Estonia s Balance of Payments for the Second Quarter of 2012

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1 Estonia s Balance of Second Quarter of

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3 CONTENTS OVERVIEW... 5 CURRENT ACCOUNT... 8 Goods... 9 Services Income Current transfers and the capital account FINANCIAL ACCOUNT Direct investment Portfolio investment...33 Financial derivatives Other investment Reserve assets ESTONIA S INTERNATIONAL INVESTMENT POSITION AND GROSS EXTERNAL DEBT AS AT 30 JUNE Estonia s Balance of Second Quarter of

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5 OVERVIEW (Based on preliminary data) Estonia s current account deficit was 86 million euros in the second quarter of. This made up 2% of the same quarter s GDP (see Table 1 and Figure 1) 1. Compared to the revised data for the first quarter of, the current account deficit contracted slightly in the second quarter, while a year ago, the current account was in a surplus. Compared to the first half of, the current account deficit for the first half of was over two times bigger, amounting to 194 million euros. The current account was shaped by several determinants. On the one hand, the surplus on services increased, while on the other hand, the income outflow and deficit on goods grew too. o The foreign trade deficit picked up, primarily because the exports of mineral products, which are previously imported to Estonia for processing and then exported again, decreased and the imports of transport vehicles increased. o The surplus on services was mainly boosted by business, travel and computer services. o The significant net outflow of income was related to the exceptionally large direct investment transactions that were settled through Estonia, but belonged to foreign holding companies registered here. The Estonian economy was a net borrower this time: the inflow of capital on the financial account was around 80 million euros larger than the outflow. o The general government, the central bank, credit institutions and other financial intermediaries lent a total of 314 million euros to the rest of the world. o However, the inflow of cross-border finances for the corporate sector was 393 million euros larger than the outflow. Estonia s gross external debt grew by 2% to 16.1 billion euros from the first quarter and was 2% smaller than the GDP for the last four quarters. The gross external debt was boosted primarily by the business sector and somewhat also by the general government. The net external debt (assets less liabilities) shrank due to a rise in the debt claims on the rest of the world, and totalled around 0.5 billion euros, or 3% of the GDP for the last four quarters, at the end of the second quarter. The current account in deficit for the second consecutive quarter The exports of goods decreased by 3%, while imports increased by 3% from the second quarter of. Nevertheless, the volumes of exports and imports remained large: exports were only a bit lower than its record level in the second quarter of, and imports posted a new record high. Goods exports contracted because of a sharp fall in the volume of mineral products that are imported to Estonia for processing and then exported again. The exports of other goods groups (excluding timber, paper and products thereof) picked up. Goods imports were driven by a rapid growth in the imports of transport vehicles, furniture and various other goods. The foreign trade deficit increased by fivefold from a year ago to 224 million euros, or 5.2% of the second quarter s GDP. The deficit was caused primarily by mineral products and transport vehicles. The surplus on services increased by a quarter to 420 million euros year-on-year. Services exports grew by 14% and imports by 8%. The surplus increased owing to the exports of business, travel and computer services, which considerably exceeded their imports. 1 The current account without reinvested earnings, which involves no actual movement of funds, was in a surplus, constituting 7.0% of GDP. 5 Estonia s Balance of Second Quarter of

6 Table 1. Estonia s balance of payments (EUR million)* Item Total Total CURRENT ACCOUNT Goods and services 1, , Goods credit (f.o.b.) 8, , , , , , , ,080.0 debit (f.o.b.) -9, , , , , , , ,303.8 Services 1, , credit 3, , , , ,126.5 debit -2, , Income credit debit -1, , Current transfers credit debit CAPITAL AND FINANCIAL ACCOUNT (including reserve assets) * The data for previous periods have been adjusted upon collection of additional data Capital account Financial account (including reserve assets) Direct investment 1, , Abroad , , In Estonia 1, Portfolio investment , Assets , Equity securities Debt securities Liabilities Equity securities Debt securities Financial derivatives Assets Liabilities Other investment -2, , , Assets -1, , Long-term Short-term , Liabilities -1, , Long-term -1, , Short-term Reserve assets Errors and omissions Capital and financial account excluding reserve assets Financial account excluding reserve assets -1, , The net outflow of income grew by about a fifth to 342 million euros year-on-year. This stemmed from a more than 25% decline in residents income from abroad, while the income earned by non-residents in Estonia remained more or less unchanged from the previous year. The net outflow of income largely 6

