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Thursday, April 9, 2009

Estonia's Trade Down, Unemployment Up As Recession Deepens

Estonia’s trade deficit narrowed to the lowest level in almost eight years in February as the deepening recession cut hard into consumption. The deficit shrank to 1.1 billion krooni ($93 million), the lowest since May 2001, compared with 1.6 billion krooni in January.

Exports fell an annual 26 percent and imports slumped 33 percent, according to statistics office data.

Having a very sharp fall in imports is, of course, one way to close the trade deficit, but the fall in living standards involved in doing it this way is hardly optimum, or enjoyable.

Unemployment Rises Sharply In March

As consumption falls, and with it demand for products and services, so unemployment rises, and at the end of March 54 979 unemployed were registered as unemployed with the Estonian Labour Market Board, an 18.5 percent increase on the February number and an estimated 8.4% of the economically active population. In the last year unemployment has now increased by 220 percent.

At the end of March 9445 young people in the ages of 16-24 and 14 188 persons of 50 or over were registered with the Labour Market Board. 53.6 percent of those registered were men. Registered unemployment was highest in Võrumaa (13.2%), Ida-Virumaa (12.7%), Valgamaa (11.9 %) and Põlvamaa (10.5 %). The lowest levels of unemployment were in Tartumaa (6.7%), Hiiumaa (7%) and Harjumaa (7.2%).

House Price Fall Continues

Median prices of apartments fell an annual 38 percent in Q1 2008 - to 10,495 krooni ($886) a square meter, according to preliminary data from the Tallinn-based Land Board. This compares with a 20 percent decline in the fourth quarter, and means prices have now almost halved from the peak hit in the second quarter of 2007.

The slump in prices adds to signs that what is now Estonia’s worst recession since independence in 1991 is deepening significantly. Rising unemployment and stagnating wages have made Estonians more reluctant to spend, and with retail sales falling an annual 18 percent in February, (the biggest drop on record dating back to 1994), there is little to cheer about. And indeed Estonian consumer confidence fell to a record low in March, according to research unit Konjunktuuriinstituut.

Property and land sales fell an annual 40 percent to 5,316 transactions, the lowest since the second quarter of 2003, the Land Board data showed. The value of sales more than halved from a year earlier to 4.7 billion krooni.

Tourist Numbers Drop

Tourism was down in February 2009, with only 121,000 tourists making overnight stays, 15% less than in the same month last year, according to Estonia Statistics.

In February 58,000 domestic tourists and 63,000 foreign tourists visited parts of Estonia. 77% of foreign tourists stayed in Tallinn, 7% in Pärnu and 5% of Tartu. The number of foreign tourists in Tallinn was down 14%, in Tartu and Pärnu visits were up by 2% (in both cities). In February compared to the same month of the previous year, the number of foreign tourists from Estonia’s main partner countries in tourism — Finland, Russia, Latvia and Germany — decreased. The number of tourists from Sweden remained more or less constant.

Inflation Falling, But We Aren't In Full Fledged Deflation (Quite) Yet

Estonia’s inflation rate fell in March to the lowest level in almost five years as the Baltic nation’s worsening recession and declining fuel prices cut demand. The rate dropped to 2 percent, the lowest since April 2004, from 3.4 percent in February. Prices fell a monthly 0.5 percent.

So while headline inflation is falling year on year, and will soo be in negative territory, there is still a long way to go. In fact both the general and the core price index have been falling for some moths now.

But remember that the general tendency in the Eurozone is also deflationary, so prices will be falling elsewhere too, which simply means that there is rather a lot of heavy lifting still to be done on the wage and price front in Estonia, in fact over 90% of the "correction" still lies out in front in these terms.

Baltic Countries Downgraded

Fitch Ratings cut the credit ratings for Estonia, Latvia and Lithuania one notch, citing growing risks to Latvia’s international bailout which could spill over into the other two countries. Latvia’s rating was lowered to BB+, one level below investment grade, from BBB-, while Estonia’s rating fell to BBB+ from A- and Lithuania’s to BBB from BBB+, the rating service said in a statement today. All three Baltic countries had a negative outlook, meaning further downgrades are possible. This detail is not unimportant for Estonia, since the ECB has a rule (temporarily suspended at present) that it will not accept assets as collateral which do not have at least an A- rating from one credit rating agency. So any languishing in the BBB+ range will make euro access more difficult.


TT said...

As I predicted in one of my earlier comments to your post, lot of "investors" are just waiting for the cheap realestate which will be thrown to the market after foreclosures.

