Deficit easing in Estonia

Jul 01, 2008
By Mike Collier

TALLINN -- With economic corrections continuing throughout the Baltic, latest figures from the Bank of Estonia (Eesti Pank) show that the country's current account deficit was already starting to narrow in the second half of 2007 and has continued into 2008.

In the first quarter of 2008, the adjustment has continued at an accelerating pace - the ratio of current account to GDP was 13.3%, the lowest level for two years. Along with the slowdown in domestic demand growth, the foreign trade deficit decreased by a quarter. 

The growth rate of goods exports was slightly above 5% which reflects a decrease in re-export year-on-year. In terms of other goods, the export growth remained fast as usual and reached approximately 14% as measured in current prices, which is 3-4 percentage points faster than the average level in 2007. The growth rate of services exports followed a similar pace.



The growth rate of profits of enterprises based on foreign capital has moderated, though it still accounts for approximately 8% of quarterly GDP. This results mainly from the contingent outflow of retained profits.

The structure of capital inflow in the first quarter of 2008 has not changed much compared to the last year, according to Andres Saarniit, an adviser in the Monetary Policy Department of Eesti Pank. Investment in equity capital and direct investment in the form of reinvested earnings to GDP were even bigger than a year ago and foreign exchange reserves continued to increase. It follows that a smaller inflow of foreign capital is due to a slower economic growth rather than limited financing, Saarniit believes.

In view of the latest data, Eesti Pank forecasts an average current account deficit at 10.2% of GDP for the whole year.