7 based on one quarter based on four quarters 10% 5% 0% % of GDP -5% -10% -15% -20% Figure 1. Current account deficit consisted of reinvested earnings, which are treated as direct investment inflow and are thus a book value without any actual movement of funds. The surpluses on current and capital transfers totalled 169 million euros, which is 17% more than in the second quarter of. The growth stemmed from an increase in EU subsidies. Estonia was a net borrower from abroad in the second quarter Capital inflow in the financial account (with reserves) exceeded the outflow by 80 million euros. The business sector was a net borrower, while the other sectors the general government, the central bank, other financial intermediaries and credit institutions were net lenders, financing the rest of the world with 116, 91, 80 and 27 million euros, respectively. Direct investment inflow was 405 million euros bigger than outflow. Non-residents direct investment in Estonia grew by 440 million euros and residents direct investment abroad by 35 million euros. This arose largely from the fact that the investment made by foreign holding companies registered in Estonia had an insignificant impact on the Estonian economy. Portfolio investment inflow was 194 million euros bigger than outflow. External assets grew by 101 million and external liabilities by 295 million euros, primarily in association with the acquisition of money market instruments by the general government. External liabilities grew as a result of an increase in debt securities issued by Estonian enterprises in other sectors that are controlled by non-residents. The net outflow of financial derivatives totalled 12 million euros. The outflow of other investment (loans, deposits and currency) was 531 million euros bigger than the inflow. This arose primarily from a growth in external assets. The volume of external liabilities did not change from the first quarter. Assets increased owing to the loans and deposits of other sectors (the business and household sectors). 7 Estonia s Balance of Second Quarter of

8 CURRENT ACCOUNT The current account of the balance of payments was in deficit for the second consecutive quarter, accounting for 86 million euros, or 2% of the same quarter s GDP (see Figure 2). Compared to the first half of, the current account deficit more than doubled, making up 194 million euros. The current account of the second quarter of was shaped by an increase in the surplus on services on the one hand, and by a growth in the income outflow and in the foreign trade deficit on the other hand. The surplus on goods and services totalled 196 million euros, or 4.6% of the same quarter s GDP. 600 goods services income current transfers current account EUR million ,000 Figure 2. Current account structure Growth in the debit and credit turnover of the current account has been slowing steadily over the past six quarters. In the second quarter of, the credit turnover increased just by 0.3%, year-on-year, and the debit turnover by 3%. Estonia traded mostly with EU countries, which accounted for 67% of the credit turnover and 80% of the debit turnover. Credit turnover with the EU decreased by 3%, year-on-year, whereas debit turnover went up by 5%. The share of the monetary union in total turnover was about a third, with credit turnover shrinking by 8% and debit turnover expanding by 14%. Five biggest partners accounted for 54% in both turnovers. Four of them were successively the same in both credit and debit turnover: the first was Finland, the second Sweden, the fourth Latvia and the fifth Lithuania. Russia was the third in credit turnover and Germany in debit turnover. Estonia had the highest surpluses with Russia (142 million euros) and the United States (123 million euros). The surplus with Russia grew considerably from a year ago, whereas surplus with the United States decreased by a third. The highest deficits were with Germany (229 million euros) and Lithuania (163 million euros). Deficit with Germany did not change much, year-on-year, whereas deficit with Lithuania increased nearly threefold. 8

