Eesti Pank ESTONIA S BALANCE OF PAYMENTS FOR 2016

Eesti Pank ESTONIA S BALANCE OF PAYMENTS FOR 216 217

The Balance of Payments Yearbook is a longer analysis of annual external sector statistics, which includes a number of graphs. In addition, the yearbook contains a chapter on the methodology: balance of payments terms and definitions, the compilation system, the legal basis, data protection, and principles for the dissemination and revision of data. It is published once a year. Eesti Pank 217 Address Estonia pst 13, 1595 Tallinn Telephone +372 668 719 Email info@eestipank.ee Website www.eestipank.ee ISSN 1736-7859

CONTENTS I. ESTONIA S BALANCE OF PAYMENTS FOR 216... 4 INTRODUCTION... 4 OVERVIEW... 7 CURRENT ACCOUNT... 11 Goods... 12 Services... 15 Primary income (excluding investment income), secondary income and the capital account... 2 FINANCIAL ACCOUNT... 23 Direct investment... 23 Portfolio investment... 26 Financial derivatives (other than reserves) and employee stock options... 31 Other investment... 32 Reserve assets... 35 II. ESTONIA S INTERNATIONAL INVESTMENT POSITION AND GROSS EXTERNAL DEBT as at 31 December 216... 36 III. ESTONIA S BALANCE OF PAYMENTS IN INTERNATIONAL COMPARISON... 41 IV. THEORETICAL CONCEPTS, METHODOLOGY AND COMPILATION PRACTICES... 49 Balance of payments... 49 The international investment position... 5 External debt... 51 External sector statistics definitions...52 Methodology and sources for compilation of the accounts of the Balance of Payments...52 Principles for the dissemination and revision of data... 52 Legal basis for balance of payments statistics...53

I. ESTONIA S BALANCE OF PAYMENTS FOR 216 INTRODUCTION The Estonian economy grew at a slightly faster rate in 216 than the average for the countries of the euro area. The rate of growth was only slower than that in Sweden among neighbouring countries, and it was a little faster than the rates in Finland and Latvia. Stronger growth than previously in Finland and recovery in the Northern neighbour is particularly important for Estonia as trade relations between Estonia and Finland are very close. Growth slowed meanwhile in Latvia and Sweden, though it remained clearly positive in both countries. Trade increased faster in Estonia in 216 than elsewhere in Europe. Exports of goods and services grew by a total of more than 4%, indicating a gain in market share both in Europe as a whole and in the markets of Estonia s main trading partners. Exports were supported by increased demand for imports from trading partners and a general improvement in the economic environment both in Estonia and in the region more broadly. The oil shale sector struggled at the start of the year but the negative impact of this was much less in the second half of the year, when growth in manufacturing exports accelerated as well. The deficit on the goods account narrowed by around 8% over the year and was at about the same level as in 29. This time though, the reduction was due to weaker growth in imports of goods rather than a sharp drop in exports. The current account surplus of 2% of GDP reflected the good results of exporters in 216 and their competitiveness in international markets, though it was also a sign of weak investment activity and a preference for saving the inflow of income from exports rather than investing it. The preference for saving in the economy is also illustrated by household savings growing faster than private consumption as incomes were rising rapidly and loan interest rates were low. Corporate profits were some 5% lower than a year earlier, which made it that much harder for companies to invest. Some of the profit had to be set aside to cover higher wages and so corporate investment declined even faster than profits did. ESTONIA S BALANCE OF PAYMENTS FOR 216 4 The inflow of direct investment made from outside Estonia recovered after 215, though it was still notably smaller than in previous years. One third of the direct investment in Estonia went into the finance and insurance sector, and substantial shares went to manufacturing, commercial, and administrative and auxiliary companies. The most common form of investment was the reinvestment of earnings, while a slightly smaller share came as investment in debt, which includes intra-group loans to companies. Outward investment from Estonia was dominated by investments in securities by pension funds. The gross external debt, which is the external debt of all the economic sectors in the country as a ratio to GDP, fell from a year earlier by four percentage points of GDP to 91%. The reason for the fall was principally that GDP increased, as the absolute amount of the gross external debt declined by less than it did a year earlier. There was a small decline in the debt burden of non-financial companies, but this was offset by an increase in the general government debt. The net external debt, which is the difference between debt liabilities and debt assets, was negative for Estonia for the fifth consecutive year in 216, meaning that debt assets abroad were larger than debt liabilities. As debt assets increased by more during the year than debt liabilities did, net debt assets were also greater than a year previously 1. Taking external assets and liabilities as a whole, more was invested abroad than was taken from there, making the Estonian economy as a whole a net lender. The net international investment position, 1 Net debt assets arise when foreign debt assets exceed foreign debt liabilities. When the foreign debt liabilities exceed the foreign debt assets, a net debt liability arises.

