Estonia’s economy has experienced very strong growth in the last three years: during that time economy has expanded by more than a quarter in real terms and almost by two-thirds in nominal terms. This has been achieved at the expense of taking very high risks. Now some of these risks have materialized, bringing the economy into a recession and uncertainties surround also growth expectations in 2009.
The main factor behind the recession is the strong downward correction in domestic demand. Moreover, external demand, which has so far supported the strong growth, is weakening too. Growth in domestic demand has been largely relying on active lending, but this trend has changed by the autumn 2008. The decline in domestic demand is facilitated by the uncertainties related to lower economic activity as well as rising energy and food prices in the global market. The autumn forecast in 2008 expects the economy to return to a growth path at the end of the forecast horizon, although the previous high levels will hardly be reached.
The extensive inflow of cheap loan capital in recent years caused the overheating of the economy and enlarged external imbalances. By now, this trend has turned and the vulnerability of Estonia’s economy is diminishing owing to weaker domestic demand. The external environment will not enhance export revenues though, at least not for the time being. However, in the medium term economic activity is expected to increase in the nearby regions and external demand is likely to recover gradually. Even though Estonia has a cost advantage compared to the majority of EU Member States, there are some signs of weakening as regards Estonia’s competitiveness, which can be attributed to the rapid wage growth.
• Companies II Q 2008: 60,630* / 43,000 **
• GDP 2007: 15.27 bln EUR
• GDP per capita 2007: 11,380 EUR
• GDP per capita by PPP 2006 (est.): 17,800 EUR
• GDP per capita by PPP: 68% of EU average
Economic growth
Estonia’s economy has been declining over the past year and a half. Year-on-year GDP decreased 1.1% in the second quarter of 2008. In the first half of 2008, real GDP growth was supported by agriculture, fishery as well as hotels and restaurants, whereas the earlier solid contributions from construction, financial intermediation, manufacturing and trade decreased. In the coming years, we expect better use of various EU funds and further general government investment in order to ease the recession and support long-term economic convergence.
According to the autumn forecast (2008), Estonia’s economy will decline both 2008 and 2009 year, and growth is expected to recover only in the second half of 2010.
From 2005 to 2007, growth was driven by strong demand based on active lending, with resources mostly servicing domestic demand. The current economic slowdown has also been largely shaped by domestic demand: quite expectedly, real estate investment has decreased, but also private consumption has experienced much stronger than expected correction. Most probably, these components will not stimulate growth in 2009 either.
The current natural cyclical down-phase is facilitated by the global financial crisis and the economic cooling of Estonia’s major trading partners. The unfavourable developments of both the domestic and external factors have increased the overall uncertainty and there are no clear signs of a possible upward cycle in the near future. Even if 2009 sees a gradual recovery in our main export markets and the turmoil in financial markets eases, the growth rate will still be unexceptionally low.
Economic forecasts do not expect the recovery to be as rapid as at the time of the previous decline; that is, at the end of 1990s. Supply-side indicators show a decrease in employment in construction, trade, services and manufacturing, pointing to a further downward trend rather than a reverse of the trend. Demand indicators do not promise a rapid recovery either – on the contrary, companies expect a decrease in orders as well as demand.
Inflation
In the first nine months of 2008, consumer prices increased by an average of 11.1%, year-on-year. The double-digit inflation rate largely arises from an increase in global energy and food prices. By now, commodity prices have dropped from the high levels, but external markets are still sending hectic signals.
As demand has eased and wage growth has slowed, Estonia’s inflation has been decelerating also in the second half-year 2008. Administrative factors have been one of the main driving forces of inflation.
In the autumn forecast (2008) of Eesti Pank has been revised this year’s inflation forecast up by less than a percentage point to 10.7%, since the earlier high price levels of energy and food are still affecting the comparison basis. At the beginning of 2009, inflation will decelerate at a faster rate. By that time, both the domestic and external price pressures will ease. It’s expected consumer price inflation to be 4.8% in 2009. As various surveys indicate, households and companies expect inflation to decelerate over the next twelve months. According to the base scenario of the autumn forecast, consumer price inflation will slow to 2.8% in 2010, and thus the likelihood of Estonia meeting the Maastricht inflation criterion will increase.
As the tensions in the labour market have not eased yet, price pressures remain strong. With regard to consumer price inflation, it is important to distinguish "imported" inflation from the domestic one as well as the impact exerted by tax policy measures. Inflation has picked up also in the euro area. In the coming years, Estonia's inflation rate will decend at its current level as a result of food decrease growth. Along with a slowdown in wage growth, domestic price pressures are expected to ease in 2009.