9 Table 2. Current account balance by groups of countries (EUR million)* EU Germany Finland Poland Latvia Sweden CIS Russia Ukraine Belarus Other USA Norway Nigeria China British Virgin Islands Total * Countries are ranked by the absolute value of last period s current account balance. Goods The goods account deficit of the balance of payments widened to a great extent in the second quarter of both quarter-on-quarter and year-on-year, accounting for 224 million euros and making up 5.2% of the same quarter s GDP (see Table 3). The stronger growth in imports increased the deficit in both reference periods, so goods imports set a new record of 3.3 billion euros. Goods exports, which shrank 3% from a year ago, increased in the same extent, quarter-on-quarter, and were 3.1 billion euros. According to the preliminary foreign trade statistics 2, goods exports totalled 3.1 million and imports (c.i.f.) 3.4 million euros (see Figure 3). Foreign trade deficit was 325 million euros. Goods exports decreased 3% (100 million euros) from the second quarter s record, due to the sharp fall in the exports of mineral products (see Table 4). Since 78% of the exports of this goods group consisted of re-exports of post-processed motor fuel to third countries, the decline in exports was justified, since motor fuel imports from Russia dropped as well in the same quarter. The largest motor fuel export partners were Nigeria, Sweden and the United States; electricity was mostly sold to Lithuania and Latvia. Machinery and equipment continued to be the largest export goods group: their exports increased by 4% with mobile communication devices making up about a third and the destination countries being Sweden, Mexico, the United States, Spain and Italy. Timber and timber products were exported to Finland, Sweden, Germany and Norway. Prefabricated wooden buildings, wooden construction materials and furniture, and unprocessed and little processed timber were the main articles. 2 The following analysis does not include the adjustments made to the goods account (repair of capital goods, provisions purchased from abroad, etc.) made by the Balance of Payments and Economic Statistics Department of Eesti Pank. Imports are in c.i.f. prices and analysed by the trading country. As of the moment of accession, the terms exports and imports are only applicable in reference to trading with third countries, while the Intrastat reporting system uses the terms dispatch of goods and arrival of goods. Since the following analysis covers both intra-community and non-community trade, the terms exports and imports have still been used for the sake of simplicity and clarity. 9 Estonia s Balance of Second Quarter of

10 Table 3. Imports and exports of goods Goods credit Change from previous period in total exports of goods and services Goods debit Change from previous period in total exports of goods and services Balance 2, , , , , , , , total 8, , , , , , , , , , , total 6, , , , , , , , , , total 8, , , , , , , , , , total 12, , , , , , exports imports balance balance as ratio to GDP (right scale) 70% 60% 50% EUR billion % 30% 20% % 0% -10% % Figure 3. Estonia s foreign trade balance 10

11 Table 4. Exports by main groups of goods Change / / Food Mineral products Chemical products Clothing, footwear and headgear Timber, paper and products Metals and metal products Machinery and equipment Transport vehicles Furniture, toys, sporting goods Other Total 3, , , The exports of metal and chemical products as well as food has picked up. Looking at metal products, waste ferrous metal was exported to Turkey, iron constructions to Finland and Norway, and other iron and steel products to Sweden, Russia, Latvia and Germany. The major chemical products were construction materials (putties, mastics, paints, etc.), plastic products and medicines, which were for the most part sold to Russia, Latvia, Lithuania and Finland. The biggest export article among food products was spirits, which was sent to Russia. In addition, dairy, fish and meat products were exported to Finland, Latvia, Russia and Lithuania. Transport vehicles (motor cars, spare parts and trailers), textile products and footwear went to Latvia, Lithuania, Sweden, Russia and Finland. Goods imports growth was most affected by transport vehicles, machinery and equipment, whereas the imports of mineral products, especially motor fuel from Russia decreased to a great extent (see Table 5). The imports of transport vehicles went up by 25% and included mainly motor cars and commercial vehicles from Sweden, Germany, Latvia and France and carriages from Ukraine. In the machinery and equipment group, components of electrical and electronic equipment (including mobile communication devices) from Sweden, Finland and Germany prevailed. Medicines from Lithuania, Latvia and Poland dominated the imports of chemical products. Food (alcoholic beverages, meat, chocolate, ready-to-eat pet food, etc.) was imported from Latvia, Finland, the Netherlands, Lithuania and Poland, various iron and steel products were bought from Finland, Germany, Sweden and Poland, and ready-made clothes, fabrics, and footwear from Latvia, Finland, China, Germany and Italy. Little-processed timber products and paper products were bought from Russia, Latvia and Finland. Foreign trade deficit increased both quarter-on-quarter and year-on-year, standing at 325 million euros (see Table 6). Chemical products and transport vehicles posted the widest deficits, whereas the negative balance of the latter expanded significantly in both reference periods. Timber and timber products and other manufactured goods posted the largest surpluses. Looking at groups of countries, goods exports to the CIS countries, especially to Russia increased, so Russia s share in total exports was 12% (see Table 7). Roadworks machinery, construction materials and spirits had the most dynamic growth in exports to Russia. Exports to the European Union shrank slightly, though exports to Latvia and Lithuania picked up. Exports to the rest of the countries contracted 15%. Here, the USA had the strongest impact, since exports there declined by half. 11 Estonia s Balance of Second Quarter of