which is the difference between external assets and external liabilities, improved to reach -37% of GDP by the end of the year. The negative net international investment position is mainly a reflection of how investment in Estonia is larger than investment going out from Estonia. Tables 1.1 and 1.2 show Estonia s balance of payments and its key indicators. Table 1.1. Estonia s balance of payments (EUR * 21 211 212 213 214 215 216 Current account 265.2 222.5-349.6 98.5 51.4 397.5 4.3 Goods and services 935.6 954.6 277.6 532.2 559. 814.4 814.4 Goods -45.6-351.4-1,28.1-924.8-1,91. -854.7-79. credit (FOB) 7,481.8 1,384. 1,749.5 1,968.3 1,998.2 1,757.4 11,167.8 debit (FOB) 7,887.3 1,735.4 12,29.5 11,893.1 12,89.2 11,612.1 11,957.8 Services 1,341.1 1,36. 1,557.7 1,457. 1,65. 1,669.1 1,64.4 credit 3,567.1 4,4. 4,672.4 4,992.2 5,323.1 5,237.2 5,495.9 debit 2,225.9 2,734. 3,114.7 3,535.1 3,673.1 3,568.1 3,891.5 Primary income -778.7-85.1-72.8-436.6-527.3-427.2-411.7 credit 844.7 1,1.7 1,5. 1,181.9 1,124.3 99.1 1,16.5 debit 1,623.4 1,86.8 1,725.9 1,618.5 1,651.6 1,417.4 1,518.2 Secondary income 18.3 118. 93.6 2.8 19.7 1.3-2.4 credit 395.2 434.4 435.6 429.7 445.5 472.3 498.5 debit 286.9 316.4 342. 426.9 425.8 462. 5.9 Capital account 512. 676.5 67.7 491.3 215.3 424.1 225.4 credit 518.5 68.4 624.9 588.6 418.2 48.2 228.6 debit 6.5 3.9 17.2 97.3 22.9 56.2 3.1 Financial account 83.8 1,8.4 57.1 439.3 339.3 947.4 385.8 Direct investment -1,12.8-1,768.7-398. -192.4-46.8 129.1-59.1 assets 922.9-95.8 995.8 641.1 847.4-532. 155.6 liabilities 1,935.8 817.9 1,393.8 833.5 1,38.2-661.1 664.6 Portfolio investment 431.2-1,19.5 1.1 527.1 495.5 541.9 2,424.8 assets 33.5-1,1.1 279.7 687. 561.6 52.6 2,442.2 equity securities and investment fund shares 316.6-82.6 175.6 317.3 131.5 212.8 32.4 debt securities 13.9-927.5 14.1 369.8 43. 289.8 2,139.8 liabilities -1.7 18.4 179.6 16. 66.1-39.2 17.4 equity securities and invest ment fund shares 74.4-2.5-94. 14. -47.1-36.1 39.6 debt securities -175.1 2.9 273.6 145.9 113.2-3.2-22.2 Financial derivatives -32.5 48. -61.8-97.8-74.4-84.7-9.6 assets 1.2 25.4-88.2-158.7-13.2-171. -118.8 liabilities 33.7-22.7-26.5-6.9-55.8-86.2-19.2 Other investment 2,275.8 3,96.9 796.3 194.4 259.2 338.1-1,472.3 assets 85.9 1,991.8 1,588.3-237. 1,236.2 448.3-1,671.1 cash and deposits 485.6 1,558.3 884.2-333.2 729.6 434.7-1,92.9 loans -42.8 29.3 442. 242.9 292.6 77.5 1.7 other assets 363.1 44.2 262.1-146.8 214. -63.9 131. liabilities -1,47. -1,915.1 792. -431.3 977.1 11.2-198.9 cash and deposits -1,532.4-1,944.6-649.5-562.4 457.7 622.1-114.7 loans -431.3 25.1 1,325.5 21.1 227. -156.2-142.4 other liabilities 493.7-175.6 116. -7.1 292.4-355.6 58.2 Reserve assets -831.3 12.9 7.3 8.1 119.9 23.1-48.1 Statistical discrepancy 53.6 19.4 249. -15.5 72.6 125.8-239.9 * Data from earlier periods have been corrected to reflect additional information received later ESTONIA S BALANCE OF PAYMENTS FOR 216 5

