baltic household outlook 2012 eng · baltic household outlook 3/25 workers' purchasing power...

Baltic Household OutlookApril 2012

Recovery in household finances on track but uncertainty remains

THE BALTICS

• A strong economic growth has led to an increase in employment, rebounding by 11 per cent in Estonia, 7.7 per cent in Latvia and 5.9 per cent in Lithuania compared to the lowest level of 2010.After a decline in 2008-2010, real wages have been recovering in Latvia and Estonia, while Lithuanians’ real earnings have decreased already for 12 quarters. Growing income supports household consumption; moreover spending is growing faster than incomes (particularly in Latvia and Lithuania). The large gap in consumer confidence between Estonia and other Balts disappeared in 2011, albeit Estonian households still have higher confidence levels than the EU average.Changes in household balance sheet statistics, but not in the financial behaviour.Largest savings of Estonian households, lowest loan-to-deposit ratio of Lithuanian households.Strong precautionary motives and risk aversion favours growth of deposits.Financial liabilities continue to decrease, despite the low interest rates.The earnings abroad and remittances have added significant amount of funds to the households’ disposable income in all three countries helping to increase consumption and savings.Population decline and population ageing will have a negative impact on sustainability of pension system and labour markets. Over the next ten years the number of working age people could decrease by approximately 10 per cent in Latvia and by 8 per cent in Estonia and Lithuania.

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Edmunds RudzitisSocioeconomics Expert SEB LatviaTelephone: +371 67215933 [email protected]

Julita VaranauskieneHousehold Economist SEB LithuaniaTelephone: +370 [email protected]

Triin MessimasHousehold ExpertSEB EstoniaTelephone: +372 [email protected]

Merike KukkResearch scientistTallinn University of Technology

Baltic Household Outlook

The year 2011 turned out to be surprisingly good for economic growth in the Baltic countries and much better than expected at the beginning of the last year. In 2011 the Baltic States were the fastest growing economies in the European Union (EU). Estonia gross domestic product (GDP) demonstrated 7.6 per cent increase, which was the fastest growth across the EU. In 2011 Lithuania’s economy expanded by 5.9 per cent, lagging only Estonia, while Latvia’s

Strong external demand boosted investments and had a positive impact on the labour market and job creation. In 2011 a number of employed people increased in all three Baltic countries. In Estonia employment rose by 6.7 per cent, while in Latvia and Lithuania increase was 3.1 per cent and 2 per cent respectively. Since its labor market bottomed in the first quarter of 2010, Estonia has recovered approximately 60 thousand of the 107 thousand lost jobs. Employment has rebounded by 11 per cent in Estonia, 7.7 per cent in Latvia and 5.9 per cent in Lithuania compared to the lowest employment level of 2010.Estonian data shows high export-led job growth – the rise in employment was mostly affected by increased number of people employed in manufacturing, construction, and transportation and storage. In Lithuania the largest growth in the number of employed persons was in transportation and storage and manufacturing as well. Although employment has increased, employment rates are still much lower than pre-crises levels – current employment rate in Latvia and Lithuania is comparable to level of 2002-2003.

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April 2012

Economy expands, labour market improves

GDP growth by 5.5 per cent was the 3rd fastest in the EU. Strong economic growth was very much due to dynamic and competitive exports and better external demand as well as by pickup in domestic demand and private consumption. The Baltic States are highly export-dependent, especially Estonia and Lithuania, therefore due to external demand decline economic growth will slow down this year.

The higher economic activity and job creation as well as emigration was reflected in unemployment statistics. The largest decline in unemployment was registered in Estonia

Changes in employment (%, Y-o-Y)

-16%

-12%

-8%

-4%

0%

4%

8%

12%

1 Q072Q073Q074Q071 Q082Q083Q084Q081 Q092Q093Q094Q091 Q1 02Q103Q104Q101 Q1 12Q1 13Q1 14Q1 1

Latvia Lithuania Estonia

Source: National Statistics

Unemployment (job-seekers) rate* in Baltics (%)

2

4

6

8

10

12

14

16

18

20

22

1 Q0 72Q0 7

3Q0 74Q0 7

1 Q0 82Q0 8

3Q0 84Q0 8

1 Q0 92Q0 9

3Q0 94Q0 9

1 Q1 02Q1 0

3Q1 04Q1 0

1 Q1 12Q1 1

3Q1 14Q1 1

Latvia Lithuania Estonia* Persons aged 15-74


where the unemployment (job-seekers) rate decreased by 8.4 percentage points from its peak in the first quarter of 2010. Nevertheless, Estonian statistics shows that job creation fell significantly in the last quarter of 2011 and unemployment increased marginally, indicating less positive labour market dynamics this year.Latvia’s unemployment rate decreased by 6.2 percentage points from record-high to 14.3 per cent between the first quarter of 2010 and the last quarter of 2011. Over the last six quarters, unemployment rate in Lithuania has declined by 4.4 percentage points. It is expected that in Latvia and Lithuania unemployment rate will shrink further stabilizing at 14 per cent level.


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Workers' purchasing power is increasing

Wages in Estonia had the highest increase among the Baltic countries – in the last quarter wages grew by 6.3 per cent compared to corresponding period of 2010. In Latvia gross wages increased by 4.5 per cent and in Lithuania by 2.5 per cent. Wage growth in Estonia during the last two years was faster than in Latvia and Lithuania, thus difference between wages in Estonia and other Baltic countries increased. In Estonia average gross wages (EUR 865) is by 28 per cent larger than in Latvia (EUR 676) and by 37 per cent higher than in Lithuania (EUR 630). Average gross wages in Latvia is by 7 per cent higher than in Lithuania; however due to larger tax wedge on the labour net monthly salaries in Latvia is the lowest among the Baltic countries. In the last quarter of 2011 average net monthly wage in Lithuania reached EUR 489 while in Latvia it was EUR 481.

It is expected that wage growth will be slightly lower than last year. Besides, wage growth will be uneven within economic sectors. Due to due to labour shortage problems some economic sectors (for instance, construction, information technology) or occupations with large difficulties to find qualified staff (for instance, engineers, programmers etc.) could face a more rapid increase in remuneration while in most industries wage growth will be modest. Although gross/net wage growth was registered in last year, high inflation had a substantial effect on real wages (nominal wages adjusted to the price level). After a decline in previous years real wage growth turned positive in 2011 both in Estonia and Latvia. Real wages of Estonian workers increased 2.1 per cent in the last quarter of 2011. The real wages in Estonia increased for the second quarter in a row. Before that the real wages had been in decline for eleven quarters. In Latvia increase of real wage earnings was 0.1 per cent last year compared to 2010. In the fourth quarter of 2011 real wage growth was 0.6 per cent. In Lithuania workers’ real earnings continued to reduce in the fourth quarter of 2011 in spite of rise in gross wages. Real earnings shrank by 1.5 per cent compared to last quarter of 2010, decreasing for the 12th quarter in a row.

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

1 Q0 82Q0 8

3Q0 84Q0 8

1 Q0 92Q0 9

3Q0 94Q0 9

1 Q1 02Q1 0

3Q1 04Q1 0

1 Q1 12Q1 1

3Q1 14Q1 1

Average gross wages and salaries (%, YoY)



Average net wages (in euros)


521

460 460481

514

477 478489

634654

693680

300

350

400

450

500

550

600

650

700

750

4Q08 4Q09 4Q10 4Q11


Real wages (%, YoY)


-12%

-8%

-4%

0%

4%

8%

12%


2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

This year purchasing power of employed persons is likely to increase slightly or remain unchanged. Changes in purchasing power will largely depend on global price developments, especially commodities prices. Growing employment and increasing wages is picking up the total income of households. Rising income are set to support private consumption, moreover there are some signs that propensity to consume is starting to prevail over that to save. In 2011 private consumption grew by 6.1 per cent in Lithuania and 4.4 per cent in both Estonia and Latvia. In 2011 private consumption grew by 6.1 per cent in Lithuania and 4.4 per cent in both Estonia and Latvia. At the same time nominal household expenditure (at current prices) grew by approximately 10 per cent, with spending growing faster than incomes. That’s made possible by a decline in the saving rates (particularly Latvia and Lithuania).

April 2012

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How do the reserved consumption plans of households match with the vigorous retail sales increase in the beginning of 2012? The most reasonable explanation is that the sale has not been demand driven but supply driven. As retail sellers have offered discount campaigns during the beginning of the year, consumers have been taking advantage of the offers. It reveals that the consumers have been postponing several purchases during the economic recession and according to the consumer survey they are ready to postpone even further unless good discounts are offered.The consumer confidence index that is indicating the overall mentality of the households has shown different dynamics in the last months. Estonian households have expressed higher confidence than the EU average until the second half of 2011. The confidence of Latvian and Lithuanian households has been comparable to the EU average: in March 2012 it was -18.1 in Latvia and -21.3 in Lithuania. The large gap with other Baltic countries disappeared in Estonia in November 2011 when the confidence indicator fell to -17.1. In March 2012 it was -12.9, bringing Estonians to slightly higher confidence levels than the EU average (-19.3).

Consumption increase induced by retail activities

Retail sales continued increase: in January 2012 it has experienced very high year-on-year real growth rates of 14.8 per cent in Estonia, 15.1 per cent in Latvia and 11.7 per cent in Lithuania. For comparison, the EU average year-on-year retail trade decreased by -0.1 per cent in January 2012. The decrease of the retail sales in other EU countries has been also much modest in 2009 compared to the Baltic States: while the EU average decrease of retail trade was -1.6 per cent in 2009, Estonia experienced a decrease of -18.3 per cent, Latvia -27.1 per cent and Lithuania -20.8 per cent. The vigorous increase in the Baltics has been induced by the low levels of retail sales in previous periods. In February 2012 the retail trade year-on-year growth rate remained the same in Estonia as in January (14.8 per cent) while in Latvia it fell to 10 per cent and in Lithuania to 4.2 per cent year-on-year. The retail trade growth rates can be expected to drop in Estonia and Latvia.


Comparing the future consumption plans about major purchases, Latvian and Lithuanian households have showed increasing readiness for consumption while Estonian households remain modest in their plans. In March 2012 the indicator in Estonia was lower than the EU average: (-35.9 vs. -23.7) in Latvia -8.1 and in Lithuania -12.3. Estonians have also been more conservative about planning consumption of durable goods during the economic growth period but the gap between Estonians and Latvians-Lithuanians has become more explicit within the last year. However, when investigating the period since the second half of 2011, the plans about major purchases have remained quite stable for Lithuania and showed small increase for Latvia. It is possible to identify the decreasing trend of the indicator in Estonia since the last quarter of 2011. Although the earnings of the households are increasing, people remain reserved about future consumption. It can be explained by the downward adjusted economic prospects in the Baltic countries induced by the development of debt crisis in Europe.