12 Table 5. Imports by main groups of goods Change / / Food Mineral products Chemical products Clothing, footwear and headgear Timber, paper and products Metals and metal products Machinery and equipment Transport vehicles Furniture, toys, sporting goods Other Total 3, , , Table 6. Foreign trade balance by main groups of goods (EUR million) Food Mineral products Chemical products Clothing, footwear and headgear Timber, paper and products Metals and metal products Machinery and equipment Transport vehicles Furniture, toys, sporting goods Other Total Table 7. Exports of goods by groups of countries Change / / EU-27 2, , , Sweden Finland Latvia Lithuania Germany CIS Russia Ukraine Kazakhstan Other Norway USA Nigeria Total 3, , ,

13 Goods imports from the European Union increased slightly, imports from the CIS countries remained unchanged, and imports from other countries dropped markedly (see Table 8). Finland was the largest contributor to import growth. Table 8. Imports of goods by groups of countries* Change / / EU-27 2, , , Finland Sweden Germany Latvia Lithuania CIS Russia Ukraine Belarus Other China USA Norway Kokku 3, , , * Analysed by trading country. Foreign trade was in deficit with the European Union (see Table 9). Out of the European Union countries, the largest trade surplus was with Sweden, the widest deficit with Germany and Poland. Of the CIS countries, Russia and Kazakhstan contributed to the positive balance and Belarus and Ukraine to the negative one. Looking at other countries, Nigeria, Norway and the United States had the biggest surplus and China and Hong Kong the largest deficit. Table 9. Foreign trade balance by groups of countries (EUR million) EU CIS Other Total Services The surplus on the services account went up by a quarter from a year ago, standing at 420 million euros (see Table 10). As a ratio to the same quarter s GDP, services surplus accounted for about 10%, having increased by 1.5 percentage points, year-on-year (see Figure 4). Services exports made up 27% and imports 18% of the total exports of goods and services, both having grown from a year ago. 67% of the exported services were provided to the European Union countries and 80% of the imported services were bought from these countries. The foreign trade balance of services was positive with most of the trade partners, the largest surpluses were with Finland (183 million euros) and Russia (66 million euros). The widest deficits were with Cyprus (19 million euros) and Germany (12 million euros). 13 Estonia s Balance of Second Quarter of

14 Table 10. Exports and imports of services Exports Imports Balance Change from previous period in total exports of goods and services Change from previous period in total imports of goods and services Change from previous period total 3, , , total 3, , , total 3, , , , , total 3, , , , ,200 exports imports balance balance as a ratio of GDP (right scale) 18% 1,000 15% % EUR million % 6% 200 3% 0 0% Figure 4. Services account 14