Table 1.2. Key indicators for the Estonian balance of payments 21 211 212 213 214 215 216 Current account balance (EUR 265.2 222.5-349.6 98.5 51.4 397.5 4.3 Current account balance (% of GDP) 1.8 1.3-1.9.5.3 2. 1.9 Goods and services balance (% of GDP) 6.4 5.7 1.5 2.8 2.8 4. 3.9 External trade turnover (% of GDP) 14.4 126.7 127. 12.8 116.8 19.9 19.6 Goods exports as a ratio to imports (%) 94.9 96.7 89.4 92.2 91. 92.6 93.4 Reinvested earnings (net, % of GDP) -5.6-5.9-4.9-3.8-3.6-2.4-2.9 Current account balance without reinvested earnings (% of GDP) 7.4 7.2 2.9 4.3 3.8 4.4 4.8 Real effective exchange rate (index, Dec 22 = 1) 115.8 116.6 116. 118.5 119.7 119.8 12.8 Gross external debt (% of GDP) 112.1 1.3 1.1 93.3 96.5 94.7 91.2 Net external debt* (% of GDP) 35.8 6. -1.1-4.9-1.6-1.5-11.8 General government external debt (% of GDP) 5.2 3.1 7. 7.4 8. 7.2 7.1 General government net external debt (% of GDP) -2.8-3.5-2.8 -.6 -.3-1.4-1. Direct investment liabilities position (% of GDP) 95. 89.9 94.2 98.8 14.9 98.9 99.8 Share of debt in the external liabilities position (%) 58.4 57.1 55.3 51.9 51.6 52.3 5.9 GDP (EUR 14,716.5 16,667.3 17,934.9 18,932.3 19,766.3 2,347.7 21,98.3 Real GDP growth (%) 2.3 7.6 4.3 1.4 2.8 1.4 1.6 * Net debt = debt liabilities minus debt assets ESTONIA S BALANCE OF PAYMENTS FOR 216 6

OVERVIEW Current account turnover and balance Current account The Estonian current account was in surplus by 2 current account balance credit turnover debit turnover.4 billion euros in 216, which was the same as a year earlier and equal to 2% of GDP. The current 15 account balance was positive because of a surplus of 1.6 billion euros on the services account. The balance of the goods account was negative by.8 billion euros, and the balance of the primary and EUR million 1 5 secondary income accounts was negative by.4 billion euros. The turnover of credit and debit on the current account were around 5% higher than a year earlier. Estonia traded mostly with countries -5 27 28 29 21 211 212 213 214 215 216 in the European Union, and members of the EU-28 provided 75% of the credit in the current account, and 83% of the debit, with euro area countries in the EU-19 accounting for 49% of the credit and Current account structure 56% of the debit. Goods 15 goods services primary income secondary income 1 Credit turnover on goods, or exports, increased by around 4% in 216 to 11.2 billion euros, while debit turnover, or imports, increased by 3% to 12 billion euros. The faster growth in goods exports meant that the deficit on the goods account eased by 8% to.8 billion euros, or just under 4% of GDP. % of GDP 5-5 -1-15 -2-25 Estonia s main trading partner, the European 27 28 29 21 211 212 213 214 215 216 Union, accounted for 77% of the credit turnover of goods and 84% of the debit turnover. Countries of the euro area provided 47% of the credit turnover and 6% of the debit. Services Services exports stood at 5.5 million euros in 216, and imports at 3.9 million euros, meaning exports of services were 5% more than a year earlier and imports were 9% more. The biggest contribution to the turnover of services came from European Union countries, with other markets contributing less. There was strong growth in exports of construction services, telecommunications services, computer and information services, and in imports of travel services. The surplus on the services account declined a little to 1.6 billion euros, or EUR billion Goods account 14 12 1 8 6 4 2-2 -4 27 sale of goods purchase of goods balance balance as % of GDP (right scale) 28 29 21 211 212 213 214 215 216 7 6 5 4 3 2 1-1 -2 % of GDP ESTONIA S BALANCE OF PAYMENTS FOR 216 around 8% of GDP for 216. 7

Primary income Services account The deficit in primary income in 216 was 412 million euros, or 2% of GDP. The net outflow of income was the smallest of recent years. Inflows 6 exports imports balance balance as % of GDP (right scale) 18 and outflows of labour income both increased. Direct investment income was affected by the 5 16 14 improved economic environment and higher profits both abroad and in Estonia. Inflows and outflows of income in portfolio investment also ESTONIA S BALANCE OF PAYMENTS FOR 216 EUR billion 4 3 12 1 8 % of GDP increased. The inflow of other investment income 2 6 was also up, but the outflow declined. Inflows and outflows of income in other primary income 1 4 2 increased. 27 28 29 21 211 212 213 214 215 216 Secondary income and the capital account The inflow and outflow of secondary income were in balance in 216. The inflow grew by 6% to 499 million euros and the outflow was 51 million euros, of which the general government accounted for 56%, or 281 million euros. Primary and secondary income and the capital account balance as % of GDP 6 primary income secondary income capital account The surplus on the capital account reached 225 million euros. Credit on the capital account more than halved to 229 million euros. Substantially less of the Structural Funds from the European Union was used in 216 than in the preceding years. As no CO 2 quotas were bought in 216, the debit on the capital account was only 3 million euros. % of GDP 4 2-2 -4-6 -8 27 28 29 21 211 212 213 214 215 216 8

