Editor comment
Robert Kitt
20.10.2011
An anatomy of Estonian economic miracle
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| Managing Director of Swedbank's Corporate Banking in Estonia |
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A lot has happened in a year in both global economy as well as in Estonia, said Robert Kitt, Managing Director of Swedbank's Corporate Banking in Estonia, in his speech at the Swedish Business Awards ceremony on October 18.
Fortunately, the turmoil almost everywhere in the economic globe has not reached us, yet. Indeed, a year ago it seemed likely that global economic recovery is underway, unusual and unexpected events were over and global economic community could return its traditional rhythm. In this very context I called for the robust and balanced economic development in Estonia. Also, the balance, as defined a year ago, stood on four pillars i) balance sheet, ii) output, iii) external and iv) internal balance. As we shall shortly see, the economic recovery has been very strong, but in order to learn something from the past crises and prepare ourselves for the future ones it makes sense to analyze the anatomy of the current recovery that is already a small miracle.
Estonian economic development and crisis management has been praised a number of times in international economic press. We love to say that we should export the cost cutting competence to Greece and other countries. But what is behind the figures and how are we really doing? In order to assess this question, it is probably worth to look at the same four pillars of stability that I touched upon a year ago.
The first item to touch upon is the balance sheet of the country. Since 2002, every single year we have had increasing deposit volumes reaching 10.7 billion Euros in this summer. At the same time, the total loans issued by banks reached 16.6 billion in 2008 and have thereafter dropped to 14.1 billion in this August. The leverage of the economy that can be measured by dividing loans and deposits has therefore risen from 100% in 2002 to 175% in 2008 and declined to 130% in this year.
Recall, the ratio stood at 145% a year ago. These facts cause two types of feelings: first, it can be only greeted that the economy is deleveraging and therefore reducing risks. On the other hand side, the speed of deleveraging is worrying. Money in deposits means low investments. Low investments mean low production and therefore lower potential output. It is an eternal trade-off between risk reduction and output maximization. As a banker, I cannot suggest of what is right and what is wrong: I can only suggest that whatever the companies and private individuals choose to do – it has to be conscious.
The second pillar of stability should be the production; or Gross Domestic Product as the economists would like to say. It is fair to say that, in terms of output, the economy has shown remarkable strength and widespread growth that is very good to look at. Estonia has managed to turn the whole economy around: internal consumption-based highly leveraged economy has been replaced with external demand for numerous products and services. The year-over-year GDP real growth by the end of the 2nd quarter stood at remarkable 8.4%. In nominal terms, the size of GDP in this year will most likely be equivalent to GDP in 2007 – that was slightly above 16 billion Euros. However, with inflation-adjusted prices, the gross domestic product is still ca 12% lower than in comparable 2007. If we take one level deeper look, we'll find that the structure of the economy has indeed changed. The construction sector, for example, stands in nominal terms in the levels of 2004 with volumes about two times lower than in the peaking 2008. On the other hand, the manufacturing sector has recorded life-high volume in this year surpassing peaks of 2007 & 2008. If we look at the GDP from the income approach, we'll see that the compensation component has slowly started to grow again; but the profits of the companies are still lower than in 2006 & 2007. All in all, Estonian economy has shown robust growth figures that somewhat postulate the receipt for the future challenges: there has not been a single crisis since the last 20 years where Estonian entrepreneurs have not come out from the crises stronger. One could say that everything that does not kill you makes you stronger – I would like to say that homework has been done and everyone is just much better prepared to the challenges.
The third pillar of stability is external balance. And we have it! We have not seen current account deficit since 2008 and we expect current plus capital account surplus close to 5% of GDP this year. With eight months in 2011, the export of goods totalled EUR 7.9 billions that is 50% larger than in 2010. I have heard a lot of scepticism that this is only due to Ericsson or exporting energy. Well, I can easily disappoint such voices: if we exclude mineral goods and electronics (that make about one-third of export), all other sectors posted all time high export turnover. From sectors that export over 60-70 million Euros (this is over one billion in Estonian kroons), only milk and milk products decreased the export in year-over-year comparison by minor 2%. Life high numbers are also valid for major service export sector: tourism that showed 15% growth with 8 months. Another interesting aspect is that our main exporting partners are Sweden and Finland that together make up one-third of total Estonian exports. This has definitely helped the economy to be so immune to the recent global crises. These and many other interesting facts point to the robust growth of Estonian economy that stands on the widest base in the history.
Finally, it is worth to comment the internal (or social) balance that we can quantify as employment. Although very much improved, the unemployment figure stands still on the 13% level. However, let's look at the dynamics: Estonian economy has added 50 thousand jobs between Q1 2010 and Q2 2011 that is 9% of workforce. Our employment stands north of 600,000 people. This is the level of the pre-2006 boom, but we are down from 670,000 people having the jobs. The job creation and therefore social security is by far the biggest problem to Estonian economy. To make the situation even more complicated, the structure of unemployment proposes certain threats to some social groups. To elaborate, there are 34,000 jobs cut in both construction as well as manufacturing sector. However, there was a similar growth of jobs in the booming years in construction sector, but no growth in manufacturing. So, the people who have lost their jobs are most likely not in the youths and they have real trouble to re-educate themselves and re-join the labour force. To conclude, there is room for improvement in labour market and we still have a lot to learn in this area.
A couple of weeks ago, the British Daily Mail reported that Taj Mahal, a landmark of India and the symbol of love could collapse in five years. This is because the water balance of the nearby river Yamuna has decreased; leaving the foundation of Taj dry. In turn, this has caused disintegration of the wooden parts in the foundation, which could cause a collapse of the pearl of Mughal architecture as soon as in five years. Whether this story is true or not, it bears a significant metaphor also to the present economic environment in Estonia and abroad. Even if we have managed to improve in all important areas of economic stability, we are still vulnerable to the external factors.
Dear entrepreneurs, nominates of the Swedish business awards! It is very good to see that all of you address the economic environment from sustainable and long term perspective. We have to increase the long term thinking in the society and your achievements are very good examples to us all.