Debt drops as corporate profits rise

TALLINN - Estonia’s external debt has declined 15 percent from its boom-time peak, Eesti Pank said last week in its analysis of Estonia’s 2010 balance of payments, reports news agency LETA. The resumption of economic growth did not cause notable changes in Estonia’s 2010 balance of payments account. Despite remarkable improvements in the 4th quarter of 2010, investment activity remained languid last year and fixed capital investment decreased further year-on-year, the central bank said.

The crisis-time decline in inventories, however, was replaced by an increase. Thus, looking at the entire year, investment picked up in its broader sense, that is, including the change in inventories. Other things equal, the current account balance would have deteriorated. This did not happen, since domestic savings grew faster, and the surplus on the goods and services account even increased. This was mainly because the profitability of Estonian businesses has expanded to a great extent.
The profit of foreign-owned enterprises grew faster than the average and the estimated capital return outflow increased by about three times, which in turn markedly reduced the current account surplus. These amounts were reinvested in the Estonian economy, so there occurred no actual movement of funds. As a result, the current account surplus as a ratio to GDP contracted from 4.5 percent, recorded in 2009, to about 3.6 percent in 2010.

A banking-sector-led decrease in foreign liabilities was typical of the entire year. The debt burden was mainly reduced by the lowering of the banks’ minimum reserve requirement, which formed part of euro-adoption preparations. Since domestic saving has been on the increase for the past few years, net external debt has been shrinking more rapidly. Net external debt accounted for around 25 percent of GDP at the end of 2010.