Financial account Financial account Capital outflows from the financial account surpassed inflows by 386 million euros. The main channel for the outflows was portfolio investment. Pension funds, with 257 million euros, and other financial intermediaries, with 59 million euros, financed the rest of the world the most. Unlike in 215, non-financial companies were again net borrowers by 481 million euros. Credit institutions continued to be net borrowers, taking in 6 million euros from the rest of the world. EUR billion 5 4 3 2 1-1 -2-3 other investment portfolio investment direct investment financial account total Direct investment -4 27 28 29 21 211 212 213 214 215 216 Direct investment assets increased by.2 billion euros in 216 and liabilities by.7 billion. This meant that liabilities increased by.5 billion euros more than assets did. The growth in assets came mainly from.3 billion euros of investment in the equity of Direct investment foreign subsidiaries and associated enterprises. Liabilities were increased by the reinvestment of.7 billion euros of profits in Estonian compa- 2.5 liabilities assets balance balance as % of GDP (right scale) 2 nies. Payouts to direct investors and buybacks of 2. 16 companies from foreign investors reduced direct investment liabilities to direct investors a little. Portfolio investment EUR billion 1.5 1..5. -.5 12 8 4-4 % of GDP The net outflow of capital from portfolio invest- -1. -1.5-8 -12 ment continued for the fifth year in a row and -2. -16 stood at 2.4 billion euros. The expansion of the asset purchase programme by the central banks -2.5 27 28 29 21 211 212 213 214 215 216-2 of Europe in 216 increased the securities investments of the central bank substantially. The net outflow was also supported by the investments of pension funds in foreign fund units and those of credit institutions in debt securities. The net inflow of financial derivatives amounted to 1 million euros during the year. Portfolio investment EUR billion 3. 2.5 2. 1.5 1..5. -.5-1. -1.5 27 liabilities assets balance balance as % of GDP (right scale) 28 29 21 211 212 213 214 215 216 18 15 12 9 6 3-3 -6-9 % of GDP ESTONIA S BALANCE OF PAYMENTS FOR 216 9

Other investment Other investment Unlike in previous years, there was a net inflow of other investment capital in 216 that totalled 1.5 billion euros. The net inflow was affected signi- 5 liabilities assets balance balance as % of GDP (right scale) 3 ficantly by the purchases of securities by Eesti 4 25 Pank within the asset purchase programmes. The other investment assets of the central bank shrank by 1.9 billion euros during the year. ESTONIA S BALANCE OF PAYMENTS FOR 216 EUR billion 3 2 1 2 15 1 5 % of GDP Gross external debt Estonia s gross external debt, which is the total external debt of all economic sectors, was 19.1 billion euros in 216, which was 1% smaller than the GDP of the year. The gross external debt shrank by.6% over the year. The external debt of other sectors accounted for 48% of the total gross debt, and 35% of it came from monetary financial institutions other than the central bank. The share of general government debt in the gross external debt was 8%, which was 2% more than in 215. Estonia s external debt assets have exceeded its external debt liabilities (gross external debt) since 212, which means that the rest of the world has owed more to Estonia than Estonia owed abroad. This surplus has increased steadily, and in 216 it reached 2.5 billion euros, or 12% of GDP. -1-2 -3 27 28 29 21 211 212 213 214 215 216-5 -1-15 -2 Gross and net external debt of the Estonian economy 13 12 11 1 9 8 7 6 5 4 3 2 1-1 -2 % of GDP 27 gross external debt as % of GDP net external debt as % of GDP 28 29 21 211 212 213 214 215 216 1

