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economy Estonian Economic Overview Economic growth accelerates tekst: Olavi Grünvald, (PricewaterhouseCoopers) 2010 was the year of recovery from the economic crisis in Estonia as well as in the European Union as a whole. According to Statistics Estonia, the Estonian GDP growth rate increased to 5.0 percent in the third quarter of 2010 compared to the same period of 2009, which is the second consecutive growth quarter after nine successive quarters of decline. Although the external sector is considered to be the locomotive of the growth, the statistics show that domestic demand is recovering at the same pace as total GDP. In the first three quarters of last year the GDP increased by 1.9 percent, which is very close to the two-percent threshold expected by many analysts for a the whole of 2010. This growth pattern continued to be strong also in the last quarter of 2010, which makes expectations likely to come true. The locomotive of the upturn has been industrial production, which grew by 23 percent in 2010 compared to the previous year, but oscillated between 35-39 percent in its last three months. This was influenced most by the branches holding bigger shares – manufacturing of electronic products, where production increased by nearly two times, and manufacturing of wood, where production grew by more than a quarter. When Estonia was the country with the largest decrease in manufacturing production among the EU Member States in the middle of 2009, with a decline exceeding 30 percent, then since the 2nd quarter of 2010 it has become the country with the fastest growth in industrial production. The growth of industrial production was mainly influenced by external demand – more than two thirds of the whole production of manufacturing was sold on the external market. Demand on the domestic market was significantly lower, but also increased continually during the year. This is confirmed by the figures of retail sales, which decreased by 4 percent in 2010, but increased in September 2010 and accelerated to 5 percent in the last two months of the year. Positive expectations for 2011 Prospects are good also for the current year, which is demonstrated by the upward correction of the expected GDP growth by analysts. The EBRD has raised its growth expectation to 3.6 percent compared to the 3.2 percent assumed for 2011 in October 2010. Danske Bank has put its mark to 3.9 percent in its latest prognosis – in comparison Lithuania and Latvia are expected to reach 3.6 and 2.9 percent respectively. The IMF is very close to Danske, with its 3.6 percent and points at the necessity for an active labour market policy, as unemployment, which is currently at a very high level, is about to decrease very slowly. The institutions with a stronger local presence seem to be even more optimistic. LHV Pank is backing its 4.8-percent prognosis with trust in an increase of household consumption and investment activities. According to LHV the export markets will continue to support the economy, and as a result investments into new technology are inevitable to adjust to production capacity. Household consumption is expected to benefit from the increasing income, decreasing unemployment and improving consumer confidence. On the other side, the biggest local bank, Swedbank has lowered its growth prognosis slightly, from 4.5 percent in September last year to 4.2 percent in January of the current year. This is because of a pessimistic view of internal demand and more specifically due to the dragging investment activities. The exceptional winter condi- 8 INTIME I kevad/spring 2011
Stock exchange continues its recovery Similar to the global market, the small Baltic stock exchanges continued the turning pattern in 2010 that had started already in the second half of 2009. Tallinn and Vilnius stock exchange indexes have moved very closely since the start of the recovery but have decoupled from the third Baltic exchange, the OMX Riga. The latter has stagnated since mid 2010. In 2010 the Tallinn stock exchange index rocketed by 73 percent, the biggest growth ratio in the history of OMX Tallinn. Vilnius and Riga performed just as well with 56 percent and 41percent respectively. In the same year globally, the developed markets stock indexes increased on average by 9 percent and the developing markets by 16 percent. One can monitor two steep upturns of the OMX Tallinn index since the beginning of 2010, which can be related to the euro. The first jump took place in January 2010, when it was evident that the euro criteria would be met by the country. This was followed by a stabilisation or even downturn period up to July. The latter, which actually started at the beginning of May, is specifically drawn back to the peak of the Greece credit crisis and the fear that this could influence the other euro zone countries. The second jump happened on January 1, 2011, together with the launch of the euro in the country. This seems to undermine the hypothesis that the elimination of the currency risks and the related decrease in interest rates would have the most immediate effect on the prices of financial assets. The longer historical trend line however does not support this fully when compared with Lithuania. Although the index seems to have calmed down after the first outbursts of emotion, analysts forecast a solid rise also for the whole of 2011. They expect the index to grow by 15% to 35% based on the solid macroeconomic fundamentals. Capitalization of the main list of OMX Tallinn has fallen heavily since 2007, when it was EUR 4.1 billion, to EUR 1.8 billion in the beginning of 2011. Beside the crisis the reason for the deeconomy tions, which some enjoy, many claim have notably contributed to this. The positive sides of the reserved investment activities are the decreasing debt burden of the Estonian residents as well as a decrease in foreign debt of the Estonian economy – the latter was considered the biggest risk to the economy in pre-euro times. real growth (same quarter of previous year) 20% 15% 10% 5% 0% -5% -10% -15% -20% -25% -30% 120% 100% 80% 60% 40% 20% 0% GDP and domestic demand 97:I 97:IV 98:III Domestic demand GDP 99:II 00:I 00:IV cline was the fact that there have been only two newcomers to the market since 2007, Arco Vara (2007) and Premia Foods (2010), but many large companies have left, including Estonian Telecom and Norma (Autoliv), the seat belt producer. The companies that have suffered the most due to the credit downturn are at the top of the best performers today. The biggest gainers in 2010 were Silviano Fashion Group by 250 percent, Tallink Group with 114 percent and Olympic Entertainment Group with 94 percent. The loser in 2010 was Tallinna Vesi with a 21% drop. Reasons for this decrease are a huge dividend payout as well as uncertainties related to water prices because of a new law that sets price limits for monopolies. Most of the listed companies managed to improve their results due to improving markets and adjustments made during the crisis. Silvano also had a share buyback and is in a very decent situation financially. Tallink recorded record numbers in passenger and cargo volumes. Reasons for the hike of Olympic shares are the successful opening of an online casino and the opening of numerous casinos in new markets like Slovakia. 01:III 02:II 03:I 03:IV Baltic stock markets OMX Tallinn OMX Riga OMX Vilnius 01/01 03/01 05/01 07/01 09/01 11/01/ 01/01 03/01 05/01 07/01 09/01 11/01/ 01/01 03/01 05/01 07/01 09/01 11/01/ 01/01 03/01 05/01 07/01 09/01 11/01/ 01/01 04:III 05:II 06:I 06:IV 07:III 08:II 09:I 09:IV 10:III more than two thirds of the whole production of manufacturing was sold on the external market. kevad/spring 2011 I INTIME 9
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