Recent news indicate that more and more foreign and local investors are taking interest in such property.

Everything thus far is following the cenario I have predicted ...

Anonymous said...

Hi Edward,

Christoph Rosenberg said in a Swedish TV program that since the Swedish government so much lobbied against the Latvian devaluation, they kept the peg. Most likely the Swedish goverment is also in Estonia lobbying against devaluation, this way they think they can save Swedbank and SEB. I send the link to the program for those of you who understand Swedish: http://svtplay.se/v/1527754/dokument_inifran/bankfallan. P.S. I have also noted that Estonians have a rude way of expressing themself. I'm from Finland and we are not known for sofisticated social skills but Estoninas seem to be even worse... Also I have noted that Estonians still do not want to admit that their country is in trouble, they expect everything to be like two years ago. Unfortunately, both Swedbank and SEB have run out of money so they can not rescue the economy.

Anonymous said...

To Edward!

I'm an business person, lived in abroad for many years, now in Tartu, due to my magister studies and - I have to agree with all statements regarding somekind of protectionism in Estonia that opposes to whatever views differing from popular parties ones here.

If popular parties agree - devalutation is not discussable - everybody who does not agree, or is opposing are seen as enemies of state (or just plain stupid).

But it is not plain "devalutation issue" I would put it as "parties control" over peoples, even educated ones, understanding of all world matters (as in theoretical, as in practical siences). Method of working for such a mechanism is in media (public opinion), and governing parties control over it.

I, an Estonian, am not rude :)!
Variety of opinions is important, scientific discussions is important! And I, am humbely greatful to this site for opening many details of economics for me.

Current processes in our economy is very worring, and goverment is discussing-discussing, nothing happens, they cant decide! At the moment whatever decision would be good, just decide something.

Lugemist, Kristjanile: http://www.lhv.ee/forums/index.cfm?id=169447&start=1451

Anonymous said...

Hi all,

Pls, have a look at http://www.bbn.ee/Default2.aspx?ArticleID=f56fab58-b599-4729-99b1-dc8c1d28709d&ref=lastadd about the Baltic exchange rates.

Edward Hugh said...

Hello Anonymous,

"Pls, have a look at.....about the Baltic exchange rates."

Thanks for the link. I don't know enough about the workings of the Riksbanken to form an opinion, but what does strike me as strange is that Swedish banks are forcefully pushing the idea the Baltics should not used exchange rate policy to ease economic adjustments while the Riksbank itself sees such a policy as an important ingredient in the Swedish policy arsenal. Indeed part of the reason they are not in the eurozone is this one.

And they recently took leading Princeton academic Lars Svensson onto the board as deputy governor:


Svensson is a long time colleague of both both Paul Krugman and Ben Bernanke, and is in fact a specialist in anti-deflationary policies. And guess what, his main policy tool for escaping a deflation induced liquidity trap (which may well be where Estonia is headed), is, you got it, devaluation:


Well, this is complex economics, and perhaps a bit beyond the present debate taking place in the Baltics, but still, in the Risbank case there does seem to be an element of preaching one thing in one country (someone else's) and preparing to practice another thing in another (your own).

Anonymous said...

Hi all,

I continue about the exchange rate. It seems inevitable that Estonia has to devaluate after the devaluation of LAT. Have you noted that Latvia needs to defend the currency rate? http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a7vGwC1CcC6I It makes of course no sense to use money this way when the country is abot to go bankrupt. When will IMF realise this?

Edward Hugh said...

And is this the liquidity support point you were getting at:


Feb. 27 (Bloomberg) -- Estonia’s central bank will be able to borrow as much as 10 billion kronor ($1.1 billion) against Estonian krooni from its Swedish counterpart to boost confidence in the Baltic country’s financial markets, dominated by Swedish banks.

“The financial systems in Estonia and Sweden are closely linked,” said Riksbank Governor Stefan Ingves in a statement on the precautionary agreement on the Stockholm-based central bank’s Web site. “The Riksbank is therefore helping to reinforce Eesti Pank’s ability to safeguard financial stability in Estonia.”

Rising overdue loans have increased investor concerns about worsening profitability for Stockholm-based Swedbank AB and SEB AB, the two biggest lenders in Estonia, Latvia and Lithuania. Estonian overdue loans as a share of total credit rose to 3.6 percent in January, the central bank said this week. It forecasts bad loans will rise to as much as 6 percent of total loans this year. More than 95 percent of Estonian banking assets are held by Nordic banks.