-40

-30

-20

-10

0

10

20

30


Jan-

05

Jul-0

5

Jan-

06

Jul-0

6

Jan-

07

Jul-0

7

Jan-

08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

10

Jul-1

0

Jan-

11

Jul-1

1

Jan-

12Retail growth (Y-o-Y)

Source: Eurostat

Plans for major purchases

Source: EurostatLatvia Lithuania Estonia

-50

-40

-30

-20

-10

0

10

20

30

Sept

-06

Mar

-07

Sept

-07

Mar

-08

Sept

-08

Mar

-09

Sept

-09

Mar

-10

Sept

-10

Mar

-11

Sept

-11

-60

-50

-40

-30

-20

-10

0

10

20J an -0

5

J ul-05

J an -06

J ul-06

J an -07

J ul-07

J an -08

J ul-08

J an -09

J ul-09

J an -10

J ul-10

J an -11

J ul-11

J an -12


Consumer confidence indicator

Source: Eurostat

April 2012

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Regarding assessment about the financial situation of households, the Estonians continue to have the strongest position among the Baltic countries, being also on the level of the EU average. In March 2012 the balance of households who were able to manage with their expenses was at 11.3 compared to the EU average 11.9. There has also been less fluctuation in the financial situation of the Estonian households during the business cycle illustrating that Estonian households have had control over their balance sheets during the recession period. The indicator for Lithuania has been positive since the second quarter of 2011, indicating that there are more households who are able to save compared to the ones who have to use their savings to cover their expenses. The financial situation of households has decreased in Lithuania in the beginning of 2012 and it can be related to the bankruptcy of Bank Snoras AB at the end of 2011.The impact on consumer behaviour is discussed more thoroughly in the country section of Lithuania. The assessment about the financial situation of households in March 2012 was 2.1 in Lithuania and -5.5 in Latvia. The indicator in Latvia has been on lower levels than in other Baltic countries since the second half of 2009, including unexplainable rise in February 2012 but falling back to trend levels in March.

The consumer survey question about the plans to save in the future illustrates that Estonian and Lithuanian households have remained stable (with small fluctuations) about their saving plans from the second half of 2010 and in March 2012 the indicator was -25 in Estonia and -45.1 in Lithuania. Latvians have gradually increased the saving plans from the lowest level in the Baltics: from -69.7 in October 2009 to -46.7 in March 2012. Still the saving plans are much lower in the Baltics than the EU average, being -10 in March 2012. Again, the low indicators do not reflect that households in the Baltic countries do not value saving as much as in other EU countries but it also includes reflection about the possibility to save.

refers to incessant importance of owning the buffer stocks and the continuing need to save; another question is how many households can do it. Lithuanians have increased their assessment about saving since the beginning of 2009, while in Latvia it decreased and in Estonia it has fluctuated around the level of -20. Since the second half of 2011 the indicator has increased in Latvia but decreased in Estonia. In March 2012, the indicator was -21.3 in Estonia, -24.9 in Lithuania and -56.7 in Latvia.

According to the consumer survey data and the households’ assessment about saving, there are more households who think that it is not a good moment to save compared to the ones who see the time to be suitable to save. It applies to all three Baltic countries while the valuation is considerably lower in Latvia. The assessment does not have direct relationship with real savings of households as it reflects both the willingness and ability to save. During the economic growth period the need for saving has been perceived to be low as households have been optimistic about future income developments. During recession the possibilities to save have shrunk although households have realised the need to own buffer-stocks to face income risks; still the indicator has not increased as the possibilities to save have been limited. Slow economic recovery due to the European debt crisis

Modest consumer confidence supports the strengthening of the households’ balance sheets


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Latvia Lithuania Estonia Source: Eurostat

Financial situation of households-80

-70

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-20

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1

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Good moment to save

-80

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0

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5

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08

Jul-0

8

Jan-

09

Jul-0

9

Jan-

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Jul-1

0

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11

Jul-1

1

Jan-

12


Financial situation of households

April 2012

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In the second half of the previous year, an extraordinary event occurred in Lithuania and Latvia - two related commercial banks have collapsed, i.e., Bank Snoras in Lithuania and Latvijas Krajbanka in Latvia. Collapse of the banks is reflected in changes of household financial assets and obligations. Elimination of the data of bankrupt banks from the banking statistics reflect that household financial assets (deposits) and financial liabilities (loans) decreased. Regardless of the prevailing public tension and falling confidence in banks after termination of activities of Snoras and Krajbanka for a short period, any greater systemic impact on the household financial behaviour was not identified – depositors did not withdraw their deposits from other banks and such depositors, who received deposit insurance compensations, continued to keep the largest share of deposits in banks and other financial institutions. Any similar events did not occur in Estonia. Based on information received from this country, the previous trends of savings accumulation and decrease in liabilities were further observed. Comparison of savings and liabilities of households in three countries does not reveal any great differences. Households in Estonia have accumulated the largest savings (EUR 3,549 per capita) and they also have the highest level of loans per capita (EUR 5,359), whereas in Lithuania the lowest loan-to-deposit ratio was identified: the value of savings per capita is lower than loans per capita (EUR 2,413 and EUR 2,363). The Latvian households have the lowest level of deposits in financial institutions (EUR 1,853), however it may not be said about the loans per capita (EUR 3,410).

by the level of deposits per capita will follow the below order of priority. One can conclude that there are relatively less depositors in Latvia than in Lithuania or Estonia, but these depositors have accumulated significantly higher amounts.Deposits make the largest share of financial assets therefore relevant fluctuations make the greatest impact on the general changes in the financial assets. The factors stimulating accumulation and savings in financial institutions should be mentioned: strong precautionary motives and higher volatility of financial markets. Bankruptcy of banks in Latvia and Lithuania decreased confidence in banks and low interest rates (lower than expected inflation rate) should be mentioned as the factors, which limited willingness to accumulate savings. During the second half year, the volume of deposits from the households in financial institutions in Estonia grew by 4.6 per cent, while in Latvia and Lithuania dropped by 0.5 and 2.2 per cent, respectively.

Changes in household balance sheet statistics, but not in the financial behaviour


Deposits per capita (EUR)

Latvia

Lithuania

Estonia

1 861 3 5471H2011

1 853 3 4102H2011

Loans per capita (EUR)

1H2011 2 467 2 454

2H2011 2 413 2 363

1H2011 3 394 5 410

2H2011 3 549 5 359

Deposits divided by the number of people enable to compare the accumulated savings. However it is clear that not every private individual accumulates savings. The analysis of living conditions performed by the national statistical agencies showed that in the year 2010 (recent analysis data), the majority of households would be unable to cover unexpected expenses (equal to the monthly at-risk-of-poverty income rate previous year) The above analysis shows that the share of such households in Latvia makes 78 per cent, in Lithuania – 62 per cent and in Estonia – 43 per cent. It leads to an assumption that the above households have no savings at all. Thus, if deposits in financial institutions are divided only by a certain number of people that accumulated deposits, the above countries

All three Baltic countries survived the banking crises in the years 1992-1996. Said crises were determined by the transitional period, economic reforms and problems caused by inadequate competence. However, during the recent twenty years, a large number of changes occurred: the economic situation in the above-mentioned countries has improved, the banking sector became more solid, management and supervision of banks was optimised. Confidence of households in banks has also increased. Theoretical and practical examples demonstrate that household behaviour, which may result in problems of some banks or the entire banking sector or make such problems more acute, is rather important for the banking market. However, it is not easy to predict household behaviour yet.The global financial crisis in the year 2008 was the main reason of collapse of the major bank Parex in Latvia. The bank financed itself with credits from the short-term wholesale markets that were frozen during the crisis. Rumours about expected devaluation of national currency were spreading in the Latvian market. Irrespective of the

75

85

95

105

115

125

135

145

2008

2009

2010

2011

2012

Snoras

Krājbanka

Household deposits change (Jan2008=100)

Latvia Lithuania Estonia Source: Central Banks

April 2012

Latvia Lithuania Estonia Source: Central Banks

compensations is excluded), amounts withdrawn by private individuals were lower than amounts deposited in accounts with financial institutions.More cautious attitude of people was observed after several months of the banks’ collapse, i.e., funds previously kept in one bank now are deposited in several banks, and decisions on the savings methods are made taking into consideration not only the interest rate level. The share of the new long-term deposits also shrank. In the first half of last year, the share of deposits with maturity over one year in Lithuania during the last months prior to the bank crisis made up 14-20 per cent, while in the first month of current year, the share of new term deposits made up only 9-10 per cent. Long-term time deposits previously were not popular among households in Estonia. Over the recent half-year, any relevant changes were not observed. Government bonds may be considered as alternative to deposits. However said bonds are not popular among households. Investment of the Latvian households in bonds (total bonds investments, not only Latvian government bonds) makes LVL 70 million (nearly EUR 100 million). The Lithuanian households unwillingly invest in the government securities. Based on the data of the Central Securities Depository, the household investment in the Lithuanian government securities in December 2011 amounted to EUR 100 million, while the value of placed government bonds totalled EUR 1.3 billion. However, over two first months of the year 2012, the volume of investment by households in the government bonds grew by 16 per cent and in February reached EUR 122 million. The investment into bonds has always been rather insignificant in Estonia – due to taxation issues (interest income from bonds taxable, while from deposits not taxable) and lack of any government bonds (due to government's extremely low gross debt level and sound financial policies).

statements made by competent officials on the efforts to prevent devaluation of national currency, interest rate was increased up to 15 per cent. Such circumstances caused public concern. When rumours about Parex started to spread, panic broke out in a couple days and customers of the bank started to withdraw large amounts of money. To prevent collapse of the entire banking system – as the banks are deeply interrelated and very prone to contagion effects – Latvian government has taken some actions. Regardless of the take-over of the problem bank by the Latvian government and its assurance that funds are sufficient to settle accounts with the Bank clients, the clients’ confidence in banks decreased. Threat to the entire banking system stimulated people to withdraw deposits from other banks too. Deposits from the households in banks during said period shrank by 7 per cent, and the former level of deposit was never restored. Such situation shows that people still tend to give in to fear. The recent crisis of Bank Snoras and Latvijas Krajbanka and relevant impact on the financial system was lower: the bankrupt banks were not the major banks of the country and deposit insurance scheme has demonstrated its potential. Currently the deposits up to 100 thousand euros are insured in all the three countries. Compared to average deposit amount of a Baltic household, the amount is more than sufficient to cover losses of majority of depositors.Statistical data shows that the level of household deposits decreased. A portion of deposits (uncovered by deposit insurance) was lost, a number of depositors decided to keep money at home and some number of people decided to repay loans. However, the largest amount of deposit insurance compensation was again deposited in banks. It was announced that 86 per cent of the deposit insurance compensations in Latvia were transferred to bank accounts, and calculations in Lithuania show that in the fourth quarter of the year (if impact of Bank Snoras and deposit insurance

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Household loan portfolio in all three countries continued to decrease. In Lithuania and Latvia the statistical loan portfolio decrease had to be larger than real due to changes in the statistical base. However, long-term trends still prevail. Households continue to be cautious in taking financial responsibilities.

