Report highlights lessons learned among private borrowers

TALLINN - Loan demand by private individuals in the Baltic States is on its way to recovery, although the developments of loan portfolios have been very different by country, as the Baltic Household Outlook, compiled by SEB, shows, reports LETA.

In 2012, the home loan balance in Estonia decreased by 0.6 percent and in Lithuania by one percent. In Estonia and Lithuania, it could be assumed that from the end of 2013, the currently decreasing loan portfolios start to increase. In Latvia, the home loan portfolio is still quickly decreasing (11 percent per year), showing that the bottom of the home loan portfolio has not yet been reached.

In Estonia, new home loans are given in volumes that are close to the level of new loans in 2003, and in Lithuania to that of 2004. Both in Estonia and Lithuania, the readiness of families to purchase housing with the help of a loan is increasing, although the lending activity is still very far from the volumes of the years 2005 - 2007.

Compared to the home loan, Baltic families are significantly more conservative when it comes to taking consumer and other loans. The statistics show that the consumer loans of Lithuanian people are steadily decreasing by five percent per year; the balance of consumer and other loans of Estonians decreased in the first six months of 2012 by seven percent when compared with the same period year ago, and even more in the second half of last year. Therefore, an increased demand for consumer loans currently seems unlikely.

In all three countries there is a clear need for improving the living conditions, although lending is restricted by many families’ rather conservative expectations for income maintenance or growth, and the negative experience with loan commitments from the recession period. In case the insecurity from the European debt crisis does not considerably weaken Estonians’ demands for loans, loan demand will grow significantly in 2013.
“In Lithuania, the upturn of the loan market will be somewhat more modest,” said Triin Messimas, development manager of private loans at SEB Estonia.

As a result of the crisis, the borrowing capacity of most families is lower than ten years ago and this mostly influences applying for consumer loans. On the one hand, the conditions for small loans are somewhat stricter; on the other hand, there are more potential borrowers who do not think it is right to finance their consumption expenditures with loans. When compared to earlier periods, people know more about interest rates and the amount of costs linked to lending,” said Messimas.

Labor market gains
The Outlook also highlights that in all three Baltic States, households are still in asset accumulation mode - saving - along with signs that borrowing is recovering. The reason for the recovery is the continuing improvement of the situation on the labor market and the expected accelerated growth of real wages. Post 2008, unemployment in Estonia can once again be expressed in single numbers.

In 2012, employment increased in all three Baltic States while unemployment decreased. In terms of decreased unemployment, Estonia was ahead of the other two Baltic States. In the fourth quarter of last year the unemployment level (number of unemployed) in Estonia fell by 2.1 percentage points to 9.3 percent. In Latvia, unemployment fell in the last quarter of 2012 by 1.2 percentage points to 13.8 percent, while in Lithuania the level of unemployment was 13 percent, which is 0.7 percent lower than in the same period in 2011.

“The decrease in the level of unemployment is due to the creation of jobs as well as emigration. Presumably, job creation will continue, albeit at a lower rate, and unemployment may decrease at about the same rate as employment increases,” said SEB Latvia’s social economy expert Edmunds Rudzitis.

It is estimated that the wage increase will pick up speed.  Analysts for the SEB Baltic Household Outlook expect the wage increase in all three Baltic States to pick up speed. The wage increase is influenced by monthly changes in the minimum wage. In January 2013, the monthly minimum wage in Lithuania increased to about 290 euros per month, and in Estonia to 320 euros. In Latvia, the minimum wage has remained unchanged at around 285 euros.
Presumably, the minimum wage in Latvia will increase to 320 euros next year.