15 Transport services contributed the most to the surplus on the services account 38% of the surplus (in the same quarter of, nearly half of the surplus). They were followed by travel services (34%) and other business services (15%; see Table 11). The exports of all major services surpassed imports. In total terms, travel services surplus increased by about a third, year-on-year, and other business services surplus by more than three times. Transport services surplus contracted slightly. Table 11. Services balance by major categories Change / / Transportation freight transport passanger transport other Travel services , Construction services Computer and information services Other business services Government services Other Total Services exports went up by 14% from a year ago, which is twice faster than their imports (see Table 12). The exports of services totalled 1.1 billion, setting a new record, quarter-on-quarter. Transport services had the highest share in services exports (38% of total services exports). They were followed by travel services (26%) and other business services (18%). Year-on-year, transport services exports increased by 7%, travel services exports by 11% and other business services exports by 26%. The latter include, for instance, trade services, operational lease, legal assistance, accounting, management consulting, scientific and technical services. The exports of computer and information services (66%) grew the most rapidly, especially as regards computer services. Table 12. Services exports by major categories Change / / Transportation freight transport passanger transport other Travel services Construction services Computer and information services Other business services Government services Other Total , Estonia s Balance of Second Quarter of

16 Two-thirds of services exports went to the European Union, especially to Finland (see Table 13). Exports to these countries increased a total of 5%. The volume of exports to Finland remained unchanged, year-on-year. 43% thereof were travel services, 27% transport services and 10% construction services. Services exports to the CIS countries (mostly to Russia) went up by 14%. Transport services accounted for a half of services exports to Russia. Services exports to other countries increased more than 50%, including the threefold growth in exports to the United States. The latter bought primarily travel services and computer and information services; offshore regions received mainly transport services and to some extent also computer and information services. Services exports to the main trade partners (excluding Finland and Sweden) increased markedly. Table 13. Services exports by groups of countries Change / / EU Finland Sweden Germany Latvia United Kingdom CIS Russia Ukraine Other Norway China USA Total Services imports grew 8%, year-on-year, standing at 707 million euros (see Table 14). Transport services accounted for 38%. They were followed by travel services (22%) and other business services (20%). Services imports growth was supported by transport services the volume of which expanded by 13%, whereas the volume of travel services and other business services shrank a little. Transport services imports are in strong correlation with goods imports, since imports growth means an increase in the cost of delivering the goods imported. Growth in the imports of other types of services was modest. Geographically speaking, 80% of the services imports came from the European Union countries, with Finland, Sweden, Germany and Latvia holding the lead position (see Table 15). The volume of imports services from the European Union went up by 8%. Imports from Finland included mostly travel services (44% of the services imports from Finland), transport services (25%) and other business services (17%). Sweden sold us mostly transport services, Germany transport and construction services and Latvia other business services and transport services. Services imports from the CIS countries increased by about 50%, making up 9% of total imports. The main contributor to the increase was Russia, and, of the types of services, transport and travel services. Services imports from other countries declined 13%. This was mostly due to the 50% decrease in imports from Norway, especially as regards other business services, which contracted more than fourfold. 16

17 Table 14. Services imports by major categories Change / / Transportation freight transport passanger transport other Travel services Construction services Computer and information services Other business services Government services Other Total Table 15. Services imports by groups of countries Change / / EU Finland Sweden Germany Latvia United Kingdom CIS Russia Ukraine Other Norway China USA Total The surplus on transport services, which is the most important service type of the Estonian balance of payments services account, was 160 million euros, which is nearly the same as in the same quarter a year ago (see Tables 11, 12, 12 and Figures 5 6). 60% of the surplus was provided by other transport services, such as storage, packaging, navigation fees, rescue, etc. Freight transport surplus included just 11% of the surplus on transport services and passenger transport 29%. Growth in the surplus on transport services was mostly held back by passenger transport the surplus of which contracted by a quarter, year-on-year. Freight transport surplus, on the other hand, went up by a third. An analysis of transport services across different types of transport shows that maritime and rail transport contributed the most to the surplus and road transport followed (see Figure 6). Air transport posted a deficit, which means that imported air transport services surpassed exported ones. Transport services surplus increased 7%, year-on-year, that is, somewhat more slowly that travel and other business services. In absolute terms, transport services exports were 428 million euros. Half of it was freight transport, 35% other transport services and the rest was passenger transport. The volume 17 Estonia s Balance of Second Quarter of