CURRENT ACCOUNT The balance on the current account was positive by.4 billion euros, or around the same as in 215 (see Figure 1.1). The goods account deficit shrank by 8% and the services surplus by 4%, while the net outflow of income was the same as a year before. Net exports of goods and services totalled 814 million euros, or 4% of GDP. Figure 1.1. Estonia's current account 1. current account current account as % of GDP (right scale) 6.5 3. EUR billion -.5-1. -1.5-3 -6-9 % of GDP -2. -12-2.5-15 -3. 27 28 29 21 211 212 213 214 215 216-18 The turnover of credit and debit on the current account, which had been growing increasingly slowly from 211 and even fell in 215, returned to growth in 216 with both turnovers up some 5% on the previous year. Estonia traded mostly with countries in the European Union, and members of the EU-28 accounted for 75% of the credit in the current account, and 83% of the debit. The current account balance with the European Union was negative by around one billion euros, but the balance with the CIS and other countries was positive by 1.4 billion euros (see Table 1.3). The three most important countries in the European Union for credit turnover were Finland, Sweden and Latvia, and the top three for debit turnover were Finland, Sweden and Germany. The European Union countries with which Estonia had the largest current account surplus were Finland, Sweden and Denmark, while the largest deficits were with Germany, Poland, and the Netherlands. The countries outside the European Union with which Estonia had the largest surpluses were Norway, the USA, Switzerland and Turkey, and the biggest deficits were with China and Taiwan. Table 1.3. Current account balance by groups of countries (EUR 215 216 European Union countries, of which -74.9-994.2 Finland* 753.3 92.2 Germany -915.3-897.5 Sweden 844.8 722.1 Poland -695.6-79.1 Netherlands -387. -562.9 CIS, of which -69.5 136.5 Russia -6.2 42.9 Kazakhstan 13.1 29. Ukraine -46.3 19.2 Other countries, of which 1,171.9 1,258. Norway 491.8 466.1 China -384. -391. USA 289.7 234.4 Mexico 39. 183.1 Total 397.5 4.3 * Countries are ranked by the absolute value of last period's current account balance. ESTONIA S BALANCE OF PAYMENTS FOR 216 11

Goods The turnover on the goods account, which declined exceptionally in 215, grew again in 216 as the credit turnover rose by 4% over the year to 11.2 billion euros and the debit turnover increased by 3% to 12 billion euros (see Table 1.4). The faster growth in goods exports meant that the deficit on the goods account eased by 8% to 79 million euros, or just under 4% of GDP. Table 1.4. Exports (credit) and imports (debit) of goods Volume* (EUR Goods credit (FOB) Change from previous period (%) Share in total exports of goods and services (%) Volume* (EUR Goods debit (FOB) Change from previous period (%) Share in total imports of goods and services (%) Balance (EUR Volume* (EUR Change from previous period (%) 27 6,838.9 23.3 66.6 9,393.4 18.5 8.2-2,554.5 7.3 28 7,157.9 4.7 64.9 9,254. -1.5 79.2-2,96.1-17.9 29 5,295.1-26. 61.6 6,2.7-34.9 76.2-725.6-65.4 21 7,481.8 41.3 67.7 7,887.3 31. 78. -45.6-44.1 211 1,384. 38.8 72. 1,735.4 36.1 79.7-351.4-13.4 212 1,749.5 3.5 69.7 12,29.5 12.1 79.4-1,28.1 264.3 213 1,968.3 2. 68.7 11,893.1-1.1 77.1-924.8-27.8 214 1,998.2.3 67.4 12,89.2 1.6 76.7-1,91. 18. 215 1,757.4-2.2 67.3 11,612.1-3.9 76.5-854.7-21.7 216 11,167.8 3.8 67. 11,957.8 3. 75.4-79. -7.6 * Data from the goods account of the balance of payments. The goods account has three sub-items: general merchandise, which covers normal exports and imports in international trade 2 and corrections arising from the balance of payments methodology; net exports of goods under merchanting 3, which shows the balance of goods bought and sold in foreign countries for the purpose of resale; and non-monetary gold, which plays a very small role in Estonia. Purchases of goods under merchanting are recorded as negative credit and sales of them as positive credit. ESTONIA S BALANCE OF PAYMENTS FOR 216 Exports of general merchandise in 216 were 1.8 billion euros and imports 11.9 billion euros, and both were up 3% on 215. The balance of general merchandise remained at the level of 215 at -1.1 billion euros. The turnover of goods under merchanting fell back however. As purchases of such goods were down 9% and sales were down 5%, the positive balance for goods under merchanting increased by 22% to 351 million euros. Goods under merchanting plays quite a large role in the Estonian balance of payments, accounting for 15% of goods imports and 2% of exports, as 1844 million euros worth were bought and 2195 million euros sold. Sales of goods to countries in the European Union were 4% higher than a year earlier at 8.6 billion euros, and they accounted for 77% of credit turnover (see Table 1.5). The biggest export partner was Sweden, which took one quarter of the exports destined for the European Union. The five biggest partner countries together took 73% of exports. Sales of goods to CIS countries had fallen sharply in the previous two years, but in 216 they increased by 47%, with sales to Russia accounting for 34% of them. Exports of goods to other countries increased by 9%, and the main trading partners were Norway, Turkey and the USA. The largest sales of goods under merchanting were to Lithuania, Russia, the United Kingdom, Latvia, Switzerland and Turkey (see Figure 1.2). 2 Exports and imports of goods not including goods crossing the border for the purposes of processing where the ownership does not change. Neither does it include quasi-transit, which is flows of goods through Estonia between non-residents. Normal imports are recorded in the balance of payments at FOB (free on board) prices. 12 3 Goods that resident merchants buy from third countries and sell on to non-residents without the goods crossing the border into Estonian territory.