Baltic Household Outlook April 2012

Financial liabilities continue to decrease, despite the low interest rates

Households reduce their debt levels. Compared to peak levels at the end of 2008, Latvian household loan portfolio decreased most, Lithuanian – least. During the housing boom years although the largest number of the loans have been reasonably obtained, some of the loans have not been sustainable. Since the second half of 2009, the mortgage loan interest rate has been at lower levels, compared to the period of economic boom and it is below the inflation rate. However, favourable interest rates do not induce increase in demand for loans. A lower willingness to borrow and a higher initial instalment requirement are the main reasons of suspended retail loan portfolio growth. Whereas the mortgage loans make the largest portion of the household loan portfolio (nearly 80 per cent in all three countries), the greatest effect on the total loan portfolio is made by changes in the mortgage loan portfolio. However the most dramatic shrink in value of the consumer loan portfolio is observed. The households, which have repaid previously obtained loans, do not dare to take new loans. It is necessary to note that the volume of loans from other institutions (non commercial banks) is not declining. During

Household loan portfolio change (Jan2008=100)

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20102011

2012

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The demographic challenge: depopulation and ageing

current year, the average interest rate on consumer loans issued by banks was lower compared to the previous year. Nevertheless it did not stimulate higher demand of private individuals for bank loans. While interest rates of other companies granting loans are remarkably higher compared to the banks’ interest rates, however the dynamics of

borrowing from said companies is not declining. An assumption can be made that clients of the above companies are not informed about the difference in interest rates or disregard it as they do not have a possibility or are unwilling to borrow from the bank.

The Baltic States have been experiencing a large decline in population since the regaining of independence. During the period from 1990 to 2011, Latvia, Lithuania and Estonia were the states with the fastest decreasing populations in Europe.

Population decline was influenced by negative natural growth (deaths over births) and emigration as well. The low birth rate, population ageing and emigration are long-term problems of all Baltic countries, particularly Latvia and Lithuania.

Since 1990, the annual number of births has fallen dramatically. In the late 1990s and at the beginning of 21st century live births were approximately 40-50 percent lower compared to 1990.

Low birth rates leads to negative natural growth

Estonia and Latvia first registered negative natural growth numbers in 1991, while Lithuania lagged behind neighbors -- excess of deaths over births started only in 1994. Since then, the natural change has remained negative, except for a break in 2010 when natural increase of 35 persons was registered in Estonia. Over the last ten years Estonia showed less negative demographic developments than Lithuania and Latvia.

In 2011 Latvia recorded the lowest birth rate among the Baltic States – 8.4 births per 1000 inhabitants. In Estonia and Lithuania this figure stood at 11 and 10.4 respectively. The birth rate 20 years ago was much higher, exceeding 14 births per 1000 inhabitants. The birth rate of Latvia fell from 14.2 births in 1990 to 7.6 births per 1000 inhabitants in 1998. In 1998 Estonia reached the lowest point -- 8.8 births per 1000 people. Lithuania the record-low crude birth rate (8.6 births per 1000 inhabitants) posted in 2002. Crude birth rate was below 10 in all three countries from 2000 to 2003. Although since accession to the European Union (EU) the number of births has increased constantly, economic downturn changed the upward trend and took the birth rate down again. In 2011 a drop in the number of births was registered in all three Baltic countries; very significant birth decline experienced Latvia -- by more than 20 per cent compared to 2008. The number of children born in Latvia last year was the second lowest since 1990.

Natural increase

Latvia Lithuania Estonia Source: National Statistics

-20000

-15000

-10000

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0

5000

10000

15000

20000

1990

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2011

40,0

50,0

60,0

70,0

80,0

90,0

100,0

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1991

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1994

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1997

1998

1999

2000

2001

2002

2003

2004

2005

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2007

2008

2009

2010

2011


Births (1990=100)

6,0

8,0

10,0

12,0

14,0

16,0

1990

1991

1992

1993

1994

1995

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1997

1998

1999

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2001

2002

2003

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2005

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Crude birth rate (per 1000 inhabitants)


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Census confirms a remarkable emigration

During current year, the average interest rate on consumer loans issued by banks was lower compared to the previous year. Nevertheless it did not stimulate higher demand of private individuals for bank loans. While interest rates of other companies granting loans are remarkably higher compared to the banks’ interest rates, however the dynamics of borrowing from said companies is not declining. An assumption can be made that clients of the above companies are not informed about the difference in interest rates or disregard it as they do not have a possibility or are unwilling to borrow from the bank.

century reaching very low levels. In Latvia the total fertility rate fell by approximately 0.9 percentage points to record low (1.11) in 1998; Estonia and Lithuania experienced drop of 0.7-0.8 percentage points. In 2006–2009 the total fertility rate slightly increased, partly due to improving long-term outlook and previous postponement of child births. Recently due to economic crisis total fertility rate has reduced part of previous gains; rate deteriorated sharply in Latvia – from 1.45 in 2008 to 1.18 in 2010. In Estonia and Lithuania total fertility rate remains relatively high compared to Latvia – above 1.50. Since the total fertility rate is calculated in a given year using information across different cohorts of women (aged 15-49), the postponement of births can influence fertility rates, generating a bias in rates. According to different researchers (Sobotka 2004, Lutz 2009), when women start giving birth at an older age, the total fertility rate decreases at first, but rebounds later. Over the past 20 years the mean age of women at childbirth has increased. More and more women tend to have their children when they are aged 30 or over. The average mother ages at childbirth in 2010 were around 29 years, indicating 0.4 years difference between the highest and the lowest mean age at childbirth – 29.3 years in Estonia, 29 years in Latvia and 28.9 years in Lithuania. Meanwhile the mean age of a mother for the birth of the first child has risen above 26 years. Taking into consideration the postponement effect, the adjusted total fertility rate is higher by 0.2-0.4 percentage points, indicating that most of the fall in the total fertility was caused by the postponement of first births. It could mean a slower rate of population decline; however the adjusted fertility rate is below the necessary replacement level of 2.1 births for a woman.


1,0

1,2

1,4

1,6

1,8

2,0

2,2

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

Total fertility rate

During last twenty years the total fertility rate, the average number of births for woman, has declined noticeably. A decline of fertility rates lasted until the beginning of 21st

Emigration is another process that contributes to the population decrease. According to the results of Census 2011, the number of Latvia’s population on March 1 of 2011 was 2070.371 thousand. At the beginning of 2011 there were 2074.605 thousand persons in Latvia which is 155 thousand less than published prior (based on the Population Register data). Since the Census 2000 the number of population in Latvia has decreased by 13 per cent or 309 thousand persons. The Central Statistical Bureau (CSB) data indicates that the largest drop was due to emigration – as a result of international migration population decreased by 190 thousand persons (61.5 percent of the total reduction or eight per cent of the population). Due to the negative natural change Latvia's population shrank by 119 thousand (38.5 percent of the reduction or five per cent of the initial population).Like Latvia, Lithuania’s latest census shows a massive outflow of people. Over the decade, the population of Lithuania decreased by 12.3 per cent or 430.2 thousand persons. The largest decline in the population was due to emigration – by 328.3 thousand persons or 76 per cent of the total decrease. Lithuania has the largest emigration rate among the Baltic States – over the recent decade 9.4 percent of the population left Lithuania. The total decrease

in the population of Lithuania was also influenced by a negative natural growth – the country lost 101.9 thousand persons (2.9 per cent of the population or 24 per cent of the total reduction).Official emigration statistical data available for Estonia does not cover unreported emigration therefore the full extent of unreported emigration remains unknown. The preliminary population number of the Estonia’s 2011 Census will be published only in May. According to different estimates, the population decrease in Estonia would reach 6-8 per cent of the initial population, including approximately two per cent decline due to negative natural change. In Estonia, after accession to the EU the emigration was smaller compared to Lithuania and Latvia, partly due to close relations between Estonia and neighboring Finland that helps Estonians to work in Finland. Statistical data shows that the main destination of Estonian emigrants is Finland and other Scandinavian countries, while Lithuanians and Latvians have moved to countries such as the United Kingdom and Ireland. One popular country of destination of Lithuanian people used to be Spain. However currently the direction changes – turns to Germany and Norway.

10/25


Both, temporary working abroad and permanent emigration are important phenomena in the Baltic countries. Working abroad has also the implications for the economy of the Baltic States and affects those staying. We could point out the benefits as well as threats of emigration to a home country. The three main benefits are (1) sending remittances to home country, (2) relieving the high unemployment and (3) human capital improvement. From the other side, the threats to domestic economy are: (1) brain-drain and brain-waste, (2) pressure on domestic wages and (3) regional economic imbalance.The biggest direct benefit of working abroad is receiving remittances: money that is earned abroad is sent home to other family members. The importance of the remittances is substantial in all Baltic countries. According to national statistics, the sum of earnings from abroad and remittances (the distinction between earnings and remittances is based of the duration of working relationship abroad: up to a year or over the year) increased until 2008 when private individuals sent EUR 0.5 billion to Estonia, EUR 1.6 billion to Latvia and EUR 1.3 billion to Lithuania. The flows decreased in 2009 in all Baltic countries while the biggest decrease occurred in Latvia. In Estonia the flows started to increase slightly in 2010 but Lithuania has experienced considerable increase in the inflows that already exceed the volumes of 2008. In 2010 private individuals sent EUR 550 million to Estonia, EUR 1120 million to Latvia and EUR 1460 million to Lithuania.