18 exports imports balance EUR million Figure 5. Transport services 200 exports imports balance 150 EUR million maritime transport air transport rail transport road transport Figure 6. Transport services in the second quarter of by transport type of freight transport exports grew by 15%, the exports of other transport services by 5%, and travel services exports decreased. Across different types of transport, the exports of transport services increased the most in the field of rail transport (12%), as well as maritime and road transport (6 9%). Air transport exports contracted by 16%, mostly due to a shrinkage in passenger transport. 62% of transport services were provided to the European Union countries, 15% to the CIS countries (primarily Russia) and 23% to other countries (see Table 16). Finland and Russia were our main partners here, accounting for 19% and 13% of transport services exports, respectively. However, transport services exports to the two countries declined a little. Transport services exports to Switzerland, Latvia, Great Britain and the United States, on the other hand, increased notably. 18

19 Table 16. Transport services by groups of countries in the second quarter of Exports Change, / Imports Change, / EU EU Finland Sweden Sweden Finland Latvia Germany United Kingdom Latvia Netherlands Lithuania CIS CIS Russia Russia Belarus Belarus Other Other offshore regions China Switzerland offshore regions USA Norway Total Total Transport services imports grew twice faster than exports (13%), standing at 269 million euros. Freight transport made up the largest share (68%) in transport services exports and this is largely due to developments in goods imports. The share of other transport services was 20% and that of passenger transport 12%. Freight transport increased 14% and passenger transport 45%, year-on-year, whereas the imports of other transport services contracted slightly. Across different types of transport, the imports of rail transport increased the most (64%), followed by air transport and road transport. Maritime transport services imports did not change. Since goods imports from the European Union countries made up 78% of total goods imports, the share of transport services bought from the European Union in transport services imports was also large (74%), having increased 7% from a year ago. The imports of transport services from the CIS countries (primarily Russia) doubled. Sweden held the lead position in transport services imports (12% of the total volume), followed by Finland, Russia and Germany (10 11%). The second-quarter surplus on travel services (141 million euros) increased 30%, year-on-year, owing to the pickup in exports. Travel services imports, at the same time, have changed little over the past five quarters (see Figure 7). Travel services surplus accounted for a third of the services surplus, ranking second after transport services on the services account of Estonia s balance of payments. Travel services exports amounted to 294 million euros in the second quarter, having increased 11% yearon-year (see Table 17). Estonia welcomed more than 1.5 million visitors. More than half of them stayed here longer than one day. Tourists from Finland (41%), Russia (12%) and Latvia (8%; see Figure 8) accounted for the largest share in the total number of visitors, whereas people from Finland and Russia dominated the group staying for several days. The largest share of one-day visitors came from Latvia and from the United States (mostly by cruise ships). The spending of visitors from Finland and Sweden in Estonia diminished, whereas tourists from Russia spent 27% more. The hike in the expenditure of Americans was owing to the earlier start of cruise ship traffic this year. Travel services imports amounted to 152 million euros in the second quarter, having decreased 2% from a year ago. The residents of Estonia visited other countries a million times (it is possible they visited several 19 Estonia s Balance of Second Quarter of

20 exports imports balance EUR million Figure 7. Travel services Table 17. Travel services by groups of countries in the second quarter of * Exports Change, / Imports Change, / EU EU Finland Finland Sweden United Kingdom Germany Germany Latvia Latvia CIS CIS Russia Russia Other Other USA Norway Norway Turkey Total Total * Based on data by Eesti Pank, OÜ Positium LBS and Statistics Estonia. countries during one trip). The figure includes 305,000 one-day visits. The list of destination countries did not change much, only visiting Russia decreased somewhat. Visits to Norway ant Turkey increased slightly. 77% of total visits were made to the European Union countries, where the residents of Estonia spent 79% of the imports of travel services. 28% of all visits were made to Finland and spending there accounted for 34% of travel services imports. Visits to other countries of the European Union were relatively even. In addition to the countries of destination listed in Table 17, Spain, Sweden and France were also popular and million euros were spent there. 20