Table 1.5. Exports* and imports of goods by groups of countries Export of goods (credit) Import of goods (debit) Volume (EUR Share (%) Change from previous year (%) Volume (EUR Share (%) Change from previous year (%) European Union countries, of which 8,629.4 77.3 3.8 European Union countries, of which 1,16.4 83.8 3.2 Sweden 2,58. 18.4-1.3 Finland 1,545.6 12.9-6.8 Finland 1,75.4 15.3 4.4 Germany 1,362.5 11.4 2.9 Latvia 1,12. 1. -6.6 Lithuania 1,138.8 9.5 4.1 Lithuania 944.2 8.5 13.4 Latvia 1,99.2 9.2 3.4 Germany 457.3 4.1 8.4 Sweden 1,25.4 8.6 3.7 CIS, of which 454. 4.1 46.9 CIS, of which 6.3 5. -1.1 Russia 272.9 2.4 33.7 Russia 483.1 4. -15.9 Ukraine 7.7.6 x Ukraine 64.1.5 47.7 Belarus 69.5.6 1.8 Belarus 45.6.4 4.4 Other countries, of which 2,84.4 18.7 9.3 Other countries, of which 1,341.1 11.2 8.3 Norway 459.7 4.1.5 China 51.4 4.2 6.8 Turkey 248.2 2.2 24.7 USA 17.7 1.4 12.6 USA 244. 2.2-26.6 Switzerland 112.8.9 1.4 Total 11,167.8 1. 3.8 Total 11,957.8 1. 3. * Exports of goods (credit) also includes net exports of goods under merchanting. Figure 1.2. Sale and purchase of goods under merchanting by country Sales of goods under merchanting Purchase of goods under merchanting other countries 36% Russia 26% other countries 43% Lithuania 13% Russia 11% Germany 16% United Kingdom 11% Lithuania 3% Poland 4% Latvia 7% United Kingdom 8% Turkey 7% Switzerland 7% Latvia 7% Purchases of goods from countries in the European Union were 3% higher than a year earlier at 1 billion euros, and they accounted for 84% of credit turnover. The top five trading partners were the same as for credit, but the order was different, with Finland taking first place and providing 15% of European Union imports. Imports from the CIS shrank by 1%, with imports from Russia decreasing by 16%. Imports of goods from other countries increased by 8%, and the top three sources of imports were China, the USA and Switzerland. Goods under merchanting were bought most from Russia, Germany, the United Kingdom, Latvia, Poland and Lithuania. The negative balance on the goods account with European Union countries was a little wider than a year earlier at 1.4 billion euros. Goods trade with the CIS was negative by some 15 million euros because of a deficit of 21 million euros with Russia. In contrast, the trade in goods with other countries was in surplus by 743 million euros. The European Union members with which Estonia had the biggest trade deficits were Germany, Poland and the Netherlands, while the largest surpluses were with Sweden, Denmark, Finland and the United Kingdom. Trade in goods with Russia, which had a small surplus for general merchandise, was in deficit because of goods under merchanting, as ESTONIA S BALANCE OF PAYMENTS FOR 216 13