The remittances (incl. earnings abroad) have added significant amount of funds to the households’ disposable income in all three countries. The remittances form 7-8 per cent of the disposable income in Estonia since 2005; in Lithuania the share has been 5-6 per cent while in 2010 exceeding 8 per cent of the disposable income. In Latvia the remittances are giving the highest contribution to the households’ income as it was 16.5 per cent in 2006 decreasing thereafter below 10 per cent by 2010. In general, the remittances are used for consumption and savings, hence increasing both, the domestic consumption and saving.

Number of Lithuania’ s emigrants by the destination country

Ireland

Spain

UK

US

Norway

Germany

Other

2001-2002

143

293

414

1526

87

1520

10356

2003

276

465

980

2302

180

1204

5625

2004

1009

730

3525

2980

241

1727

4953

2005

2073

794

4223

2010

237

1473

4761

2006

1313

766

3223

1771

216

1114

4199

2007

1616

841

3659

1540

261

1277

4659

2008

1983

917

4472

1782

337

1349

6175

2009

2763

1355

5719

1700

536

1350

8547

2010

13048

3535

40901

2783

4901

3806

14183

2011

5587

1948

26395

1788

3814

3745

10586

TOTAL

29811

11644

93511

20182

10810

18565

74044


How does the emigration affect the economy of the Baltic countries?

0

300

600

900

1 200

1 500

1 800

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010


Source: Eurostat, SEB calculations

Remittances and earnings abroad (EUR million)


Source: Eurostat, SEB calculations

Remittances and earnings abroad –share of disposable income

0%

3%

6%

9%

12%

15%

18%

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

There are a number of channels through which the effects of remittance inflows benefit the wider community and not just those families directly receiving the transfers. One such important route is through any multiplier effects of spending by the recipients. That is, the spending of remittances may generate incomes for those providing the goods and services purchased, and they in turn spend this income, setting off a chain reaction. Still it has to be kept in mind that migration of highly skilled workers, who settle permanently abroad with their families, commonly brings little remittances to the home country. Main source of the remittances are workers, whose families remain in their home country.

11/25


The graph illustrates that the remittances follow a business cycle: they help to increase the household’ s disposable income and therefore consumption during the economic growth period while there is lower contribution to the disposable income and consumption during recession. Consequently, working abroad is not helping to smooth the volatility of the economy of the Baltic countries.

Majority of those working abroad are low-skilled workers among which the unemployment in home country is higher than average. The flow of labour supply abroad diminishes the pool of those unemployed or underemployed within this segment, thereby shortening waiting times for job openings. Either way, low-skilled workers who remain at home are rendered better off. To some extent it is also possible to estimate the impact of emigration. The model of Barrell, Fitzgerald& Riley indicates that after the EU enlargement emigration decreased the unemployment rate in Estonia by 0.2-0.3 per cent, in Latvia 0.5-0.7 per cent and in Lithuania 0.7-0.9 per cent.Additionally, one of the expected long-term advantages of the periodic labour migration is learning and skills gained abroad. It is expected that the additional skills and productivity growth will be retained when returning to the home country. Domestic companies would benefit from hiring the returned workers. This effect is more obvious in high-skilled professions but also lower-skilled can improve their qualification while working abroad.

But every coin has two sides. There are also threats of emigration. First, when high-skilled workers are leaving, it will create a deficit in some qualifications as high-skilled

workers are anyway a scarce resource in domestic labour market. It is most explicitly seen in the healthcare sector where medical personnel have been leaving, although domestically there is explicit need for their competences and skills. The departure of highly educated emigrants represents an export of human capital in which the state has invested by offering education. Second, the aggravating ageing process and decreasing population in all Baltic countries’ tight labour market. Emigration strengthens the deficit of labour force in some sectors, leading to wage pressure that will also lead to higher inflation. Increasing labour costs have accompanied the economic growth period but has also continued the following period as there is big diversity in wage developments across sectors. For instance, Barrell, Fitzgerald& Riley have also estimated the inflation in 2006-2007 to be 0.08 per cent higher in Estonia, 0.23-0.28 per cent higher in Latvia and 0.26-0.29 per cent higher in Lithuania due to emigration.And third, the emigration can propagate the regional demographic and economic imbalance: the low-skilled unemployed workers in the countryside tend to leave for abroad instead of regional movement. The integration of domestic labour market across different locations within the Baltic countries is usually low. Consequently, rural regions suffer most from emigration leading to less economic activity and less development prospects in these regions.To summarize, emigration has both positive and negative effects on the Baltic countries. The remittances have the strongest direct positive effect while the others factors mentioned have longer-term indirect negative effects.

Countries facing ageing population

Population Census approves that economic migration and low fertility rate has led to population ageing. As a result of low birth rates and emigration, Latvia, Lithuania and Estonia are among the most ageing countries in Europe. During the last 10 years there were significant changes in the age structure (smaller share of children and larger share of old age persons).At the beginning of 2011 the average age in Latvia was 41.6 years or 2.9 years more than the average age in the previous census in 2010. In Latvia, since 2001 the number of children (aged 0-14 years) has fallen by 28 per cent, while the number of people aged 15–64 has declined by 12 per cent. At the same time, the number of seniors over 65 years grew by six percent.

100000 0 50000

0-45-9

10-1415-19

20-2425-2930-3435-3940-4445-4950-5455-5960-6465-6970-7475-79

80+

Males Reduction (males)Females Reduction (females)

Population structure and reduction in Latvia (data as of 01.01.2011)

Source: CSB

50000 100000

12/25


In 2000 the number of children (aged 0-14) was similar to seniors (above 62), each group making up approximately 18 per cent of Latvia’s total population. Now the numbers are 14.1 per cent and 21.8 per cent respectively. Compared to previously used statistical information (based on the Population Register data) the Population Census data shows a significant population reduction in the 20-31 year age group – more than by 14 per cent. Ageing index (ratio of the number of elderly persons (aged 65 and over) to the number of young persons (from 0 to 14)) shows that Latvia’s population is older than that of Lithuania and Estonia. In 2011 Latvia’ ageing index value gained to 129, which is 15 per cent higher compared to Lithuania and Estonia where this figure was approximately 111.

The population composition in Estonia and Lithuania is slightly better compared to Latvia due to less negative natural growth; however increasing average age is the one most characteristic feature of the demographical evolution in all Baltic countries. The population structure shows a high level of women ageing and the large gap between women's and men's ageing indicators compared to other EU countries. The ageing process has been accelerated by the low birth rate and the emigration of the population predominantly of working ages. Additionally, the number of families with children moving abroad is increasing; therefore in the near future the intensity of ageing in the Baltic States will be quite high.

According to the projections of Eurostat (2010) the total population in the Baltic States will decrease by more than 20 per cent between 2010 and 2060. The sharpest decline is projected for Latvia (25.6 per cent) and the lowest for Estonia (12.5 per cent). Baseline demographic projections indicate a movement towards population decline in the foreseeable future. Population decrease and ageing process requires urgent actions and implementation of reforms in social, regional, healthcare and education policies. The long-term challenges in all three Baltic countries are birth rate increase, emigration diminishment, re-emigration or smart immigration policy. If emigration continues and the total fertility rate does not grow significantly exceeding the necessary replacement level, over the next ten years the population ageing process will continue at a faster pace than previously. The number of births now determines what happens in the next two decades. The availability of ageing will get worse, and this will act as a brake on economic growth in the future. Population decline and ageing may translate into a shrinking labor force. Over the next ten years the number of working age people could decrease by approximately 10 per cent in Latvia and by 8 per cent in Estonia and Lithuania. The unemployment rate in the Baltic States remains relatively high; the number of job seekers is above pre-crisis level without indication of shortages in the ageing force. Presently the generation born before 1990, when the birth rate was much higher, enters the labour market increasing the supply of labour force. Nevertheless, in the near future new inflows to the working-age group (persons aged 15–64 years) will be two thirds or half as much today due to record low birth rates in the 1990s. At the same time, people born during the years when the birth rate was much higher will reach retirement age. This asymmetrical age structure will lead to an ageing workforce marking the trend towards a higher rate of participation in the labour market by people above 55 years of age. Larger employment participation rates will partially compensate for the working age population decrease; however after 2017 due to changes in the labor force supply Baltic economies (mainly Latvia and Estonia) may face shortages in their labour supply.

Population ageing also involves potential problems with the financing of pension and social systems. A shrinking working age population will have to support more pensioners and other dependants as well. Presently the total dependency ratio (ratio of people under the age of 15 and over the age of 64 or dependant groups and working age population) in Estonia is about 49 whilst in Latvia and Lithuania ratio is 48 and 46 respectively, reflecting about two working age persons for every dependent person. It is expected that total dependency ratio will grow considerably -- in 2060 the total dependency ratio may exceed 80 in Lithuania and Estonia or even 90 in Latvia.An increase in the retirement age is imminent in the Baltic States; notwithstanding the higher retirement age still does not guarantee decent old-age benefits. Under such circumstances the mandatory pension scheme (pillar II pension) and voluntary private pensions (pillar III pension) plays a more significant role and can ensure a larger financial security in retirement. Due to the economic crisis and social budget deficit widening, contributions to pillar II pension scheme were significantly cut in all the Baltic States, reducing money increase in the pillar II amounts and decreasing the potential pension for the future pensioners. As a result pillar II pension scheme assets are growing at a slower pace. In the second half of 2011, in Estonia 2nd tier funds value per customer was EUR 1600, while in Lithuania and Latvia, value per customer was about 30 per cent lower -- EUR 1110 and EUR 1080 respectively. In the future the demographic situation in all three Baltic countries will be complicated and social tax payers will be much lower. If contributions to the pillar II scheme and inflows to the pillar III pension remain at the current low levels future pensioners could experience a sharp drop in their life standards therefore it is important to support long-term savings through tax policy and increase contributions to the pillar II pension scheme.

Fight or forfeit?

LATVIA

The process of economic recovery is continuously reflected in the employment statistics, the number of jobs grows and the average wages of employed people increase as well. The new job creation is obviously not fast enough to push the unemployment rate down to the pre-crisis level, however past two years saw a considerable increase in the employment figures. The data of the labour survey carried out by the Central Statistical Bureau (CSB) indicate a 3.7 per cent employment rise during the last quarter of 2011 in comparison to the fourth quarter of 2010. The increase of new jobs amounted to over 30 thousand last year and exceeded earlier estimations. The comparative data of the last quarters of 2011 and 2009 indicate the increase in the number of employed persons by 5.8 per cent; still this number is behind the employment levels of 2007-2008. In the fourth quarter of 2011, the number of the employed people is by 9.1 per cent lower than in the last quarter of 2008.