21 Inbound travel Outbound travel other 12% other 12% Finland 29% other EU-27 countries 20% Finland 42% other EU-27 countries 27% Germany 6% Latvia 8% Russia 12% Germany 4% Sweden 7% Russia 10% Latvia 11% Figure 8. International travel statistics by countries in the second quarter of Income The net outflow of income posted a remarkable 342 million euros (8% of the same quarter s GDP). This was largely related to extraordinary direct investment by large foreign-owned holding companies in Estonia and abroad and to reinvested earnings. Reinvested earnings are a book value without any actual movement of funds (see Table 18 and Figure 9). Labour income recorded a net infl ow of 45 million euros, while investment income posted a net outfl ow of 387 million euros (see Table 19). Compared to the same quarter a year ago, net labour income decreased slightly, whereas the net outfl ow of investment income increased by 15%. Labour income decreased due to the fact that those working abroad become residents of the country where they work after one year of employment and their remittances to the home country are recorded under current transfers on the balance of payments. The net outfl ow of investment income (income on direct, portfolio and other investment) almost entirely consisted of reinvested earnings, which are a book value. The great volume of the latter was in turn related to extraordinary direct investment by large foreign-owned holding companies in Estonia and abroad. The net infl ow of the portfolio investment was 17 million euros and the net outfl ow of income on the other investment was 19 million euros. Both decreased year-on-year by a third. Income inflow or income earned by residents abroad decreased by a fourth from the second quarter of and totalled 159 million euros (see Table 20). 84% of income infl ow came from EU countries and decreased by a third year-on-year (see Table 21). Income infl ow from the CIS and other countries increased. Approximately 40% of income infl ow or 60 million euros was labour income that decreased during the year by 3%. Estonian residents earned the biggest income in Finland (43% of the labour income infl ow), followed by the United Kingdom, Sweden and the United States (all 8 9%). Labour income inflow from Finland and Sweden decreased, whereas from the United Kingdom and the United States it increased. 21 Estonia s Balance of Second Quarter of

22 Table 18. Income Inflow Outflow Balance Change from previous period Change from previous period Change from previous period total 1, , total , total , total , income inflow to Estonia income balance reinvested earnings as a ratio of GDP (right scale) income outflow from Estonia income balance as a ratio of GDP (right scale) 20% % EUR million % 5% 0% % -400 Figure 9. Income account -10% 22

23 Table 19. Structure of income account Change / / Labour income Investment income Income on direct investment income on equity dividends reinvested earnings ,481.3 income on debt (interests) Income on portfolio investment Income on other investment Total Table 20. Income inflow to Estonia Change / / Labour income Investment income Income on direct investment income on equity dividends , reinvested earnings income on debt (interests) Income on portfolio investment Income on other investment Total Table 21. Income by groups of countries in the second quarter of Inflow Change, / Outflow Change, / EU EU Cyprus Sweden Lithuania Lithuania Latvia Finland Sweden Netherlands CIS CIS Russia Russia Belarus Ukraine Other Other USA Canada ,064.6 offshore regions offshore regions Total Total Estonia s Balance of Second Quarter of

