Estonian Current-Account Gap Is Widest in 14 Years

From Bloomberg recently:


Estonian Current-Account Gap Is Widest in 14 Years

Estonia's current-account deficit swelled last quarter to the widest in at least 14 years as soaring wages and consumer borrowing spurred spending on imported cars and clothes.

The deficit, the broadest measure of trade in goods and services, widened to 17.9 percent of gross domestic product from 16.1 percent a year earlier and a revised 17.2 percent in the previous quarter, the Tallinn-based central bank said on its Web site today. The deficit is the highest since at least the first quarter of 1993, when the bank started giving quarterly figures.

Economic growth of 9.8 percent in the first quarter, the second-fastest pace in the European Union, helped trigger a 20 percent surge in wages in the period while credit growth of about 30 percent underpinned household spending. The widening deficit and faster inflation has raised concern the economy may overheat.

``The Estonian economy is living beyond its means,'' said Neil Shearing, an economist at Capital Economics in London, in an e-mailed comment. ``More needs to be done to slow domestic demand. The fiscal position could be further tightened and measures to curb rapid credit growth are needed.''

Estonia's biggest retailer, AS Tallinna Kaubamaja, more than doubled profit in the first quarter at its department stores and supermarkets. New car sales rose 49 percent, according to the association of car sales and service employers, AMTEL. Private consumption jumped 18 percent, the biggest increase in 14 years.

Deficit Outlook

Andres Saarniit, an adviser to the central bank, said the deficit is expected to ``decline in coming years, but still remain sizeable.'' The central bank revised up the 2006 current account deficit to 15.7 percent of GDP from an earlier estimate of 14.8 percent.

The Finance Ministry said it expects the current-account gap to widen further this year, citing fast growth in domestic demand and worsening competitiveness of industries where growing wages make up a bi part of overall costs. It also expects lower demand from abroad due to lower growth in Estonia's export destinations, the ministry added in an e-mailed statement.

Moody's rating service warned today the economy may slow more than expected if confidence slumps among borrowers and banks, which started tightening credit requirements in the first quarter.

Analysts said the risks to the economy were reduced by strong levels of foreign direct investment, which help cover the current account deficit.

``Some comfort is provided by the fact that the financing of the deficit seems to be okay, as 45 percent of the deficit was covered by FDI,'' said Mika Erkkila, a senior analyst with Nordea Bank in Helsinki, in an e-mailed comment.