TALLINN - Estonia’s debt will decline as a percentage of gross domestic product this year and grow at a slower pace than previously forecast in coming years, Finance Minister Jurgen Ligi said, reports Bloomberg. Debt will decline to 7.1 percent of GDP this year from 7.2 percent in 2009, and the debt-to-GDP ratio will “about double” by 2015, Ligi told reporters in Tallinn on Oct. 28. The Finance Ministry in August forecast that the ratio would increase to 8 percent this year and 18.7 percent in 2014.
“We can say now that our borrowing schedule is totally different from what we had forecast,” said Ligi. “We are already borrowing 1.5 billion kroons (96.1 million euros) less from the European Investment Bank than we forecast, we know that Latvia has given up a plan to borrow from us, and we have reserves.”
Estonia, which is due to adopt the euro Jan. 1, has the lowest level of government debt in the 27-member European Union. The former Soviet republic’s most important lesson from its deepest recession since independence, in 1991, was the need to accumulate government reserves in good times, Prime Minister Andrus Ansip said last month.
Ansip pledged that government debt would remain the EU’s lowest “for years.” Estonia’s debt ratio is less than half that of second-place Luxembourg, where it stands at 14.5 percent, according to EU figures.
Estonia’s government may need to borrow 7 billion kroons for investments in state-owned utility Eesti Energia, “which would be a totally different thing than borrowing to finance current spending,” Ligi said.
State reserves of 19.2 billion kroons exceed debts by 3.3 billion kroons, he said.
Estonia last year agreed to borrow 4.2 billion kroons from the EIB to finance investments and help cover its budget deficit. The Cabinet in July approved a loan option for Latvia of as much as 100 million euros as part of an international bailout program for Estonia’s neighbor.
With the country’s finances seemingly in order, Robert Kitt, the head of the corporate banking division of Swedbank in Estonia, believes that Estonia should now focus on balancing its economic structure, reports news agency LETA. During his speech at thr Swedish Business Awards in Estonia 2010, Kitt said that, at least officially, the economic crisis in Estonia is over, as indicated by the 3-percent year-on-year growth in the second quarter; however, double-digit growth of macroeconomic indicators shows that Estonia is not having overall solid economic growth, but one that is fragile and vulnerable.
“I would like to urge all economic sectors to engage in broad-based discussion about Estonia’s economic development. In the last twenty years Estonia’s economy has gone through a major transition. Development has been extremely fragile and there have been many traps. Climbing to the top of the development ladder has proven that rapid, albeit vulnerable, growth has been worth it. But now we have reached a step where we could break a leg if we slip and fall. Therefore, the only meaningful solution today is balanced development,” the expert of Swedbank emphasized.
When in 2002 borrowing and depositing was largely equal in Estonia, by the end of 2008 loans constituted 175 percent of deposits. This imbalance created bubbles. By now this ratio has fallen notably and stands at about 145 percent. Banks are in excellent shape and the total picture hints at stability, Kitt emphasized.
“Also, the government debt burden is very small and the government has liquid reserves at its disposal. The balance is becoming more stable and we have a buffer to protect us by the end of next year. Estonia’s second-quarter economy expanded mainly on growing industrial output. I disagree that this was based on cheap labor or low-cost subcontracting. I have spoken with many businessmen and visited many plants and farms. In my opinion, Estonian producers have adapted to the new situation. I also think that the government’s public sector spending cuts helped the private sector to adjust. The plants were downsizing and becoming more efficient, but at the same time they were actively looking for new markets. While before the crisis Estonia exported 20 percent of its output, this figure today is much higher,” the Swedbank corporate banking head noted.
“Our competitive edge is not quantity - we actually produce quite ordinary items for all parts of the value chains of different economic sectors. Our main advantage is flexibility,” pointed out Kitt. “Return to reality has wiped out excessive demand, leaving behind high unemployment. Although it is no longer growing, it is dangerously high since our workforce out of 1.3 million people is about 690,000. Of them, 128,000 have no jobs. We cannot talk about stability before we have brought unemployment down to below ten percent.”
“Yes, we have gone through rapid economic growth, we are members in OECD, EU and NATO and, very soon, also the eurozone. I hope that further development will be more stable. We must have balanced structure in our economy as well. It is too risky to focus too much on high-tech or nanotechnology industries. I would therefore like to calm down the calls to move towards a knowledge-based economy and, instead, urge you to move more towards an integrated broad-based economy. Also, a knowledge-based economy needs basic skills on how to operate, let’s say, a bakery,” the expert remarked.
From 2004-2007, Estonia’s economy overheated and expanded at a rate of over eight percent annually, with inflation reaching ten percent in 2008.