Growing numbers of employed people

13/25

April 2012

Number of persons making the SSMIC (in thousands)

752

711

Jan-04

Jan-05

Jan-06

Jan-07Jan-0

8Jan-0

9Jan-10

Jan-11Jan-12

Source: State Revenue Service

600

700

800

900

1000

1100

500

The increase in employment is also proved by the State Revenue Service’s (SRS) data showing the number of persons making the state social insurance mandatory contributions (SSIMC). In January this year the number of SSIMC payers amounted to 752 thousand and it is approximately 24 thousand or 3.24 per cent above the number of January of 2011. In comparison to the lowest level of employment (March 2010) the number of employed persons paying taxes (excluding the illegally employed persons and temporary workers) has increased by almost 42 thousand. Thus, the reduction of unemployment is related also to new jobs creation and not only to emigration which the sceptics referred to as the only source of drop in unemployment rates.

The number of job seekers decreased by 2.6 percentage points down to 14.3 per cent of economic active people during 2011. The registered unemployment index indicated a slightly higher reduction of unemployment last year -- by 2.8 percentage points from 14.3 per cent in the beginning of the year down to 11.5 per cent at the year end. Thus, the number of registered unemployed people dropped by 32 thousand during the year. The status of the unemployed person was granted anew to 128 thousand people last year

and this figure is lower than during the two preceding years when the pool of unemployed was joined by 161 thousand and 223 thousand people respectively. The number of people who lost the unemployed person's status was slightly lower last year than during the preceding year – 161 thousand vs. 179 thousand in 2010. Not all the people out of those who lost the unemployed person's status found a job -- according to the data of the State Employment Agency (SEA) 93 thousand unemployed persons were employed in 2011 (the employment figure has been recalculated based upon the data of SRS). A certain portion of the former unemployed persons is likely to have gone abroad to find a job, and a sufficiently high number of the people who have no job are no longer motivated to renew their status because they are not entitled to the unemployment benefit and cannot find suitable job offers among the list of vacancies offered by SEA. In the beginning of 2012 the possibilities of finding a job in Latvia are better than in 2009 or the first half of 2010 because the number of vacancies has increased. The data of SEA indicate that the average number of vacancies in 2011 amounted to 3268 (it was only 2038 on average in 2009). Besides, not all the employers register their vacancies with SEA (for example, highly qualified experts, managers are searched for elsewhere and not among unemployed people), which means that the number of actually available vacancies is above the level indicated by SEA data.

Unemployment and vacancies

Source: State Employment Agency

0

3

6

9

12

15

18

01.2006

07.2006

01.2007

07.2007

01.2008

07.2008

01.2009

07.2009

01.2010

07.2010

01.2011

07.2011

01.2012

0

5000

10000

15000

20000

25000

30000

Unemployment rate (%; lhs)

Number of vacancies (rhs)

During the first months of this year an increase in registered unemployment can be seen again – in March it surged up to 11.8 per cent (3 thousand unemployed persons more than at the end of last year). The unemployment growth does not indicate the reversal of the trend, it is rather related to the seasonality, and therefore the decrease of unemployment can be expected during summer months again. Taking into account the instability and the threat of recession in the Euro area as well as the unclear perspective of the global economy growth the performance of the Latvian economy will be more

modest this year and the number of new jobs will be accordingly lower. The businesses' mood regarding the growth of employment is optimistic enough at this moment and it is even more positive than in the beginning of 2011, still this does not automatically mean that these expectations will come true and there will be a rapid increase of employment. The number of new jobs could be lower than last year and it could reach the level of 20 thousand according to the optimistic scenario.Most probably the registered unemployment rate will not drop below the level of 10 per cent this year – it could amount to approximately 10.3 per cent at the end of the year. Nevertheless one has to remember that the current

estimations of registered unemployment are based upon imprecise assessment of the economically active people. The data of the 2011 Population Census indicate that the number of the economically active people in Latvia is below the number that has been used for the statistics purposes before, thus the level of registered unemployment could be one percentage point higher and amount to approximately 13 per cent instead of the reported 11.8 per cent. Therefore, when the new and correct statistical data are applied for the purposes of making assessments the registered unemployment rate will be corrected upwards and also the percentage of the job seekers could be subject to upward corrections (though less than the registered unemployment rate).

14/25


Higher income, improving purchasing power of employed people

Following the downfall of income in 2009 and 2010 when the people's income decreased by 15.9 per cent and 8.3 per cent accordingly in comparison to the preceding period, the year 2011 has been much more successful for the Latvian households from the point of view of income, as the total regular income of people (wages, pensions and benefits) increased by 3.9 per cent during the year. The upsurge in income was secured by both the increase of the number of employed people and the growth of the average wages of the employed people (by 4.5 per cent) resulting in the growth of the total income of the employed people by 8.8 per cent last year in comparison to the year 2010. Comparison of these data to those of the year 2010 reveals that wages have increased in all the sectors of economy, moreover, the increase of the total wage is more related to the increase of the variable part of the wages (bonuses, premiums) which depends on the overall company results and the individual performance. The expenditure for benefits and pensions experienced the overall decrease by 6.6 per cent in 2011 – the decrease of this expenditure is mostly attributed to the benefits, for example, the amount of the paid unemployment benefit fell considerably. The number of people receiving the unemployment benefit decreased last year from 38 thousand in January to 31 thousand in December, the average sum of the unemployment benefit also went down. During 2011 the average monthly number of persons receiving the

unemployment benefit amounted to approximately 35 thousand, but in 2010 it amounted to 60 thousand on average (the highest number of 82 thousand in January and the lowest number of 38 thousand in December).

A slight increase of the real wages (wages taking into account the impact of consumer prices) can be seen in 2011. The increase of the average monthly wage exceeded the inflation last year, thus the real wages increased by 0.1 per cent. The improvement of the purchasing power of the employed persons is too small for the time being for achieving the pre-crisis level -- the real wage in the last quarter of 2011 was 12 per cent lower than in the corresponding period of 2008. It is possible that the increase of the real wage in 2012 could exceed the result of last year, thus the purchasing power of the employed persons will increase more rapidly than last year. However, the hope for a very rapid increase in wages is not justified -- the wage could grow along similar trends to last year, by 4-4.5 per cent on average. It should be added that the prevailing uncertainty in the global economy presents a risk factor and any new financial stresses or rapid downturn of the global economy growth will have a negative impact upon the dynamics of growth of the Latvian national economy and also wages. In case of the basic scenario when the average wages increase by 4-4.5 per cent the real wage could increase by 1.5-2 per cent taking into account that the average inflation this year could be below the level of last year (about 2.5 per cent).

Real wage and real old-age pension (1Q2005=100)

110

120

130

140

150

160

170

1Q2005

3Q2005

1Q2006

3Q2006

1Q2007

3Q2007

1Q2008

3Q2008

1Q2009

3Q2009

1Q2010

3Q2010

1Q2011

3Q2011

Source: CSB, SSIA, SEB estimates

Real wageReal old-age pensionReal old-age pension, excluding newly granted in 2009-2011

100

Household income

0

100

200

300

400

500

600

1Q07

2Q073Q07

4Q071Q

082Q08

3Q084Q08

1Q09

2Q093Q09

4Q091Q

102Q10

3Q104Q10

1Q11

2Q113Q11

4Q110

600

1200

1800

2400

3000

3600

Source: CSB

Average net wage (EUR)Average pension (EUR)Overall income of households, mln EUR (rhs)

We spend what we earn

Despite the comparatively modest increase of income and higher expenditure resulting from the increase of prices people have increased their consumption more rapidly last year than it was forecasted. The household consumption increased by 4.4 per cent in 2011. Disregarding the impact of prices these expenditures demonstrated the increase of even 9.6 per cent in the real prices.

15/25


The dynamics of the real old-age pension differs from the changes in the real wage. The real old-age pension has undergone the decrease of 2.9 per cent during 2011. It should be added that the index of the average old-age pension is affected by the amount of newly granted pensions that are higher than the current average old-age pension in most cases, therefore, the purchasing power of the retired people has decreased by at least the percentage equal to the average annual inflation (4.4 per cent) or even more due to the higher proportion of expenditure for food products in the consumption basket of the pensioners. The nominal income of the retired people has not actually changed since January 2009 (no indexation has been applied and additional payment for the length of employment have not been changed), thus the real pension has been dependent upon the changes in the consumer prices during this period. In the result of deflation in 2009 the real income of the retired people increased, however, since the second quarter of 2010 consumer prices have been increasing again and the real pensions have been decreasing accordingly. The real pension is equal to the level of the end of 2008 now - over the last three years the real income of the retired people has decreased by approximately 3 per cent.

In 2011, in particular, during the first 6 months of the year, the growing food prices served as a major driving force of the inflation, whereas this year a more modest increase of food

prices is expected, a small decrease of prices could even be expected in some product groups. The attention this year could be focused on the expenditure related to housing and transport expenses which have to be considered important groups of expenditure. The increase of fuel prices in the beginning of the year harmed the purses of drivers very painfully, besides, the people who are not car owners have no reasons for joy, either, because due to the increase of fuel prices also the costs of production and services are growing, thus, the prices of various goods and services could increase.The situation is similar regarding utilities payments (expenses for heating, natural gas and other services), as they have increased considerably during last couple of years, and also the increase of these costs is felt in a dual way by households – both directly in the form of increased personal utilities payments and indirectly due to the increase of production costs and the prices of goods and services. The impact of the price increase related to housing upon the budgets of households will be one of the major financial issues for households this year. Taking into account the structure of the consumption expenditure the increase of housing costs will be felt more by low-income households and the households of retired people. The increase of fuel prices will result in a high increase of transportation expenditure for the households of the 5th quintile or high income households, the impact upon the households of the 1st quintile or low income households will be much more negligible.

