Estonian May Inflation Rate Rises to 5.7 Percent on Fuel Prices

From Bloomberg recently

Estonian May Inflation Rate Rises to 5.7 Percent on Fuel Prices


une 7 (Bloomberg) -- Estonia's inflation rate rose in May, driven by fuel and housing costs, moving the Baltic state further from its goal of adopting the euro.

The annual inflation rate increased to 5.7 percent from 5.5 percent in April, the statistics office based in the capital Tallinn said on its Web site today. Prices rose a monthly 0.7 percent, with transport costs rising 2.5 percent from April.

``The inflation pace was set by increases in fuel prices,'' said Anne Karik-Uustalu, an economist with Sampo Pank in Tallinn, before the report.

Estonia has already been forced to drop plans to adopt the euro because the inflation rate has remained above euro-entry rules. An unemployment rate at a 15-year low and a 20 percent jump in wages in the first quarter boosted spending on housing, food and cars.

To adopt the euro, the nation must keep inflation to within 1.5 percentage points of the average 12-month inflation rate of the three European Union nations with the slowest consumer price growth. That rate in April was 3 percent, while Estonia's rate was 4.7 percent in the same month.

Inflation will continue to accelerate this year amid a labor shortage and fast economic growth, the Finance Ministry and central bank have warned.

Moving Targets

The Cabinet of Prime Minister Andrus Ansip last week cut budget surplus targets in 2008-2011 from 1.5 percent of gross domestic product to 0.5 percent, prompting criticism from Central Bank Governor Andres Lipstok.

International institutions, including the International Monetary Fund, are also concerned that the $15.1 billion economy may overheat.

Reining in government spending is among the few tools available to Estonia to control price increases because the local currency, the kroon, is pegged to the euro in the exchange-rate mechanism.

Estonia Central Bank Says Wages, Prices Threaten GDP

From Bloomberg Recently:


Estonia Central Bank Says Wages, Prices Threaten GDP

By Ott Ummelas

June 19 (Bloomberg) -- The Estonian central bank said soaring real estate prices and ``tension'' about wage increases risk destabilizing the economy and fast inflation may keep the Baltic state from adopting the euro before 2011.

The bank forecast in April the $15.1 billion economy will grow 8.4 percent this year, following last year's 11.4 percent expansion, and slow to 6.5 percent in 2008. The central bank today said there was a risk of an even ``sharper'' slowdown in growth.

``Estonia's economic growth'' will ``slow gradually as projected in the forecast,'' the Tallinn-based central bank said in its quarterly economic policy statement. ``However, the risk of a somewhat more abrupt adjustment in the future has increased.''

Estonia's inflation and a widening current-account deficit, at 14.8 percent of gross domestic product in 2006, has raised concern among foreign investors and credit agencies earlier this year that the $15.1 billion economy may overheat, triggering a sudden decline in growth. Estonia delayed euro adoption twice last year as economic growth caused inflation to accelerate.

Prime Minister Andrus Ansip said last month in an interview that he expects the country to slow inflation enough by 2010 to switch to Europe's common currency in 2011.

Wage Risk

The central bank also said that the inflation rate, at 5.7 percent in May, is still too high and the risk of a slowdown in wage growth has increased after a 20 percent increase in average wages in the first quarter. It expects consumer prices to rise 5.1 percent this year, well above euro entry criteria, after 4.4 percent in 2006.

``The `soft landing' is still a much more probable scenario than a `hard landing,' '' Deputy Governor Andres Sutt said in an interview today.

He said that a ``soft landing'' would require wage growth to fall into line with productivity increases and credit market growth to become more sustainable.

``We will know by the autumn whether the adjustment of the economy has become permanent,'' he said.

The central bank said labor costs grew ``considerably faster'' than the economy in the first quarter of 2007, which ``refers to decreasing competitiveness and possible stronger inflationary pressures.''

Real Estate Risk

The real estate market was most at risk because of high indebtedness, while developers may have overestimated the strength of demand during the period of rapid growth, it added.

House prices in Estonia's capital, Tallinn, jumped 24.5 percent in the first quarter from a year earlier, the second- fastest growth globally after neighboring Latvia, according to data published last month by Knight Frank residential research in London.

The central bank also said that the government's budget strategy is too ``lax.''

