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Monday, February 25, 2008

Estonia Trade Deficit December 2008

Well, the only news we are receiving on the economic front from Estonia at the moment certainly seems to be bad news. At the end of last week we had the Q4 2007 wage increase data, while today we have the December trade data. I quote the statistics office release:

According to the preliminary data of Statistics Estonia, in December 2007 the Estonian foreign trade turnover made up 22.4 billion kroons.a Compared to December 2006, the foreign trade turnover decreased 6% and, compared to November 2007 it decreased 19%.In December 2007 the exports were 9.3 billion kroons (42%) and imports 13.1 billion kroons (58%). Compared to December 2006, the exports of goods decreased 8% and the imports of goods decreased 4%. Compared to November 2007, the exports of goods decreased 22% and the imports of goods decreased 16%. The trade deficit was 3.8 billion kroons. In December 2006 it was 3.6 billion kroons and in November 2007 it was 3.8 billion kroons.

Imports are obviously decreasing as domestic demand (and reprocessing for export) declines. But crucially exports are down year on year by 8%, and the turnover decreased 6%.

Given the increased level of openness in the Estonian economy this is important. Basically if we can assume there will be no significant revival in domestic demand in the coming months (and if the Estonian government add to this by keeping a very tight reign on fiscal spending, then exports are the only possible growth area. But with relative prices as they are, it is hard to see how this can happen. Basically productivity increases and sector shifts cannot hope to compensate in any adequate degree for the erosion of price competitiveness we are currently seeing, and we may still be facing several more months - at least - of this. By that point the damage will effectively have been done (if it hasn't been already). I'm afraid ladies and gentlemen that the time for some very hard decisions on the currency peg front is fast approaching. I do hope that the IMF and the EU Commission/ECB are preparing some kind of contingency plan here. The big danger is that once all this breaks loose it can spread from one country to another like widlfire.

Many hold the view that since the Nordic banks have a strong stake in the Baltics’ economic future, a sudden Asian-style stop of funding would seem to be unlikely. The thing is, a sudden withdrawal of funding is not that likely, but what the countries in question need is a continuous injection of funding to cover the ongoing CA deficit. So even if the banks were willing to continue to increase lending, the question is what would the money be borrowed for? To pay for imports presumeably. And what would the Estonian banks offer as collateral if they are not creating loans to be securitised?

And anyway, since part of the adjustment programme involves a tightening of loan conditions inside Estonia, who is going to be able to do the necessary borrowing to attract in the funding needed to settle the monthly external account book? And if no one is able to borrow because the loan conditions are tightened, doesn't this in itself provoke a correction in the trade deficit, but in an extremely violent way?

I see Ott Ummelas in Bloomberg quotes Christoph Rosenberg this morning as saying that "risks of a 'hard landing' in Estonia, Latvia and Lithuania are 'real' due to rising trade imbalances in recent quarters". I couldn't agree more.

Incidentally, a piece of news is in this morning which is not devoid of significance for the future of Estonia's peg: the National Bank of Hungary today decided to remove the defended trading band and allow the forint to float freely.

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