Swedbank said in a statement that operations in the Baltic market are a “key part” of its business and that it has a “long-term commitment” towards Estonia. The bank had its credit rating cut to A1 from Aa3 by Moody’s Investors Service today, which cited the risk of a “substantial increase in impairments” from Swedbank’s operations in the region.

Edward Hugh said...

Here some background on how Sweden's government is coming to the rescue of its "troubled" banks.


Sweden’s government said on Feb. 3 it will pump as much as 50 billion kronor ($6 billion) into the banking system to revive lending and steer the economy back to growth. The program marks the country’s biggest bailout of its financial markets since the early 1990s, when the collapse of the real-estate market led to soaring loan losses at banks.

The government doubled its bank deposit guarantee to 500,000 kronor in October and has increased credit to small and large companies through state-owned lenders. It has also given companies an option to postpone tax payments and introduced a 28 billion-krona rescue package for the auto industry, which includes Ford Motor Co.’s Volvo Cars unit and General Motor Corp.’s Saab Automobile division.

The Riksbank has pumped 330 billion kronor of loans denominated in dollars and kronor into the financial system since October to revive lending. The government has this year pledged about 40 billion kronor, or 1.3 percent of GDP, to stimulate the economy. Measures include tax cuts and spending on infrastructure, schools and health care.

Edward Hugh said...

I don't know who Heido Vitsur is, and hove no interest in the Estonian Development Fund, but I do pretty much agree with this version of his opinions which appeared in Eesti Päevaleht. Always assuming you remain adamant in not devaluing, of course.


Estonia is 20 pct more expensive than international competitiveness would allow and even modest inflation is harming economy’s recovery, Heido Vitsur, an economy expert at Estonian Development Fund told Eesti Päevaleht.

“Deflation is usually something that is terrifying. But Estonia has no other way than deflation is it doesn’t want or can’t devalue the EEK,” Vitsur said.

“Estonia wasn’t competitive even years ago and it’s so even less with its expenditures and productivity. The level of expenditures can be taken down by devaluation or deflation in the short term. In longer perspective the productivity growth will also help, but it’s not possible to count on it in the time of sharp crisis,” Vitsur said.

He brought out three reasons why it’s not possible to compare Estonia to other countries when talking of deflation.

First, not a single country besides Estonia has set euro as their first priority, but coming out of the crisis.

“These two are far from being concurrent. Of course we’re talking of how big aid packages can be used in one or other case,” Vitsur said.

“The other reason is that Estonia is among those countries that let huge consumption boom on foreign credit to evolve. Accidentally we’re among weak countries in this group and can’t hope on measures which are used by GB, US or even Ireland. It is, to take huge loans to enliven the economy. No one is lending money to us for they don’t believe in our capability to service bigger national loan than we already have. So the 3 pct deficit level is already given by the size of reserves and borrowing capability (considering that the crisis won’t be over this year),” Vitsur said.

“Thirdly – if Estonia had understood importance of a policy that recons with the cyclic nature of economy couple of years ago, it would have given us more liberty is using economy’s incentive programs and we wouldn’t have increased our expenditures to such level from which coming down is painful and complicated,” the economy expert said.

Ultrafast halting like ours is complicated and may bring along downwards spiral which is difficult to control and also social tensions:” But the main problem, as mentioned before, is elsewhere – Estonia’s economy was uncompetitive years ago with its high expenditures that didn’t match productivity,” Vitsur said.

He said that the situation hasn’t improved, rather worsened.

“The currencies of nearly half of our trading partners have devalued sensibly in past 6 months and that has worsened our competitiveness and hopes for recovery,” Vitsur said.

Edward Hugh said...


"And those unproductive (asking only 300 CHF for the same work costing in Switzerland 1400 CHF) lazy bastards should devalue to regain it?"

Well,as it happens, the Swiss National Bank have just adopted CHF devaluation as an official policy objective, although this is more because they don't want deflation than to regain lost competitiveness :)

"If you look around Estonia you see following number of GDP declines: devalued Sweden (March/March) -10,5%, Eurozone member Finland (Feb/Feb) -11,3%, Estonia Q1/Q1 -15,6%, Latvia Q1/Q1 -18%, Russia Q1/Q1 -7% etc."

Look, the proof of the pudding will be in the eating, when the recovery comes (which may be in H2 2010 or early 2011 by the way things are looking now - you saw the US April retail sales numbers yesterday I suppose). The only real driver of growth in most countries will be exports, so those who have devalued and are well positioned should do better. But we will have to wait and see, and meantime it can be quite a long wait.


