of the first quarter by more than seven times. Unlike in the first quarter when liabilities to affiliated/associated companies increased considerably, these were down by 8.5 million kroons in the second quarter. The long-term capital positions increased mainly in the affiliated and associated companies abroad (see Figure 17).

Like in the previous quarters the resident businesses increased their direct investments the most into Latvia and Lithuania (see Figure 18). The bulkiest direct investments were made into the financial sector as well as real estate, leasing and business services (see Figure 19).

Portfolio Investments

The inflow of portfolio investments exceeded their outflow by nearly 150 million kroons in the second quarter, with both the positions of residents abroad and the positions of non-residents in Estonia down (see Figure 20).

Claims on non-residents decreased by 455 million kroons. The decline was mostly caused by the realisation of the promissory notes of foreign companies held by Estonian residents - the debt security claims fell by 388 million kroons.

Liabilities to residents decreased by 307 million kroons in the second quarter. A large amount of debt securities was redeemed by the banking sector. Thus, the debt security liabilities decreased by more than 900 million kroons, of which the share of the banks was over 850 million kroons (see Table 17). The investments of non-residents into the shares of the Estonian other sector companies amounted to 600 million kroons.

Other Investments

The first quarter was characterised by the extensive outflow of other investment capital, while in the second quarter the balance of other investments was positive by more than 700 million kroons (see Figure 21).

Claims on non-residents decreased by 45.4 million kroons (see Table 18). Deposits were down by 278.6 billion kroons, while loans granted by companies to non-residents increased.

Liabilities increased by 692.6 million kroons in the second quarter. The inflow of capital was first of all associated with direct loans of the other sector from abroad - the long-term loans of the companies increased by nearly 980 million kroons and short-term loans by 180 million kroons (see Table 19). The loans were mainly taken by companies of the financial sector. Borrowing by the government sector was also up. The deposits of non-residents in Estonian banks increased by more than 300 million kroons.

RESERVES

The gold and foreign exchange reserves of the central bank increased by 782 million kroons in the second quarter, which is the biggest increase of the past four quarters. Thanks to the increase of reserves and the decrease of imports the latter is better covered by the reserves. At the end of the second quarter the cover exceeded the volume of quarterly imports and thus increased the reliability of Estonia in the eyes of foreign investors (see Figure 22).

INTERNATIONAL INVESTMENT POSITION AND EXTERNAL DEBT

By 30 June 1999 Estonian residents had claims on non-residents worth of 36.4 billion kroons, ie these were equal to almost half of the Estonian annual gross domestic product (GDP). The total of foreign liabilities of Estonian residents twice exceeded the claims, forming 74.6 billion kroons, which is comparable with the expected GDP. Thus, the international investment position was negative by 38.2 billion kroons (see Table 20).

Compared to the end of the first quarter, foreign claims did not change and by one third were made up of the gold and foreign currency reserves of the central bank. Almost of the same proportion were Estonian residents' settlement accounts and deposits at foreign banks. Sums invested in foreign bonds and sums due from the sale of goods and services both formed one tenth of investments made abroad. However, Estonia's direct investments abroad formed 8%. Figure 23 and Figure 24 characterise the latter by countries and spheres of activities.

Compared to the end of the first quarter, foreign liabilities increased by nearly 8% mostly due to the increase in direct investment liabilities. The latter formed 45% of residents' foreign liabilities. The increase in the share of non-repayable capital was also due to the growth of equity securities liabilities up to 10% of foreign liabilities. The structure of direct investments made in Estonia by countries and spheres of activities is given in Figure 25 and Figure 26.

93% of foreign claims was made up of repayable capital, while in foreign liabilities the share of repayable capital was 56%. If only debts are included in external claims and liabilities, it can be seen that the Estonia's gross external debt formed 41.9 billion kroons, ie nearly 57% against the expected GDP by the end of the second quarter. At the same time, Estonia's net external debt amounted to 8.1 billion kroons, ie 11% against the expected GDP (see Figure 27).

The overall external debt of the government sector stood at 3.6 billion kroons (approximately 5% against the expected GDP) and net external debt at 736 million kroons (1% against the GDP; see Figure 28 and Figure 29).

INTERNATIONAL PAYMENT TRANSACTIONS OF CUSTOMERS VIA THE ESTONIAN BANKING SYSTEM

Number and Turnover of Payment Transactions

Since the beginning of 1996 the number of incoming and outgoing international payments has increased 1.7 times (up by 10.3% and 7.7%, respectively, against the first quarter of 1998). The number of incoming payments increased by 33.8% against the second quarter of 1998 and the number of outgoing payments was down by 8.4% (see Table 21 and Figure 30).

Over the past four years, the turnover of international payments performed by the customers of the Estonian commercial banks has increased 3.3 times for incoming payments and 1.7 times for outgoing payments. As compared to the first quarter of 1999, the turnover of incoming payments decreased by 3.4% while the turnover of outgoing payments increased by 16.3% (see Table 22 and Figure 31).

Since the fourth quarter of 1998 the turnover of foreign transactions has decreased for both incoming and outgoing payments (by 23.7% and 24.5%, respectively, against the third quarter of 1998). As compared to the second quarter of 1998, the turnover this quarter was down by 25.5% for incoming payments and by 36.1% for outgoing payments.

In the second quarter of 1999, the average size of an outgoing payment was 239,500 kroons, which is by approximately 8% more than in the first quarter. The average size of an incoming payment was 497,200 kroons, which is by approximately 12% less than in the first quarter.

Use of Currencies (4)

(4) The analysis of transactions by currencies does not reflect payment transactions below 100,000 kroons as these are given only in the Estonian kroons in the statistics available to Eesti Pank and their inclusion would thus considerably distort the actual picture.

In the second quarter of 1999, the share of major currencies was similar for incoming and outgoing payments. The only major difference concerned the use of the German mark, the share of which was 15% in outgoing payments and 24.3% in incoming payments.

The bulk of the transactions were made in US dollars, the share of which in the total turnover (31%) was nine percentage points smaller than in the first quarter of 1999. The share of the German marks was 19.8%, ie by 0.6 percentage points bigger than in the previous quarter. The share of the Estonian kroon was significant (an average 14.4%) - 15.3% in incoming payments and 13.5% in outgoing payments. Euro has gained an important place over just a short time, accounting for 12.8% of the total volume of transactions in the second quarter. The share of the Finnish markka decreased by one percentage point, dropping to 9.6%. Of other currencies, the most frequently used was the Swedish krona, which accounted for 3.2% of the total volume of transactions. The share of the Russian rouble fell to 0.9% (see Figure 32).

By the number of payment transactions the breakdown of the currencies was similar to their use by the turnover of transactions (USD - 28.8%, DEM - 21.9%, SEK - 5.1% and RUB - 1.2%). The share of the Estonian kroon was 11% of the total number of transactions, just like in the first quarter (14.4% for incoming payments and 8.3% for outgoing payments).

Eesti Pank Balance of Payments Statistics Section