24 The remaining income inflow was related to investment income that decreased during the year by almost 40% to 99 million euros. 44% of investment income inflow was direct investment income, 34% was related to portfolio investment income and the rest was other investment income, i.e. interest income. Direct investment income decreased by more than a half during the year. One of the reasons for the decrease in income inflow and, in particular, direct investment income inflow was a structural change in the banking sector last year the Latvian and Lithuanian subsidiaries of one major bank were brought under the direct control of their foreign parent bank. While dividends as direct investment income were drawn in the amount of 230 million euros, the reinvested income inflow decreased by almost an equal amount. Income from foreign portfolio investment decreased by 17%, but income from other investment increased by 12%. While in the second quarter of the majority of foreign investment income (41% of investment income) was earned in financial intermediation (excluding insurance and pension funds), in the second quarter of, due to the structural change in the banking sector mentioned above, the first place was already held by water transport investors who received 29% of the investment income inflow (see Figure 10). Income earned by head office and insurance investors followed in almost equal shares (18 19%). 40% 30% 29% Inflow 37% 45% 40% 35% 41% Outflow 37% 20% 19% 18% 30% 10% 9% 25% 20% 0% 15% -10% -11% 10% 5% 7% 6% 5% 4% -20% water transport activities of head offices; management consultancy insurance and pension funds** real estate related activities financial intermediation* other 0% financial intermediation* wholesale*** real estate related activities activities of head offices; management consultancy warehousing and support activities for transportation other Figure 10. Inflow and outflow of investment income by fields of activity in the second quarter of * Excluding insurance and pension funds. ** Excluding statutory social insurance. *** Excluding motor vehicles and motorcycles. Three quarters of investment income inflow was related to three countries: Cyprus (34%), Lithuania (27%), and Latvia (15%). While investment income from Cyprus increased by almost a quarter, income from Lithuania and Latvia decreased by approximately a half. Investment income received from Cyprus was mostly earned by water transport investors and it increased year-on-year by a fifth. 40% of the investment income from Lithuania was earned by the investors in the field of head office activities, 28% by insurance investors (excluding statutory social insurance), and 12% by financial intermediation investors (excluding insurance and pension funds). While the income of insurance investors from Lithuania increased slightly year-on-year, the income of financial intermediation investors, as well as income of head office investors decreased significantly for the reason already mentioned. A third of the investment income earned 24

25 in Latvia belonged to financial intermediation investors (excluding insurance and pension funds), 15% to energy supply investors, 13% to insurance investors (excluding statutory social insurance) and 12% to real estate investors. In the first case, the income inflow decreased significantly, whereas the income of investors in the remaining areas mentioned above in Latvia increased. Income outflow from Estonia remained almost unchanged compared to the same quarter in the previous year and totalled 501 million euros (see Table 22). 95% of the outflow went to EU countries, having grown by 8%. Unlike in the case of income inflow, labour income had only a minor part in income outflow (3%), 97% accounted for investment income. In absolute terms, labour income outflow amounted to 15 million euros and investment income outflow to 485 million euros; the former grew during the year by 6% and the latter remained almost unchanged. The majority of the labour income earned in Estonia continued to go to Finland, Latvia, and Russia. Table 22. Income outflow from Estonia Change / / Labour income Investment income Income on direct investment income on equity dividends reinvested earnings income on debt (interests) Income on portfolio investment Income on other investment Total As regards investment income outflow, direct investment income accounted for 88%, interest income for 8%, and portfolio investment income for 3%. Year-on-year, the volume of direct investment income remained the same, interest income decreased by almost a quarter, and portfolio investment income increased by an equal amount. The volume of dividends drawn from foreign direct investments was the same as the volume of dividends drawn from direct investments made in Estonia (231 million euros). Reinvested earnings accounted for 44% of direct investment income. Foreign investors earned in Estonia primarily on financial intermediation (excluding insurance and pension funds, 41% of the total outflow of investment income), to a smaller extent from wholesale (7%), real estate activities (6%), and head office activities (5%, see Figure 10). In all these areas, the income earned was 10 20% higher than in the same quarter year-on-year. 75% of investment income earned in Estonia went to four countries: 27% to Sweden, 20% to Lithuania, 18% to Finland, and 11% to the Netherlands. While investment income outflow to Sweden decreased by almost a half, outflow to the other countries increased, whereas to Lithuania the increase was more than tenfold. 63% of the income of Swedish investors was related to financial intermediation (excluding insurance and pension funds) and decreased by almost 40% compared to the same quarter last year. To a smaller extent, income in Estonia was also earned on the electronics industry, insurance (excluding statutory social insurance), textile industry and real estate activities. Income from electronics industry decreased by six times, while income from textiles industry and real estate activities increased. The upsurge of investment income of Lithuanian investors was almost entirely due to income from financial intermediation (excluding 25 Estonia s Balance of Second Quarter of