The increase of consumption was supported not only by the growth of income, but also the flow of earned money from abroad, the contribution by the shadow economy because the content of the "envelope" wages shows up in the people's spending sooner or later and the improvement of the consumer sentiment. The adoption of the Law on Declaration of the Initial Property Status also contributed positively to retail trade because it served as the encouragement to spend the accumulated savings for purchases for a certain part of people to avoid filling in this declaration and/or paying these amounts into the bank account.Analysis of the people's spending reveals that the proportion of the goods for long-term use has increased considerably and this indicates the postponed consumption, i.e. during the downturn (this applies to year 2009 in particular when the retail volume dropped very rapidly) people postponed their expenditure and did not spend money and made savings instead. Along with the stabilisation of the situation and the recovery of the economy people started to feel more assured of their future and are buying various goods for long-term use, at the same time they are not busy with thoughts about difficult times and making any savings. The above is attested also by the changes in the household gross saving rate which reflect the share of the income of households not spent for the consumption. In 2009 the gross saving rate reached an unusually high level for Latvia exceeding the level of 10 per cent (10 per cent of the income at the disposal of households were directed for savings), however, in 2011 this index rapidly approached the zero level which means that all the earned money has been spent.

Household consumption and income (labour costs, social benefits); million EUR

1500

2000

2500

3000

3500

4000

2Q 054Q 05

2Q 064Q 06

2Q 074Q 07

2Q 084Q 08

2Q 094Q 09

2Q 104Q 10

2Q 114Q 11

Source: CSB, SSIA, SEB estimatesConsumptionIncome

1000

The financial "safety cushion" gives no safe feeling as yet

16/25


increase of the share of current accounts in the total volume of household deposits from 45 per cent at the end of 2010 to 49 per cent in December 2011. Certainly the low interest rates of term deposits do not encourage people to invest money in deposits and many people choose to keep their money in current bank accounts.

Household gross saving rate (% of disposal income)

-3,00

-1,00

1,00

3,00

5,00

7,00

9,00

11,00

13,00

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

*

Source: Eurostat; *SEB estimates

-5,00

The Latvian people could afford spending all the earned money and contribute to the growth of the domestic consumption and the economic growth this way, if only their financial balance were much more positive and the volume of financial assets (savings at banks, securities and other financial instruments, private pensions and savings insurance, the 2nd tier of the pension savings) was considerably higher. The financial assets of households are still below the financial liabilities (loans and leasing) and in 2011 the total volume of the financial assets of households did not change considerably – there was a small increase of LVL 6 million (EUR 8.5 million). The 2nd tier of pensions saw an increase by LVL 49 million (EUR 70 million), the increase of long-term savings (savings life insurance and the 3rd tier of pensions) was lower and amounted to LVL 21 million (EUR 30 million). A decrease can be seen in other two groups of assets – the volumes of deposits and securities decreased by LVL 13 million (EUR 18.5 million) and LVL 52 million (EUR 74.2 million) respectively during last year. The changes in the securities portfolios of households serve as a clear reflection of the people's psychological shades and the frequent experience on the funds markets that is best described by the saying "buy expensive, sell cheap". This is confirmed by the changes in the indices of the global stock markets and the decrease of the investment funds amount held by households in the third and also the fourth quarter of the year when the stock markets started to recover after the sale of several months and the increase of the investments amount would be a logical expectation. The dynamics of the amount of household savings was impacted by the crash of "Krājbanka" [Savings Bank] resulting in a decrease of above LVL 200 million (EUR 285 million) in the total household savings in November, however in December the amount of savings returned to the level of October again. The fact that the curves of the term deposits of households and savings accounts of households crossed deserves special attention – it was the first time when the amount of current accounts exceeded the amount of term deposits. Such changes resulted in the

Household deposits (EUR million)

0

300

600

900

1200

1500

1800

2100

2400

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Demand deposits Term deposits Savings accounts

Source: Bank of Latvia

People continued reduction of their debt liabilities last year – during the year they were reduced by LVL 468 million (EUR 668.6 million) down to LVL 5.436 billion (EUR 7.766 billion). The decrease of the total amount of loans issued to households can be seen for 13 quarters in sequence or as from the last quarter of 2008. Although the interest in housing loans increased in 2011, still the issued amounts are small in comparison to the amounts of loans issued during the crediting boom and cannot compensate the process of amortization of the credit portfolio and amounts of written down loans. The volume of loans issued to households decreased by 7.9 per cent last year and this is a more rapid downfall than during the preceding periods (the decrease of

5.3 per cent in 2010 and the decrease of 5 per cent in 2009). The falling trend of the total volume of loans issued to households will also continue this year; the percentage decrease of the portfolio is expected to be lower at the end of the year. Thus, the burden of the debt liabilities of households will continue to decrease this year as well and their financial vulnerability will diminish; moreover, the decrease of the debt burden of households will take place on the account of both reduction of the loan volumes and also the increase of income.Along with the reduction of the volume of the liabilities of households the balance of net financial assets of households continues to improve. The negative difference between the financial assets and the financial liabilities of households equalled to approximately LVL 1.13 billion (EUR 1.614 billion) at the end of 2011, and this is LVL 1.8 billion (EUR 2.571 billion) less than at the end of 2008. Despite the considerable improvement of the financial balance during last three years the financial balance of the Latvian households is still negative which means that a certain portion of households have to be considered financially vulnerable, not having savings for compensating the decrease of income. In order to feel more stable the households should still direct most of their income for

17/25

savings, however, the first months of 2012 do not indicate the formation of an additional financial "safety cushion" yet.


Financial assets and liabilities of households(EUR billion)

3 000

3 800

4 600

5 400

6 200

7 000

IVQ08

IVQ09

IQ 10 IIQ 10 IIIQ2010

IVQ2010

IQ2011

IIQ2011

IIIQ2011

IVQ2011

Financial assetsFinancial liabilities Source: SEB estimates

Financial assets and liabilities of households (EUR million)

Financial assets

Deposits

Securities and financial instruments

Life insurance and private pension funds

Pillar II pension funds

Liabilities

Mortgage loans

Consumer loans

Other loans

Leasing

Net value of financial assets

* SEB banka estimatesSources: Bank of Latvia, FCMC, LIA, SEB dzīvības apdrošināšana"

IVQ 2008

5 421

4 109

394

259

660

9 559

7 188

1 121

755

494

-4 138

IVQ 2009

5 677

3 999

375

301

1 002

8 944

6 866

1 012

736

329

-3 267

IVQ 2010

6 117

4 108

485

347

1 178

8 400

6 554

920

682

244

-2 284

IQ 2011

6 076

4 058

465

352

1 201

8 217

6 359

907

712

238

-2 141

IIQ 2011

6 148

4 108

461

361

1 219

8 055

6 247

891

692

225

-1 907

IIIQ 2011

6 080

4 109

402

367

1 203

7 912

6 126

886

687

214

-1 832

IVQ 2011

6 125

4 090

411

377

1 247

7 735

5 985

864

679

207

-1 610

Over the second-half of last year, it became obvious that a gradual improvement in the ratios reflecting the financial standing of the Lithuanian households was limited or even dropped. The tremendous changes in the households’ balance sheets are also observed. The volume of financial assets of households has decreased considerably and the retail loan portfolio continued to shrink. Several factors that have influenced the above changes, i.e., the economic problems in the euro-zone countries and the economic forecasts of the European Union member states (closely related with the Lithuanian economy) revised downwards have determined a lower volume of investments in securities, stagnation on the labour market (no new jobs created, no intentions of wage increase). People were most worried about the new winter heating season that drove prices up by nearly one fifth. An extraordinary event – a collapse of the commercial bank with 15 per cent market share of deposit from households and with the household loan market share of 3 per cent has distorted the statistics of

LITHUANIA

Too early to talk about individuals’ financial behaviour U-turn yet

18/25

the deposits and loans, and the actual losses were incurred by a number of individuals (a portion of deposits with said bank non-covered by the deposit insurance), and has spread doubts among others concerning banks’ trustworthiness. However it is too early to talk about the individuals’ financial behaviour reversion. In the opinion of the European analysts “the worst case scenario has passed”, the winter heating season will be ending in two months, the collapse of one bank did not cause the contagion effect and did not make any remarkable changes in the financial habits of households. Thus, it is possible to expect that over coming years, the financial situation will remain similar to that of the current year, i.e., people, instead of borrowing, will accumulate savings and repay debts, the growth of bad debt portfolio will be suspended and it will start shrinking and people will be cautious when entrusting their money to financial institutions and will select more conservative savings instruments.


Slow individual income growth

When the local economy started to recover after decline in the year 2009, individual income did not start rising immediately – average wage growth was slower than the local economy improvement and taking into consideration the inflation rate, the real wage continued to shrink. Compared to the year 2008, the real net salary making LTL 1,689 (EUR 489) dropped by 12 per cent in terms of purchasing power. A decrease in wages was the factor that resulted in lower costs for employers and lower income for employees, and created favourable conditions for improvement of the country’s competitiveness, export development and local economy recovery after a dramatic decline in the year 2009. Therefore prior to increase in wages, the labour market indicators started to go up – the number of jobs increased and the number of unemployed dropped. During the second-half of last year, the number of unemployed dropped from 255.6 thousand to 222.1 thousand and the number of newly employed people grew by 9.2 thousand.

More signs of the improved financial standing of individuals are observed after a certain period of time subject to business recovery. Statistical reports on the average wage increase received mixed reaction from members of the public. Such rise is mostly determined by an increase in wages only in some competitive sectors where local employers have to compete for the skilled workers with foreign employers (IT sector, health care sector, chemical industry, furniture production, scientific activity), which employ nearly 22 per cent of the local labour force.

People often do not take into account some factors included in the statistical calculation showing an increase in wage. E.g. part-time employees are again invited to work full-time. Such people do not feel that their work hour became more expensive or that their wage increased. Wage statistics is influenced by various one-off benefits and bonuses (e.g. paid at the close of the year); however employees usually do not consider the above income to be an increase in the permanent wage. Non-official salaries and relevant fluctuations may also influence public perception, however such data is not reflected in the official statistics.

Other more rapid income-related changes are not expected in current year. Any positive or negative wage fluctuations are not forecasted. In the opinion of SEB Bank analysts, the unemployment rate over the current year will shrink insignificantly – from 15 per cent to 14 per cent, the average salary will rise only by 2 per cent. Salary increase assumptions are identical with those, which existed until now. Slight increase in salaries is forecasted taking into consideration obvious shortage of staff in some competitive business sectors, thus the employers willing to ease staffing shortages are forced to raise salaries not only of those receiving minimum wages.

Since January of the current year, people whose retirement pay was reinstated to pre-crisis levels (year 2009) may be satisfied. The Ministry of Social Security and Labour declared that the average retirement pay grew by nearly LTL 71 (EUR

21). However assessment of changes in prices of goods and services over the equivalent period shows that in terms of purchasing power the average retirement pay today is lower by 13 per cent than in the year 2009. At present, the average retirement pay in Lithuania amounts to LTL 815 (EUR 236).