Last month, the cabinet approved a four-year spending plan last week, cutting budget surplus targets in 2008-2011 from 1.5 percent of GDP, announced during a visit by the International Monetary Fund's mission, to 0.5 percent of GDP.

Russian Minority in the Baltics

From Bloomberg recently:

Baltics' Russian Integration Engulfs EU in Disputes

By Leon Mangasarian and Ott Ummelas

July 31 (Bloomberg) -- Aleksei, a Russian in the Estonian capital Tallinn, longs to become a citizen of the Baltic state, where he was born. There's one snag: The 31-year-old taxi driver, who asked that he not be identified by his last name, failed the language exam when he applied for citizenship.

Difficulties integrating ethnic Russians in Estonia and Latvia -- former Soviet republics whose populations are one-third Russian -- are contributing to tension with Moscow. Russians rioted in Tallinn over the relocation of a Soviet World War II memorial in April, leaving one dead and 153 injured. Pro-Kremlin protesters in the Russian capital replied by attacking the Estonian embassy.

Since Estonia and Latvia joined the European Union and North Atlantic Treaty Organization in 2004, any spat with the Kremlin risks becoming an international crisis, adding to disagreements over issues such as U.S. plans for a missile-defense system in eastern Europe.

``The EU is now engulfed in the historic disputes that these countries have with Russia,'' Oksana Antonenko, senior fellow and program director for Russia at the London-based International Institute for Strategic Studies, said in an interview on July 27.

Perceived threats from Russia -- and 20th-century history -- fuel demands in the Baltic states for stronger security guarantees from NATO, the EU and the U.S.

Retaking Control

The Soviet Union occupied Estonia, Latvia and Lithuania in 1940 under a secret agreement with Nazi Germany. From 1941 to 1944 they were occupied by Germany, with the Soviets retaking control in 1944 until the countries regained their independence in 1991.

Hundreds of thousands of Russians settled in the region during the Soviet era. Estonia and Latvia didn't grant these Russians automatic citizenship after independence. Instead, the two countries require applicants to pass language and other citizenship tests.

About 29 percent of Estonia's 1.3 million people belong to the Russian-speaking minority. Half don't have Estonian citizenship; and according to official figures, 126,000 of these people are stateless and have no passport.

In Latvia, 36 percent of the 2.3 million people are Russians, Belorussians or Ukrainians; and 424,000 are stateless or have ``non-citizen Latvian passports.''

Free of Contention

Things are different in Lithuania -- the third Baltic state and also a NATO and EU member -- where 6 percent of the country's 3.4 million people are Russian. Lithuania gave citizenship to all residents, and the country is largely free of Russian minority contention.

Alexander Rahr, at the German Council on Foreign Relations in Berlin, says the EU is partly to blame for Estonia's and Latvia's ethnic strains, because it didn't demand better integration policies before letting both countries join.

``If the EU had helped win over Estonia's Russians for its values, the chance for Russia to use these people for dirty games would be marginal,'' he said. ``Of course Russia will try to use a radical minority in this group to raise tensions.''

Some analysts, though, say granting citizenship to Estonia's Russians might have delayed EU and NATO entry.

``The homogeneity of the Estonian community allowed for very painful reforms to be carried out fast,'' said Andres Kasekamp, the head of the Estonian Foreign Policy Institute. ``The Russo- phone community would have undoubtedly voted for left-wing political parties, which would not have favored rapid economic reform.''

`Discord and Distrust'

Antonenko said Estonia and Latvia must accept some responsibility for the tension because they dragged their feet on integrating the ethnic Russians and ``are not prepared to overcome old rivalries and share the EU spirit,'' she said.

When Estonia relocated the war memorial from the center of Tallinn to a cemetery on the edge of the capital, Putin criticized the move as sowing ``the seeds of discord and distrust.''

Putin followed his words with action. Transit of goods from Russia, mostly oil and oil products, fell 22 percent in May and 15 percent in June, Estonian officials said. Several Estonian companies, including AS Kalev, a 201-year-old confectionery maker, have said exports to Russia had to be halted since the start of May because of a boycott by Russian retailers.

Estonia was also hit by attacks that disabled Web sites, which Estonian President Toomas Ilves said were traced to the Kremlin. The Estonian government called on NATO to defend it against Russian ``cyber attack.''

