Flash comment: Estonia - August 14, 2012

The Estonian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Teele Reivik No. 3 • 14 August 2012 Investments are likely to continue growing, but at a slower pace  Enterprise investments grew rapidly in 2011 fuelled by recovering foreign demand and rising exports. The largest amounts of investments were made by the manufacturing and energy sectors. By the first quarter of 2012, the growth had slowed in manufacturing but risen strongly in energy sector. The increase in enterprise investments has not been dependent on loan money; companies are using more of their own funds.  Public sector investments are planned 28% larger this year – funds for increase will mostly come from EU funds and the revenues from sales of CO2 quotas.  The number of transactions and the prices of residential real estate have been growing steadily for the past two years. The increase in prices is caused mainly by the rising costs of materials and labour, as well as by the growth in demand. Although home loan interest rates are at a record low it seems that people are using more of their own funds now than in recent years.Investment share in and contribution to GDP confidence, increased foreign demand and also the(in real terms) postponed investments, which were delayed during 15% 45% the crises and then finally made. Although growing, 40% investment share in last year’s GDP was below the 10% historical1 level and based on that there is a reason 35% 5% to expect a continuing growth in investments. 30% 0% Enterprise investments made a strong 25% 2006 2007 2008 2009 2010 2011 2012 comeback in 2011 -5% 20% After hitting the bottom in the beginning of 2010, the 15% -10% enterprise investments had made a strong 10% comeback by the end of last year, growing an -15% 5% average 55%. The rapid increase could be -20% 0% explained by recovering foreign demand, which boosted exports and production and, therefore, laid GDP annual growth Contribution to GDP growth a perfect foundation for increasing investment Share in GDP (rs) Source: SE volumes. In the first quarter of 2012, however, the number grew only by 1% in annual comparison.Investment volumes had made a decent recovery Behind the slowdown is the high base effect2,by the end of last year after a rapid fall whichstarted in 2007. As a result of that recovery,investments started to contribute to GDP growthpositively again (after nearly three years of stayingon the negative side) reaching the pre-crises level 1 10 year average share is almost 30%.by the end of last year. Behind the grown volumes 2 In the first quarter of 2011, Estonian Air enlarged itswere, amongst other factors, the improved overall fleet which affected strongly the overall investments in vehicles Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000. E-mail: ek.sekr@swedbank.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720. Annika Paabut, +372 6 135 440. Elina Allikalt, +372 6 131 989. Teele Reivik, +372 6 137 925

The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 14 August 2012ongoing uncertainties about the euro area which building the Enefit 280 oil plant, co-generation plantmay be keeping companies from “putting it all out at the rapeseed processor Werol (both by Eestithere” and also because larger investments could Energia), and the renewal of the distributionbe planned for later this year (investments tend to network (Elektrilevi OÜ). Investments shouldbe smaller during the first months of the year due to continue to grow in the energy sector as there areweather conditions). many new and ongoing capital-intensive projects planned for the near future- amongst others, theContributions to enterprise investments annual growth construction of Estlink 2, Harku-Lihula-Sindi high 80% voltage line (both by Elering) and the Auvere power plant (by Eesti Energia)3. 60% 40% Enterprise investments (EUR million) 20% 600 3,500 0% 500 3,000 2007 2008 2009 2010 2011 2012 -20% 2,500 -40% 400 -60% 2,000 300 buildings constructions 1,500 v ehichles computers machinery and equipments land 200 Total 1,000 Source: SE 100 500The largest investments in 2011 were made in the 0 -manufacturing and energy sectors, almost 20% and 2007 2008 2009 2010 201119% of all enterprise investments. In the Source: SE Manuf acturing Energy Total (rs)manufacturing sector roughly three-fourths ofinvestments were made in equipment andmachinery. Behind these numbers were the Industry confidenceimproved economic environments of Estonia’s main 40trade partners. The resulting increase in foreigndemand caused production volumes to continue 30growing even more (the growth started in 2010) in 20the beginning of last year and induced companiesto invest to avoid capacity constraints. Production 10volumes grew the most in machinery and 0equipment, which also was the largest export 2006 2007 2008 2009 2010 2011 2012article. The growth of machinery and equipment -10slowed at the end of the year and remained low in -20the beginning of 2012 due to the decreased(foreign) demand, grown uncertainty and high base. -30As of July present year the industry’s confidenceindicator reflects that in the annual comparison the -40 Industry conf idenceexpectations on export and production volume have Export expectationslowered somewhat and so has the general Source: DG ECFIN Production expectationsconfidence regarding the sector. Considering thedecreased demand and the sector’s hesitant Although enterprise investments have been growingattitude about the near-term prospects it may be again since the beginning of last year, this growthlikely that the enterprise investments growth will has not been based on loans. In the boom yearsremain slow for a while. the total corporate loan stock peaked at the level ofIn the energy sector, investments grew by nearly55% last year and by 120% in the first quarter of2012 in annual comparison. This was due toseveral large development projects, with many newones starting or already started this year- e.g., 3 See also www.energia.ee and www.elering.ee 2 (4)