"But you must keep in mind he have historically been close to Savisaar (opposition leader) and therefore his opinions are usually somewhat critical to the government."

Apart from societies being democratic I have no political opinions whatsoever when it comes to doing economics, so I screen out what party bla bla bla, or whatever. I take opinions on their economic merits, and he was more or less talking sense (if you iron out one or two of the errors in translation).

Edward Hugh said...

I am definitely an armchair economist, although to avoid such criticism I sometimes stand to key in data. I find that in the days of the internet I can see the world better from my armchair than ever I can from hopping on a plane, and like Thomas Jefferson before me, I find that every time I get really, really lucky, I am always seated at my desk working.

Edward Hugh said...

Hi again,

"Up to the year 2007 (2008) this "another planet" was also consumption in the CEE region."

That's it, you've got it. And all this is now unsustainable. Hence the correction, and hence also the fact that Germany, Sweden and Austria find their economies collapsed (the so called surplus countries, who finance the borrowing and then sell the exports). They have to start finding new customers and the CEE have, as you suggest, to start saving rather than borrowing (net). This also means exports.

This is why I think "the recovery" will be rather a long time arriving.

Edward Hugh said...

Incidentally, I'm just doing a study on Slovakia (you will find the post on Afoe tomorrow). The Q1 GDP data is a nightmare. 11.2% contraction q-o-q (Eurostat number, may be inaccurate due to lack of seasonal data).

I want to make two points here.

S&P are generally positive in their Slovakia outlook, but see two challenges ahead in terms of structure.

1) Autos (obvios): “There is ... an increasing risk to the economy from Slovakia's high exposure to the auto sector”.

2) The euro (more important): “Because the conversion to the euro was undertaken when the Slovak currency was at a peak, Slovak exports are now somewhat penalised comparedwith Czech or Polish exports in terms of competitiveness”.

I personally can't stress how big an issue I think this is.

Secondly, Societe Generale stress your point (Kristjan) that the Slovak economy is very open, having become impressively more so in the past few years. Slovakia is the third most open economy in the EU after Luxembourg and Malta, according to Eurostat data (in the sense of a “small open economy”). With respect to the trade of goods, Slovakia is even the most open economy in the EU. That reflects its small size (Slovak GDP represents only 0.6% of EMU-16 GDP, or some 2.4% of German GDP). SG argue that, given Slovakia is so small and open, much of the domestic demand will be met by imports from its “cheaper” neighbours (notably Hungary and Poland). So Slovakian growth will have to rely more on investments for companies (logically who are doing exports so they can pay for there imports.

I think all of this applies to Estonia. Slovakia may now face a difficult time (like Portugal) of internal price adjustment having entered the euro at too high a rate.

On a side issue Slovakia issued a 2 billion euro, 2015-dated bond yesterday at 170 basis points over mid swaps. So this can give you some idea what new eurozone members can expect in the future, somewhere up there in the spreads with Greece and Ireland.

Slovakia is rated A1 by Moody's Investors Service, A+ by Standard & Poor's Corp. and A+ by Fitch Ratings.

Edward Hugh said...

"It has the same logic and morality"

Morality! Morality! And what about the morality of condemning people in Latvia and Estonia to mass unemployment, to losing their homes, possibly even to provoking the break up of their families as people are forced to leave their homes and countriesd in search of work possibly even entering irregularly a country (Germany) which shows so much solidarity it does not even let them come and work legally.

What about the morality of forcing countries (Hungary and Latvia) into ridiculous fiscal squeeze policies which only fuel contractions, instead of printing EU bonds to collectively lend them a helping hand and encouraging them to restructure the debt - as they will eventually have to.

My feeling is that the people who wrote the lines you quote have quite simply no idea whatever what is going on, or what all this is about. Still, words are cheap I suppose.

And remember, I am a European Federalist. But fortunately I also understand some basic economics.

Edward Hugh said...

"For the euro to be devalued, the major trading partners of the eurozone would have to see their currencues increase in value."

Well, this all takes us back to Krugman's point about which planet you want to export to. Someone is going to have to run CA deficits given all the new surplus countries we have in the East. Indeed the whole EU 27 is going to become a surplus region.

Basically the other part of the answer here is a redoing of Bretton Woods II - to incorporate currencies like the Brazilian Real, the Chinese Yuan, the Indian Rupee, and the Turkish Lira. Then, to some extent these rising economies can revalue upwards to help take some of the strain from a struggling EU and US.

Have a look at my India post on Afoe yesterday.

Morality, paf!