Future of the Estonian economy unclear

  • 1998-09-03
  • By Urmas Maranik
The last year has been an uphill struggle for most of the banks in Estonia, as well as investment funds and the Tallinn Stock exchange. This has taken a toll on Estonia's international reputation as a secure destination for investors.

Various economic analysts have predicted a collapse, or at least a major crisis for the Estonian economy since Oct. 4, 1997. Erkki Raasuke (ICM conference speaker), the newly promoted financial director of Hansabank looks at the situation differently.

"I don't believe in a crisis in the Estonian economy, taking into account also the definition of crisis. A crisis is an irreversible and uncontrollable process, where things go their own way is very unlikely for Estonia," Raasuke said. "But it is easy to create a crisis situation in Estonia, as people are very sensitive to all kinds of negative information."

"At the end of 1997, the four or five major economic indicators, on which the assessment is based, did show that the element of crisis was there, but the overreaction of the media, especially in the Nordic countries distorted the actual positions for the public."
According to Raasuke, at the moment the Estonian financial climate is mostly influenced by the fact that the banks have increased their loan portfolios quite considerably.

Since the end of last year the economic circles in Estonia have brought up the issue of possible kroon devaluation, which would break the crucial bond between the Estonian kroon and the German mark.

This has been a theme which the financial world in Estonia is somewhat afraid of discussing in public as the 8:1 rate to the German currency has been crucial for Estonia's development.

Raasuke said he thinks the kroon devaluation is unlikely to take place. He supports the opinion of Bo Kragh, vice president of Svenska Handelsbanken, "A normal state has three sacred symbols of statehood, but Estonia has four. In addition to the flag, coat of arms and the anthem Estonia relies on the 8:1 rate of the kroon to the German mark."

"The Estonian central bank has done a great job during the first couple of years after the monetary reform in June 1992. The current strong position of the Estonian currency is much to their credit, as well as the openness of Estonia for financial investors," Raasuke said.

Raasuke said he thinks if this rate between the kroon and the mark was to disappear, volatility would characterize the kroon's rate in the future.

"Estonians are quite sensitive to various economic indicators. The strong work of the central bank in maintaining this value of the domestic currency has laid the foundation for the Estonian financial environment," Raasuke said supporting this monetary policy.
"The ruble devaluation in Russia, which is greatly influenced by the massive withdrawal of assets by the foreign investors, who are all leaving the Russian markets due to the unfavourable business climate the recent changes implemented by the Russian government have brought about, is having an effect on Estonia as well," he said.

"The exporters suffer from the loss of markets, on the other hand the transit going through Estonia is aided by the Russian currency's decline in value."

There are varied opinions floating around in Estonia, concerning the effect the situation in the neighbouring country has on Estonia. "In my mind these opinions shouldn't be taken so lightly, the seriousness of some of them is not overstated," Raasuke said.

"The great economic year of 1997, which saw the growth of Estonia's gross domestic product at 11.4 percent, which was more than expected by most analysts, was not as illusive as some like to believe due to the role the stock market played in the GDP figure," Raasuke said.

"The real growth of GDP has been higher in the first two quarters of this year and the growth of the financial sector has been even better, but one should not underestimate the significance the monetary sector has," Raasuke explained.

Raasuke gives a positive evaluation of Estonian economic development in the future. "Estonia's economic development at the moment is difficult to predict, but in my opinion no major setbacks should hamper the progress."