In the second-half of the year, the overall level of prices grew only by 4.2 per cent. However the greatest rise in prices of goods and services that can hardly be refused and consumption rate thereof may not be lower such as water supply – by 6.7 per cent, heating – by 6.5 per cent (compared to the second half of the previous year – by 17.2 per cent) was observed: Compared to the second half of last year, increase in prices of hard fuel (28.8 per cent), private car fuel (12,9 per cent), gas (12.6 per cent) was the highest. Over a year period, food prices went up by 6.7 per cent.

Taking into consideration the above, lower growth forecast of prices of consumer goods and services for the next year compared to last year, i.e., expected average annual inflation of 2.5 per cent will not ease the situation, as the expected rise in prices will be mostly caused by rise in prices of energy resources primarily resulting in rise of prices of goods and services of first necessity – dwelling heating, fuel (transport

costs make 6.8 per cent of the Lithuanian consumer basket) and food products.

Irrespective of continuously shrinking real wage, household consumption over the second half of last year was increasing. The economic recovery prospects prevailed in the third quarter, however in the fourth quarter expectations started to come down again and limited consumption was balanced by the holiday season when trade in nearly all kinds of consumer goods became proactive.

A review of the household balance sheets should be split into two parts, i.e., one part – prior to the collapse of Bank Snoras AB in the middle of November and another part – by the end of the year. The financial behaviour of households did not show worsening sentiment till November: the volume of household deposits with the financial institutions increased and the loan portfolio grew for the first time after almost a three-year period. It should be noted that unfavourable fluctuations in the financial markets lead to the slight decline in assets of private individuals. In the last quarter of the previous year when Bank Snoras AB terminated its activity, the statistics of household balance sheets changed remarkably, however the actual financial standing and behaviour patterns of households changed insignificantly. If the deposits in Bank Snoras AB and compensations paid by the Deposit Insurance Fund are not included in the calculation, the value of deposits form the households in the financial institutions was higher than the value of withdrawn deposits, the loan portfolio continued to shrink slowly, and increase in the amount of overdue loans to the financial institutions and other lenders at the end of the year was limited.

Statistics of household balance sheets distorted by bank collapse

19/25


Household consumption expenditure (change y-o-y)

-30%

-20%

-10%

0%

10%

20%

2008 2009 2010 2011


The year-end was different compared to the situation two years ago: the value of household financial assets based on statistical data shrank. The greatest impact was made by the collapse of Bank Snoras AB when deposits from the households shrank by LTL 628 million (EUR 182 million). A portion of household deposits (exceeding the maximum deposit covered by the insurance) was lost, other depositors decided to keep savings at home and a number of depositors decided to repay loans or a portion thereof. However if the impact of Bank Snoras’ collapse is not included in calculation, the approximate amount placed with banks by private individuals in the fourth quarter exceeded the withdrawn amount by nearly LTL 400 million (EUR 116 million) thus it shows that after said bank collapse the individuals retained confidence in banks and intentions to accumulate savings.

Panic among depositors was prevented, however they became more cautious. After such event, some of them took measures to ensure higher protection of savings – deposits previously kept in one bank were placed with several banks, the Government bonds were acquired and a lower number of long-term deposit agreements was signed. Analysis of the data of financial institutions revealed that deposits in the credit unions have increased (credit unions offer higher interest rates than banks). While the share of deposits in banks offering higher interest rates dropped and the share of deposits in major banks offering lower interest rates increased. The above shows that private individuals are not trying to receive higher interest income but to deposit funds in different institutions.

Household assets and liabilites (mEUR)

2008 2009 2010 2011Liabilities Source: Central bank, Central depository

7000

8000

9000

10000

11000

12000

6000

Assets

Statistical data shows that over the last quarter of the previous year, deposits from the households in the financial institutions declined by approximately 5 per cent (or by LTL 1.37 billion (EUR 0.4 billion)). However if the loans granted by Bank Snoras are excluded from the calculation, it shows that retail loan portfolio was shrinking nearly three times slower – only by 1.7 per cent. Thus in the third quarter, the retail loan portfolio growth was limited. A lower willingness to borrow and a higher initial instalment requirement are the main reasons of suspended retail loan portfolio growth. The situation in the consumer loan portfolio is slightly different – said loan portfolio is continuously declining. However analysis of statistical data of companies (other than banks) shows that private individuals borrow more and more money from such companies. During current year, the average interest rate on consumer loans issued by banks was by 2.5 npercentage points lower compared to the previous year. Nevertheless it did not stimulate higher demand of private individuals for ba k loans. While interest rates of other companies granting loans are remarkably higher compared to the bank interest rates, however the dynamics of borrowing from said companies is not declining. An assumption can be made that clients of the above companies are not informed about the difference in interest rates or disregard it as they do not have a possibility or are unwilling to borrow from the bank.

The volume of loan overdues is not decreasing, however the situation is not drastically worsening. Based on the data of the personal credit history system Manocreditinfo.lt, the share of overdues during the recent quarter grew by 3 per cent (or by LTL 79 million (EUR 23 million)), while over the previous quarter it went up by 10 per cent, or by LTL 216 million (EUR 63 million). At the end of the year, overdues to banks of 102 thousand of individuals totalled LTL 2.23 billion (EUR 0.6 billion), and repayment of LTL 170 million (EUR 49 million) to other companies issuing loans was overdue by 43 thousand of individuals. Regardless of fulfilment of overdue liabilities to banks over the last quarter (LTL 162 million (EUR 47 million) to banks and LTL 9 million (EUR 2.6 million to loan companies), the volume of overdues was increasing, therefore the total overdue loan portfolio continued to increase.

20/25


Households‘ potential to timely repay the loans deteriorates if interest rates are increased or income becomes lower and other costs rise. Interest rates on previously obtained loans currently are lower than a year or two years ago, and increase in interest rates is not expected. The situation in the labour market has stabilised: the unemployment rate stopped rising and is slightly dropping, wages are not falling, and the general level of prices is going up rather slowly. If such situation continues, the volume of overdue loans should start shrinking.

Although the events at the end of the year in the financial world were not encouraging, the financial depression did not prevail among people. The consumer survey conducted by the Department of Statistics shows that the consumer sentiments in January and February were more optimistic than in December. The largest number of respondents (56 per cent) believes that in coming twelve months their financial situation will not change and it means that it will not deteriorate. Therefore probability exists that over the current year, the households will be willing to accumulate savings and to repay debts, and will select more conservative, and seeking to accumulate or keep assets will choose lower yield and lower risk financial instruments.

Household deposits distribution change (mEUR)

0

1000

2000

3000

4000

5000

6000

Banks with higher deposit interest rates

Banks with middle deposit interest rates

Banks with lower deposit interest rates

Credit unions

September 2011 January 2012

+6%

+18%

+9% +23%

-12%

Sources: Central bank, Bankers' association, Central depository www.indeliai.lt, SEB estimatesNB "Snoras" deposits not includet in September 2011 statistics

State bonds

Overdues and their repayment (mEUR)

300

400

500

600

700

800

1Q2011 2Q2011 3Q2011 4Q20110

10

20

30

40

50

60

Amount of overdues Paid overdues (RHS)

200

manocreditinfo.lt

21/20

Financial assets, liabilitiees and net asset value of households (EUR million)

Financial assets

Deposits

Bonds (Lithuanian corporate bonds and Government bonds)

Equities (Lithuanian equities)

Units of investment funds offered by the banks

Savings under life insurance agreements

Pillar II pension funds

Liabilities

Mortgage loans

Consumer loans

Other loans


Sources: Bank of Lithuania, Central Securities Depository, Lithuanian Bankers’ Association

2008

9138

7152

493

522

121

206

644

8741

6055

1265

1420

397

2009

9994

7392

580

633

183

261

945

8362

6027

1026

1309

1362

2010

10680

7856

241

879

264

323

1117

7917

5983

932

1002

2763

1H2011

10917

7893

263

974

259

369

1159

7850

5982

871

997

3066

2H2011

10488

7719

322

700

206

361

1180

7560

5934

691

935

2928


ESTONIA

22/25

Labour market is recovering

Labour market is experiencing gradual recovery. The unemployment rate has been decreasing to 11.4% by the end of 2011 with the number of unemployed 79,000. It is now at the same level as in the beginning of 2002. The recovery has not been achieved by unemployed leaving the labour market – on the contrary, the participation rate has shown increasing long-term trend and there are more people involved in working than in the first half of the 2000s. Whether the unemployment rate will continue to decrease depends on the prospects of the companies to increase their sales and profits. As sales growth is challenging in the current economic environment where export markets are experiencing common difficulties due to the European debt crises and domestic demand is lingering, the chances for further unemployment decrease are modest.


0

4

8

12

16

20

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

56

58

60

62

64

66

68

70

Unemployment rate % (LHS)Participation rate % (RHS) Source: Estonia Statistics

Participation and unemployment

Long-term unemployment rate is twice as high as the short-term one: at the end of 2011 59% of the unemployed had been without work for more than a year, while only 31% of the unemployed had been looking for a job less than 6 months. It is not a surprise that there are more long-term unemployed than short-term ones; the comparable ratio has prevailedin the beginning of 2002 and the end of 2004. Still, the high share of the long-term unemployed is troubling, indicating that structural unemployment plays a significant role on the labour market.

Average gross wage increased by 6.2 per cent in the fourth quarter of 2011 compared to a year ago, reaching the level of 865 euros. The increase i n real wage that is adjusted by inflation was 2.1 per cent. The rise of the real wage has occurred for two quarters after the decrease for almost two years (11 quarters) in a row. However, the wages are growing unevenly in different sectors: the wages in transportation sector have experienc de a decrease (-0.05 per cent) while in wholesale and retail the wages increased by 11.8 per cent. Hence, some households gain from the real wage growths while others are still experiencing real wage decreases. Big differences in the wage developments across sectors confirm that some sectors experience surplus while others experience a deficit of labour force.

