TALLINN - Estonia's sizzling, credit-driven domestic demand needs to be cooled off in order to avoid the risk of interest-rate instability, Sweden's SEB, owner of Uhispank, warned last week from its headquarters in Stockholm.
Estonia's current account deficit is alarmingly large, and there is no willingness to tighten fiscal policy, explained the bank. What's more, the Central Bank has little opportunity to pursue a stabilization policy in a currency board system, the Swedish bank observed in its Baltic outlook for April.
Last year Estonia's banking assets grew 20 percent to 6.3 billion euros, a higher rate than in Latvia but slower than that in Lithuania.
At the same time fresh data has shown that while incomes grew significantly last year, household expenses only underwent a slight nudge upward.
The average monthly net income per household member was 2,789 kroons (178.2 euros), and expenditures per household member reached 2,540 kroons in 2003. Average incomes grew 12 percent, while expenditures increased only 3 percent, the statistics office reported.
It was not clear how, given the conflicting data, the Central Bank might curb domestic demand for cheap loans. The Bank of Latvia recently raised its lat-denominated interest rate to somehow slow down its overexcited loan market.
Curiously, one Estonian bank has taken matters in their own hands. On April 5 Sampo Bank announced that it would raise the minimum income requirement for its mortgage loans.
Starting from April 5, an applicant for a mortgage loan residing in Tallinn and the adjacent Harju county will be required to have a net minimum monthly income of at 7,000 kroons, up from 5,000 kroons previously.
All other Estonian residents must have at least 6,000 kroons in monthly income, bank officials said.
Margus Zuravljov, director of Sampo Bank's personal and retail banking division, said the change was due to a rise in average income and real estate prices and the resulting increase in average loans. In his opinion, the change will help reduce the risk of below average income people from assuming loan obligations that they could not meet in the long term.
Still, the proportion of compulsory expenditure continued declining in Estonian households last year, the statistics office said. Household members spent last year an average 46 percent of monthly expenditure or 1,158 kroons on food and dwelling.
However, due to higher than expected inflation this year expenditures could undergo a dramatic change.
SEB has predicted that this year's growth in consumer prices would be several times higher than last year's 1.3 percent. In the bank's opinion, higher excise taxes upon accession to the European Union, higher electricity and water fees, as well as rising food prices, will lead to inflation of 3.3 percent in 2004.
Next year even higher increases in prices could be in store, said the Swedish bank.
Yet at the same time there will be a gradual decline in Estonia's current account deficit to 11.5 percent of gross domestic product from last year's 13.7 percent due to a stronger trade balance, SEB predicted.
The bank's GDP growth forecast remains unchanged at 5.4 percent this year and 5.9 percent in 2005 on the assumption that the country's economic growth rate would pick up on growing exports.
Last year GDP growth amounted to 4.4 percent.
To Estonia's credit, SEB also noted that Estonia would receive in 2004-2006 a larger amount of structural support from the EU than other acceding countries - 505 euros per capita, or a total of 683 million euros.