purchases of goods under merchanting from Russia were 24 million euros more than sales to Russia. Estonia had trade surpluses with Norway, Turkey, Mexico and the USA from the group of other countries, and the largest trade deficit was with China. Normal exports of goods 4 increased by 3.4% year on year to stand at 1.9 billion euros (see Table 1.6). The growth was apparent in all the main groups of goods except foodstuffs and mineral products. The biggest driver of growth was the increase in exports of machinery and equipment and wood and wood products, which were generally also the biggest groups of goods in Estonian exports. Around half of the machinery and equipment group of goods was mobile communications equipment and parts, which was mainly sold to Sweden, and also to Mexico, Romania and Germany. Wood and wood products, including pre-fabricated wooden houses, furniture, wooden construction components and firewood, were exported mainly to the Nordic countries, Germany and the United Kingdom. Exports of foodstuffs declined a little, and the main products traded were grain, dairy, meat and fish products, and alcohol, and the main destinations were Finland, Latvia and Lithuania. Various chemical products, such as construction materials, plastic products, medicines, carboxylic acids and rubber tyres were exported to Russia, Finland, Lithuania and Latvia. Iron and steel products and scrap iron went mainly to Finland, and also to a lesser degree to Sweden, Latvia, Lithuania and Turkey. Exports of transport vehicles increased notably, with passenger cars and their parts accounting for 6% of them, and the main destinations being the Baltic states, Sweden, Finland and Germany. Exports of mineral products were down 1% over the year, and the main export goods were again motor fuels and electricity. Fuels were sold to the Netherlands, Belgium, the USA and Canada, and electricity to Latvia and Finland. Textile products and footwear were sold mainly to neighbouring countries. Table 1.6. Normal exports by major groups of goods ESTONIA S BALANCE OF PAYMENTS FOR 216 14 Volume (EUR Share (%) Change (%) 215 216 215 216 216/215 Food 1,6.7 1,17.5 1.1 9.3-4.1 Mineral products 721.2 649.2 6.8 6. -1. Chemical products 88.4 91.3 8.3 8.3 2.4 Clothing, footwear and headgear 315.8 348. 3. 3.2 1.2 Timber, paper and products 1,453.3 1,53.9 13.8 14. 5.3 Metals and metal products 793.9 797. 7.5 7.3.4 Machinery and equipment 3,82.2 3,241.2 29.2 29.7 5.2 Transport vehicles 644.7 698.6 6.1 6.4 8.4 Furniture, toys, sporting goods 977.9 1,32.7 9.3 9.5 5.6 Other 615.3 692.5 5.8 6.3 12.6 Total 1,545.4 1,98.9 1. 1. 3.4 Normal imports of goods at CIF prices were 12.6 billion euros (see Table 1.7), which was 3.6% up on the previous year. The drivers of the growth in imports were transport vehicles and machinery and equipment, while the growth was restrained by a decline in imports of mineral products of around a fifth. Three quarters of imports of transport vehicles was made up of passenger and commercial vehicles and parts for them, which came from Sweden, Germany, Finland and Poland. Machinery and equipment, which was mobile communications equipment, components for electronic production, televisions, computers, cables and cable ties, came from the Netherlands, Germany, Finland, China and Sweden. The sharp fall in imports of mineral products was due to a reduction in supplies of motor fuels, electricity and natural gas from Lithuania, Finland and Russia. Medicines accounted for 17% of chemical products, and plastic products, rubber tyres, fertilizers, and the like for smaller shares. Chemical products came from Lithuania, Germany, Poland, Finland and Latvia. Food (strong and weak alcoholic beverages, fish and meat products 4 The analysis draws on the Statistics Estonia foreign trade statistics, which do not contain the adjustments and corrections that are in the balance of payments methodology, quasi-transit or the import and export of processed goods. Exports are recorded at FOB (free on board) prices and imports at CIF (cost, insurance, freight) prices.

Table 1.7. Normal imports at CIF prices by major groups of goods Volume (EUR Share (%) Change (%) 215 216 215 216 216/215 Food 1,333.8 1,378.9 11. 11. 3.4 Mineral products 1,125.9 98.4 9.3 7.2-19.3 Chemical products 1,75. 1,765.5 14. 14. 3.5 Clothing, footwear and headgear 67.8 727.7 5.5 5.8 8.5 Timber, paper and products 655.1 685. 5.4 5.4 4.6 Metals and metal products 997.6 1,6.1 8.2 8.4 6.3 Machinery and equipment 3,448.7 3,52.9 28.4 28. 2.1 Transport vehicles 1,195. 1,418. 9.8 11.3 18.7 Furniture, toys, sporting goods 315.3 328.1 2.6 2.6 4.1 Other 692.1 78.5 5.7 6.2 12.8 Total 12,139.2 12,573.1 1. 1. 3.6 and similar) was imported mainly from Lithuania, Latvia, Finland, the Netherlands, Germany and Poland, various metal products were bought from Finland, Germany, Sweden and Poland, and textile products and footwear came from those countries and China and Italy. Wood and wood products came from Finland, Russia and Latvia. The deficit in normal trade was 1.7 billion euros, which was 4% more than in the previous year (see Table 1.8). The biggest deficits were in chemical products, transport vehicles, and clothing and food products, while surpluses were posted by wood and wood products, and furniture, toys, and sporting goods. The deficit in transport vehicles was larger than in 215, while those in mineral products and machinery and equipment were smaller. Table 1.8. Balance of normal exports and imports by major groups of goods (EUR 215 216 Food -273. -361.4 Mineral products -44.6-259.2 Chemical products -824.6-864.2 Clothing, footwear and headgear -355. -379.7 Timber, paper and products 798.3 845.9 Metals and metal products -23.7-263.1 Machinery and equipment -366.4-279.7 Transport vehicles -55.3-719.5 Furniture, toys, sporting goods 662.6 74.6 Other -76.8-88. Total -1,593.8-1,664.2 Services Exports of services increased by 5% in 216 and imports by 9% (see Table 1.9). The biggest contribution to the turnover of services came from European Union countries, with other markets contributing less (see Table 1.1). The surplus on the services account declined a little to 1.6 billion euros, or 8% of GDP. Services exports were 26 million euros more in 216 than a year earlier at 5.5 billion euros (see Table 1.11). The structure of services exports has been relatively stable over the years. Transport services accounted for the largest share of services imports with 29%, followed by travel services with 25% and other business services with 2%. Other business services include trade services, legal assistance, accounting, management consulting, scientific and technical services and other professional services, including operational leases. There has been strong growth in recent years in exports of telecommunications, computer and information services, and in 216 their share of services exports was 9%. ESTONIA S BALANCE OF PAYMENTS FOR 216 15