Key Macroeconomic Indicators and Economic Development Perspectives
|
| 2005 | 2006 | 2007 | 2008* | 2009* | 2010* |
| GDP, billion EUR | 11.09 | 13.10 | 15.27 | 16.35 | 16.97 | 18.02 |
| GDP real growth, % | 9.3 | 10.4 | 6.3 | -1.8 | -2.1 | 3.0 |
| Export, billion EUR / growth % | 6.83 | 7.734 | 8.023 | -0.9 | 0.5 | 4.8 |
| Import, billion EUR / growth % | 8.204 | 10.699 | 11.321 | -5.9 | -3.3 | 5.3 |
| Current account balance, (% of GDP) | -10.0 | -16.7 | -18.1 | -11.1 | -6.5 | -7.1 |
| Consumer prices, (growth %) | 4.1 | 4.4 | 6.6 | 10.7 | 4.8 | 2.8 |
| Average monthly wage, EUR | 516 | 601 | 725 | 830 | 872 | 914 |
| Wage real growth (%) | 11.4 | 16.2 | 20.4 | 14.6 | 5.0 | 4.9 |
| Employment (15-74 years old, thousands) | 607.4 | 646.3 | 655.3 | 650.7 | 634.4 | 626.8 |
| Employment growth | 2.0 | 6.4 | 1.4 | -0.7 | -2.5 | -1.2 |
| Unemployment rate (ILO,%) | 7.9 | 5.9 | 4.7 | 4.8 | 7.0 | 8.3 |
* Forecast
Source: Bank of Estonia
Cornerstones of Economic Success
• Monetary reform – since 1992 currency board arrangement (fixed exchange rate 1 Euro = 15.65 Kroons)
• Privatization – completed, 4 infrastructure companies in state ownership
• Liberal foreign trade regime – market is open for competition (Up until May 1st 2004 no import taxes, quotas, tariffs)
• Modern Tax system – motivating, transparent, simple
The World Bank “Doing Business in 2008” report places Estonia on 17th rank among 178 countries, because:
– starting a business is easy
– taxation is simple and transparent
– investors feel secure
– trading across borders is active
– communication is easy
Starting a Business
• Number of procedures – 5
• Minimum starting capital of most wide-used company form (Ltd.) – only 2550 EUR
• 2007 – electronic registering – max 2 hours
• Companies can be 100% foreign owned
• Business registry is public
More information about Estonian economy:
Bank of Estonia: www.eestipank.info/frontpage/en/
Statistics Estonia: www.stat.ee
Ministry of Foreign Affairs: www.vm.ee
Ministry of Economic Affairs and Communications: www.mkm.ee
Ministry of Finance: www.fin.ee
Estonian Tax and Customs Board: www.emta.ee
Tallinn Stock Exchange: www.hex.ee
Enterprise Estonia: www.eas.ee
Estonian Trade: www.estoniantrade.ee
Advanced Technology
Significant developments have taken place in Estonia in terms of telecommunication infrastructure, leading Estonia to be one of the most advanced of the CEE countries.
Key points in IT & Telecom development in Estonia:
- e-Tax Board - Income Tax Statements can be filled out via Internet (since Spring 2001)
- 58% of households having Internet and 80% Internet banking (Summer 2008)
- e-elections (local 2005, national 2007)
- the Government is using web-based document system (since August 2000)
- all Estonian schools are connected to the Internet, as a result of state-run “Tiger Leap” program
- over 800 Public Internet Access Points
- there are 955 free wireless Internet zones around the country (Autumn 2008)
- e-billing (since July 2000)
- mobile parking project (July 1, 2000)
- world’ first MPS (Mobile Positioning System) project for society (since May 3, 2000)
- digital Signature Act came into force (since December 2000)
- ID card - new primary domestic identification document (since January 2002)
- Skype – internet telephone
Significant facts:
Business-to-Business:
- 95% banking transactions made electronically
- 123% mobile penetration rate
- 98% of companies have internet connection
Government-to-citizen:
- 89% income tax statements filled online
- e-tax-board for companies
- e-elections
Useful links about IT & Telecommunications
The Association of Estonian Information Technology and Telecommunications Companies:
www.itl.ee
Eesti Telekom: www.telekom.ee
EMT: www.emt.ee
Elion: www.elion.ee
Elisa: www.elisa.ee
Tele2: www.tele2.ee
Starman: www.starman.ee
Estonian IT College: www.itcollege.ee
ESIS II Projects Database: www.esis.ee/ist2000/esis/data.html
Specific information on data communication companies: www.ee
Tourism
- 2.34 million overnight visitors in 2007, compared to 1.94 million in 2006
- The purpose of stay:
- 57% on holiday
- 15% on business
- 3% on conference
- 24% on other purposes
- Arrivals by country of residence:
- 51% from Finland
- 6% from Sweden
- 6% from Germany
- 5% from United Kingdom and Ireland
- 5% from Latvia
- 4% from Russia
- 4% from Norway
- 19% from other countries
- Total (foreign) tourism revenue 754.2 mln EUR
I
nteresting facts about Estonia:
- Estonia's area of 45,227 km2 is similar to that of the Netherlands, but the population (1.34 million) is ten times smaller.