Rally Voters

Masha Lipman, a political analyst at the Carnegie Moscow Center, said Putin is using the spat with Estonia to rally voters before Russia's March 2008 presidential election.

It's ``easy'' to create ``this sense that the Baltics are our enemy and we should not allow them to disrespect us like this,'' Lipman said.

Last month the U.S. warned Russia it had to handle its ``deep and difficult'' relations with the Baltic states ``in an honest and civilized way.''

``The past is not forgotten, but it need not determine the future,'' U.S. Assistant Secretary of State Daniel Fried said June 14 in a speech on the Baltic states in Washington. ``Threats, attacks, sanctions should have no place'' in the countries' relations with Russia.

For Tallinn taxi driver Aleksei, there may still be a happy ending.

``I am learning Estonian again, and at some point I want to try applying for Estonian citizenship again because this is my home,'' he said. ``This is where my roots are.''

Migration in the Baltics

I am back from Barcelona with and ready to slowly pick up the pace again. I am going to start easy and leave the heavy stuff for some later posts in the beginning of next week. One of these posts will be on my view of the recent flurry on rising bond yields and global interest rates. Will the trend linger? How far will rates go? and is Greenspan's famous bond market conundrum finally unravelling? All these vexing questions will be answered here at Alpha.Sources (ahem, attempted I think :)) next week so stay tuned.

For this one I really only want to present one bar-graph for you in the spirit of the proverb that a picture says more than a thousand words. Consequently, the graph below plots net migration in the Baltic states (Latvia, Lithuania, and Estonia) from 1995 to 2005.

Now, to put all of this into context you might want to head over briefly to Demography.Matters where I posted recently on the economic convergence/catch-up process in Eastern Europe. In many ways, the general analysis quickly converged on the nature and availability of human capital which is becoming an increasing scarcer ressource. This is mainly due to two factors and in some countries three. The two factors which are common across the region seems to a structural mismatch on the labour market with a lot unemployed people in lower value added sectors and a very tight labour market in high value added sectors. Secondly and more profound is the very rapid and essentially unprecedented speed by which these countries have ventured throught the demographic transition. The third factor represented by migration does not present the region's countries with equal effects and as such this is the point of this entry. This is a case in point in terms of the Baltic countries where there are considerable differences between the reality in the respective countries. Of course, the relative large negative net migration in terms of Lithuania should be seen in the light of the fact that it has a comparatively larger population than Estonia and Latvia. Since the Y-axis shows real numbers it obviously biases the result. However, there is still a clear trend to be inferred I think. Whereas Estonia and Latvia have managed to decrease the negative migration flow in the last five years it has actually accelerated in Lithuania. In Estonia, the last five years even show a small positive net migration rate even if it is ever so tiny.

The bottomline here seems to be clear. The Eastern European countries face, on a whole, a tremendous challenge in terms of human capital. This relates to a general mismatch between the desired economic activities (high value added) and the educational composition of the labour force. Yet, more worryingly labour is set to become a regionwide scarce ressource and in the high value added sectors it already epitomized by very tight labour markets in the service sector on a region wide scale. Also, there is the perceived drainage of well educated young people to Western Europe. I say perceived here since the dynamics are very different across countries and also subject to change very quickly as labour markets tighten and wages increase in the domestic markets.

As a litmus test to discern which countries are better at creating employment and opportunities for people net migration seems to be a very important indicator. In this light there is a clear difference between the Baltic countries where especially Estonia seems to be fairing much better than Lithuania and also Latvia. This does not mean that complacancy is warranted though. My guess is that the inevitable flipside to the capacity constraints, which are obviously materialising themselves with the whopping increase in labour costs as a proxy, will soon emerge as a real ceiling for economic growth and thus convergence. Quite simply the labour supply will be perfectly inelastic in the long run which again means that in stead of worrying about soaring labour costs now we should really worry on what comes next after that. And now I guess I have already opened up pandora's box on this whole global interest rate and bond yield discussion. As such, it is all well and good to note that global rates are going up to reflect inflationary pressures mounting but what happens in those countries (read, the rapid agers!) where capacity will largely be inelastic to any stimulant which may come as the central banks decide to call it a day and perhaps loosen the string again? Well, as I said above, this is for another day.