0%

10%

20%

30%

40%

50%

60%

70%

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Less than 6 monthsMore than 12 months Source: Estonia Statistics

Share of the unemployment by duration

Changes in gross Wages

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4

2003 2004 2005 2006 2007 2008 2009 2010 2011

year

ly g

row

th ra

te, %

Economic activities totalWholesale and retail trade; Repair of motor vehicles andmotorcyclesTransportation and storage

Source: Estonia Statistics

Households are strengthening their balance sheet

Households continue to be cautious in taking financial responsibilities. The total loan stock of households continues to decrease at an average of 2-3 per cent year-on-year that is slightly less than in 2010 and the beginning of 2011 when the deleveraging took place at the rate of 3-4 per cent year-on-year. In February 2012,the household loan

stock was EUR 6.9 billion.Compared to the peak in December 2008 (EUR 7.6 billion), it has decreased by EUR 715 million. The deposit volumes are continuing to increase by 10 per cent in a year and reached EUR 4.4 billion in February 2012.

23/25

half of 2009 for housing loans. The decrease of housing loan portfolio has remained 1-2 per cent year-on-year while the decrease in consumer loans has been 10-12 per cent year-on-year. The adjustment process of balancing the households’ budgets,which has lasted for two and a half years, can be expected to continue at least for another year.


0

1000

2000

3000

4000

5000

6000

7000

8000

01.0007.0

001.0

107.0

101.0

207.0

201.0

307.0

301.0

407.0

401.0

507.0

501.0

607.0

601.0

707.0

701.0

807.0

801.0

907.0

901.1

007.1

001.1

107.1

101.1

2

mEU

R

-10,0%

2,0%

14,0%

26,0%

38,0%

50,0%

62,0%

74,0%

86,0%

Loans (LHS)Deposits (LHS)Change of loan portfolio, y-o-y (RHS)Change of deposits, y-o-y (RHS)

Household loans and deposits

Source: Bank of Estonia

The average debt ratio to disposable income in Estonia is slightly below the average of the level of euro area (95% vs. 99% of household’s disposable income, respectively), indicating medium indebtedness of the Estonian household sector. However, households experience different levels of loan burdens and there are still considerable amount of households who have difficulties in repaying the loans. There has been a slight decreasing trend in overdue loans, but still in February 2012, the share of overdue loans was 8.4% in housing loan portfolio and 15.9% in consumer loan portfolio.

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

12,00%

14,00%

16,00%

18,00%

20,00%

01 .0505.05

09.0501 .06

05.0609.06

01 .0705.07

09.0701 .08

05.0809.08

01 .0905.09

09.0901 .1 0

05.1 009.1 0

01 .1 105.1 1

09.1 101 .1 2

Housing loans Consumer credit

Overdue loans % in loan portfolio


There are several reasons why households need to lower their debt levels. First, the increase of the household debt in Estonia has occurred within the last decade as a result of financial liberalisation that took place in all Central and Eastern European Countries. It resulted in vigorous increase in borrowings as households started to fulfil the postponed needs while in older Europe the increase in borrowing has taken place over several decades. Consequently, the development in Estonia has most probably occurred unbalanced across different segments: although most of the loans taken have been reasonable, some of the loans have not been sustainable. Hence, some households need to adjust to the new prospects by decreasing their debt levels.The decrease in loan portfolio has been taking place since the beginning of 2009 for consumer loans and the second

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

12.08 03.09 06.09 09.09 12.09 03.10 06.10 09.10 12.10 03.11 06.11 09.11 12.11

Y-o-y change of housing loanY-o-y change of consumer loanY-o-y change of other loans Source: Bank of Esonia

Changes in loan portfolio

The interest rates of housing loans have been decreasing since the second half of 2008, mainly thanks to the low levels of the Euribor rate. Euribor has decreased by 40% since the end of 2011 and is on its lowest level of the last 20 months. In February 2012 the average interest rate of a housing loan given in EUR was 3.27%, more than three percentage points less than in October 2008 when the average interest rate was 6.35%. The decrease has alleviated the debt repayment burden of the households. Since the second half of 2009 the average housing loan interest rate has been at a lower level compared to the economic boom period and it has been even below the inflation rate. However, the favourable interest rates do not induce an increase in loan demand as other factors mentioned above play more important role in the borrowing decisions.

Average interest rate of housing loans

1,00%

2,00%

3,00%

4,00%

5,00%

6,00%

7,00%

01.2007

04.2007

07.2007

10.2007

01.2008

04.2008

07.2008

10.2008

01.2009

04.2009

07.2009

10.2009

01.2010

04.2010

07.2010

10.2010

01.2011

04.2011

07.2011

10.2011

01.2012


0,00%

Households keep about70 per cent of their financial assets in deposits. The volume of deposits is increasing in double figures: while in the second half of 2011 deposits increased 12-13 percent year-on-year, then in January and February 2012 the deposits increased 10 per cent year-on-year. Consequently, the households own significantly higher buffer stocks: their deposits are 23 percent higher than at the

24/25


observe an increase in term deposit interest rates during the period but not at the same growth level. The extremelyunfavourable period for keeping buffer stocks on deposits was from the second half of 2007 - when inflation rocketed in double figures - until the end of 2008. The gap between interests and inflation has been high from the start of 2011 and this will continue likewise as long as inflation retains at high levels. Estonia reported HICP inflation of 5.1 per cent in 2011 that is among the highest in the EU countries and therefore the savings are losing more of their real value. The HICP growth rate is predicted to come down to 4 percent in 2012 and to 5 per cent in 2012. Still, as households do not have other alternatives to keep their buffer stocks as riskless, the volume of deposits is expected to continue growing in 2012.

0

500

1000

1500

2000

2500

01.0007.0

001.0

107.0

101.0

207.0

201.0

307.0

301.0

407.0

401.0

507.0

501.0

607.0

601.0

707.0

701.0

807.0

801.0

907.0

901.1

007.1

001.1

107.1

101.1

2

mEU

R

Demand and overnight depositsTerm deposits Source: Bank of Estonia

Household deposits

Deposit interest rate compared to the inflation rate

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%

12,0%

14,0%

01. 0007. 0

001. 0

107. 0

101. 0

207. 0

201. 0

307. 0

301. 0

407. 0

401. 0

507. 0

501. 0

607. 0

601. 0

707. 0

701. 0

807. 0

801. 0

907. 0

901. 1

007. 1

001. 1

107. 1

101. 1

2

InflationInterest rate of term deposits over 1 year

Source: Estonia Statistics and Bank of Estonia

Uncertainty about future prevails

Consumer survey results indicate that household’s perception about their economic situation in the following 12 months is fluctuating less than their assessment about the country’s future economic situation. From the second half of 2009 households have been more conservative about their personal economic prospects than about the future economic situation of the country.From Q2 2010 their balance in assessing the country’s future economic situation turned to a positive side. However, it dropped sharply at the end of 2011 when households started to worry about the debt crisis developments in Europe and its impact on Estonia. It has recovered to some extent in recent months being on the same level with the assessment of the economic situation of households in March 2012 (the balance -4 per cent). Despite the strengthening of economic situation of the households in the recent period, by deleveraging and increasing precautionary savings, the assessment of the future economic situation remains still modest.

end of 2008. Due to the continuing uncertainty of the European economy and financial markets, households would like to continue to increase their savings to protect against negative shocks. As optimistic prospects of economic growth are missing, it is rational from households to continue to accumulate buffer stocks and to prefer keeping these in riskless assets. The deposit insurance is EUR 100,000 since January 2011, underlining the safety of deposits regardless of bank bankruptcy cases in Latvia and Lithuania.The level of demand deposits has now exceeded that of the term deposits as the interest on term deposits has come down and the opportunity cost of households to keep their savings very liquid has decreased.

Unfortunately, deposits are not the best options for the households to keep their savings, as inflation is still higher than the interest rate earned. The gap has prevailed from the 2004 when inflation started to increase. One can also

Consumer survey results

-40

-30

-20

-10

0

10

20

30

40

01.05

07.05

01.06

07.06

01.07

07.07

01.08

07.08

01.09

07.09

01.10

07.10

01.11

07.11

01.12

net b

alan

ce o

f res

pond

ents

, %

Economic situation of householdsEconomic situation of country Source: Estonia Statistics

On one hand, it is good that the households are more realistic about the future than they were in the booming period when the overoptimistic emotions prevailed. On the other hand, it

25/25


can have a boomerang effect on the country’s economy if it leads to too modest consumption. The consumption plans (in the next 12 months) increased to some extent during 2010, remained on a stable level in the first half of 2011 and are showing a slight decrease after that. The plans to buy durables have decreased from -34 in February to -37 in March. The plans for home improvements have decreased sharply while the plans to buy a car are stable at low levels. Households are conservative in their plans as there is uncertainty about the future and there is no good reason to change their future prospects until the debt crisis has cleared out in Europe.The consumption plans do not reflect one-to-one the real retail volumes as these are also affected by efforts of retail to promote the sales. The retail sales has increased since February 2011 in the range of 2-6 per cent year-on-year peaking at 14.8% in January and February 2012. Additionally the car sales year-on-year growth was nearly 30 per cent, being the highest in EU.As mentioned in the overview of consumption in all Baltic countries, the increase in retail sales has been induced by

Consumption plans

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0

01.0505.05

09.0501.0

605.06

09.0601.0

705.07

09.0701.0

805.08

09.0801.0

905.09

09.0901.1

005.10

09.1001.1

105.11

09.1101.1

2

net b

alan

ce o

f res

pond

ents

, %

Major purchasesHome improvementsBuy a car Source: Estonia Statistics

Financial assets, liabilitiees and net asset value of households (EUR million)

mln EUR

Financial assets*

Demand and overnight deposits

Term deposits

II pillar pension funds

III pillar pension (Funds + insurance)

Other securities

Liabilities (loans)

Housing loans

Consumer loans

Other loans


Source: Bank of Estonia, Estonian Central Register of Securities, SEB calculations*Private portfolios and assets under managment in life insurance are missing

2007

4 788

1 776

1 453

703

193

663

6 958

5 626

799

533

-2 170

2008

4 946

1 635

1 966

729

179

438

7 713

6 209

856

647

-2 767

2009

5 299

1 616

2 076

944

214

449

7 494

6 111

765

618

-2 195

2010

5 741

2 054

1 860

1 066

254

506

7 244

5 973

671

600

-1 503

IIQ 2011

6 042

2 206

1 984

1 106

259

488

7 130

5 920

632

577

-1 088

IVQ 2011

6 193

2 219

2 110

1 131

255

479

7 063

5 882

599

582

-871

promotional discounts that households use to execute the consumption plans that have been postponed since the economic crisis started. The development of consumer confidence index questions the sustainability of the strong consumption growth in the beginning of 2012.

baltic household outlook 2012 eng · baltic household outlook 3/25 workers' purchasing power...

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