The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 14 August 2012EUR 7.6 billion and by mid-2012 the amount had 2010. Since then investments have shown afallen to EUR 6 billion. Loan volumes have been growing trend throughout the last year and also indecreasing steadily since the beginning of 2009, the first quarter of present year. According to theand loan turnovers have remained modest. One of state budget of 2012 the investments are plannedthe main reasons is that banks and companies are to be 28% larger than in the previous year (inmore cautious: requirements for getting a loan are nominal terms). The funds for the increasedstricter and many enterprises do not qualify. But investments will mostly come at the expense of theinvestments have been growing (+54% in 2011) local governments and the selling of CO2 quotas,4while the loan stock has been declining (-8.5% in as well as from EU funds. The largest amounts are2011) and it may be so because enterprises prefer expected to go to the areas of government ofto use their own finances for making them (which Ministry of Economic Affairs and Communicationhas been possible due to grown turnovers and (mostly for the renewal of highways:profits) or might depend on foreign investments EUR 71 million), the Ministry of Agriculture and the(e.g. in terms of foreign-owned firms). Nearly 50% Ministry of the Environment (renewal of the waterof all foreign investments in Estonia are direct and waste management infrastructures).investments (FDI) and last year, the largest Looking forward, the government recently approvedamounts of FDI came from Finland and Netherlands a substantial real estate investment plan (2013-and were made in the manufacturing, real estate, 2016), according to which (amongst many otherand wholesale and retail sectors. In annual objects) the construction of the Estonian Nationalcomparison the FDI decreased 70% in the first Museum, Tallinn Prison and the European ITquarter of 2012. Behind that fall might again be agency building will be supported. Nevertheless, itpreviously mentioned concerns over the euro area is likely for public sector investments to decreasewhich made foreign investors to pull back and wait for the next few years due to the end of the CO2for things to clear up. Despite the overall decrease projects and EU programming period (2007-2013).which affected also the real estate and wholesale The next programming period starts in 2014.and trade sectors, FDI in the manufacturing sectorgrew. Behind that growth were new and ongoing Residential real estate sector on its way toconstruction projects for new plants or expansions a full recoveryof existing ones (e.g. ABB, Incap Estonia, LappsetOY). The further growth or decline of FDI depends The growth of notarised purchased-sale 5mostly on the economic developments in the other transactions of real estate has been rather stableEU countries (mainly Sweden and Finland) where in the past two years and has reached about theroughly 90% of FDI to Estonia are coming. same level as in 2002-2003. In annual comparison the number of transactions had increased 22% byEnterprise investments and loan stock the first quarter of 2012. Behind this rise might be(EUR millions) the people’s growing confidence in their financial situation: wages have been increasing and there 1,000 8,000 are more jobs available (which results in the 900 increase of household disposable incomes). Prices 7,500 in residential real estate have also been increasing: 800 according to the Estonian Land Board data, the 7,000 price index of apartments sold as dwellings grew 700 almost 12% in the second quarter of 2012 in annual 6,500 basis. This may be explained by the rising prices of 600 materials and labour, increasing demand and also 6,000 500 changes in the quality of real estate sold. 5,500 Although home loan interest rates are at a record 400 low, the loan volumes have been decreasing and 300 5,000 turnovers have remained modest. Considering that 2007 2008 2009 2010 2011 2012 Source: SE, BoE Enterprise inv estments Loan stock (rs)Public sector investments to grow 28% 4 Synopsis of the state budget 2012The public sector cut back its investments during http://www.fin.ee/riigieelarve-2012 „Lühiülevaade 2012 aasta riigieelarvest”the crises years- they fell 35%, from 5 In this case registered immovables with residentialEUR 825 million in 2008 to EUR 557 million in buildings and apartments 3 (4)

The Estonian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued Nr 3 • 14 August 2012the trend for residential real estate transactions is This is expected to happen in 2013-2014 dependingmoving up we may find an indication that a large on how and when the euro area debt crises will benumber of those transactions might be financed solved. Public sector investments are likely be morewith peoples’ own funds. modest next year due to the end of the CO2 projects and decreasing EU funds. ResidentialPositive outlook despite the slower growth investments are anticipated to continue a steadyrate growth if wages keep rising, the employment keepsEven though the investment growth rate is slowing, increasing and consumer confidence growing.our outlook remains positive: in April Swedbank Although there is a high probability of loansEconomic Outlook we anticipated investments to becoming more expensive in the near future, if theirgrow over 10% next year (our new SEO will be turnovers were to increase, there is room for evenreleased at the end of this month). Enterprise further growth.investments are likely to increase more when theongoing uncertainties surrounding the euro areastart to dissolve and companies feel more secure.SwedbankEconomic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to ourSE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparationPhone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy orek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in thewww.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible forLegally responsible publisher losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’sCecilia Hermansson, +46-8-5859 7720 monthly newsletter The Estonian Economy.Annika Paabut +372 6 135 440Elina Allikalt +372 6 131 989Teele Reivik +372 6 137 925 4 (4)

Flash comment: Estonia - August 14, 2012

by Swedbank on Aug 24, 2012

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