- The length of the longest day in summer is over 19 hours, while the shortest winter day lasts only six hours. It is not completely dark at night from the beginning of May until the end of July.
- Estonia has more than 1,500 islands, 1,000 lakes (5 per cent of the Estonian territory), 7,000 rivers and streams. Bogs and wooded swamplands of different types cover over one fifth of the country.
- Estonia is a sea country – the length of coastline (3,800 km) is about 6 times longer than the mainland borders.
- Estonia is very rich in forests – various kinds of forests cover almost half of Estonia's territory. Elk, wild boar, bear and lynx are amongst Estonia's common large mammals. About 10 per cent of Estonia is a nature reserve
More information about tourism and travel in Estonia:
www.visitestonia.com
www.vm.ee/eng
www.turismiweb.ee
www.balticsworldwide.ee
www.inyourpocket.com/estonia/en
www.tallinn-airport.ee
www.eas.ee
Business ethics and culture in Estonia
- Hand shaking is common
- Deriving from strong Scandinavian values, undue physical contact is unnecessary
- Punctuality is important in Estonian business
- Discussions may start with weather, but always end with business or politics
- Although at first glance people may seem reserved and not talkative at all, they are actually very friendly and have a favourable opinion of tourists. The reserve and shyness will melt away once you try and talk to the people
- Jokes are self-ironic and sarcastic
- Interrupting conversations is very impolite, hence long pauses in conversations are common as the Estonian mentality is combined with scepticism, thus rushing through negotiations is not common – completing negotiations might take longer than in Western Europe, during negotiations honesty and forthrightness are well respected
- Combine politeness with competence and you are on your way to success in Estonia
- A number of people in Estonia speak English, but also Finnish, German, and Russian, so do not be afraid to ask for directions or help in a foreign language.
- Estonians value their language and culture. They are always very delighted when foreigners know something about it as well.
Estonia in International Ratings and Rankings
• Country Credit Ratings: Fitch IBCA A-; Standard & Poor A-; Moody’s A1-
• 12th in 2008 Index of Economic Freedom (Wall Street Journal; The Heritage Foundation)
• 23rd in 2008 International Competitiveness Rating (IMD, Lausanne)
• 32nd in Global Competitiveness Rating 2007/08 (World Economic Forum, Geneva)
• 27th in International Corruption Perceptions Index 2008 (Transparency International)
• 22nd in Doing Business in 2008 Report (World Bank)
• 20th in Global Information Technology Index (World Economic Forum, Geneva)
VISAS
As of 1 May 2004 Estonia is a member of European Union and therefore nationals of the member states of EU and EEA are free to enter Estonia.
Since October 27th 2008 Estonian citizens have visa freedom to Australia and since November 17th 2008 to USA.
Look closer from the website of the Estonian Ministry of Foreign Affairs http://www.vm.ee/eng/kat_132/ .
As of 21 December 2007, Estonia is a part of the Schengen visa area.
Schengen area is composed of 24 states, and most of it overlaps with European Union (EU) territory. Although Great Britain, Ireland, Cyprus, Bulgaria and Romania are EU member states, they have not signed the Schengen Agreement. Also, Switzerland, Norway and Iceland are not EU member states, but they are part of the Schengen area.
One of the principles of Schengen is the free movement of persons. Checks of persons are not carried out at internal border crossings. There are only border controls at the Schengen area’s external borders.
More information on Visas, Work and Residence Permits
Citizenship and Migration Board: www.mig.ee
Estonian Representations around the World: www.vm.ee/eng/kat_150/
Estonian Ministry of Foreign Affairs: www.vm.ee
Customs Guide for Travellers: www.emta.ee/?id=1089