Table 1.9. Exports and imports of services Volume (EUR Exports Imports Balance Change from previous period (%) Share in total exports of goods and services (%) Volume (EUR Change from previous period (%) Share in total imports of goods and services (%) Volume (EUR Change from previous period (%) 27 3,428.1 12.8 33.4 2,315.4 14.1 19.8 1,112.7 1.2 28 3,875.2 13. 35.1 2,428. 4.9 2.8 1,447.2 3.1 29 3,36.2-14.7 38.4 1,879.1-22.6 23.8 1,427.1-1.4 21 3,567.1 7.9 32.3 2,225.9 18.5 22. 1,341.1-6. 211 4,4. 13.3 28. 2,734. 22.8 2.3 1,36. -2.6 212 4,672.4 15.7 3.3 3,114.7 13.9 2.6 1,557.7 19.3 213 4,992.2 6.8 31.3 3,535.1 13.5 22.9 1,457. -6.5 214 5,323.1 6.6 32.6 3,673.1 3.9 23.3 1,65. 13.2 215 5,237.2-1.6 32.7 3,568.1-2.9 23.5 1,669.1 1.2 216 5,495.9 4.9 33. 3,891.5 9.1 24.6 1,64.4-3.9 Table 1.1. Exports and imports of services by groups of countries Exports European Union countries, of which Volume (EUR Share (%) Change from previous year (%) 3,89.5 69.3 6.4 Imports European Union countries, of which Volume (EUR Share (%) Change from previous year (%) 3,4.5 77.2 8.5 Finland 1,431.4 26..2 Finland 523.1 13.4 2. Sweden 463.3 8.4 7.9 Sweden 332.5 8.5.3 Latvia 321.2 5.8 14.3 Latvia 33.2 7.8 7.4 Germany 293.8 5.3 18.1 Germany 278.5 7.2 12.5 United Kingdom 267.5 4.9 3.2 United Kingdom 263.7 6.8 11.9 CIS, of which 498.9 9.1 2.3 CIS, of which 222. 5.7.2 Russia 396.1 7.2-4.7 Russia 149.3 3.8 1.8 Ukraine 38..7 13.9 Belarus 36..9-7.7 Kazakhstan 29.2.5 64.5 Ukraine 21.9.6-3.3 Other countries, of which 1,187.5 21.6 1.6 Other countries, of which 665. 17.1 15.4 Norway 246.4 4.5-7.9 Norway 141.1 3.6 16. USA 243.3 4.4 21.7 USA 118.1 3. 46.3 Switzerland 189.6 3.5-8.5 China 74.8 1.9 18.8 Total 5,495.9 1. 4.9 Total 3,891.5 1. 9.1 ESTONIA S BALANCE OF PAYMENTS FOR 216 16 Table 1.11. Exports of services by major categories Volume (EUR Share (%) Change (%) 215 216 215 216 216/215 Manufacturing services 192.5 177.8 3.7 3.2-7.6 Maintenance and repair services 137.2 165.8 2.6 3. 2.8 Transport 1,672.1 1,584.8 31.9 28.8-5.2 passengers 353.9 364.2 6.8 6.6 2.9 freight 696.7 648.8 13.3 11.8-6.9 other transport services 546.1 51.4 1.4 9.3-6.5 other* 75.3 61.4 1.4 1.1-18.5 Travel services 1,39.5 1,344.9 25. 24.5 2.7 Construction services 296.6 368.3 5.7 6.7 24.2 Telecommunications, computer and information services 456.2 519.3 8.7 9.4 13.8 Other business services 97.2 1,11.9 18.5 2. 13.6 Government services 42.1 41.9.8.8 -.6 Other 16.7 191.3 3.1 3.5 19. Total 5,237.2 5,495.9 1. 1. 4.9 * Pipeline transport, transmission of electricity and postal and courier services.

Figure 1.3. Travel services 1.6 exports imports balance balance as % of GDP (right scale) 3. EUR million 1,4 1.2 1..8 2.5 2. 1.5 % of GDP.6.4.2 1..5. 27 28 29 21 211 212 213 214 215 216. Transport services were provided abroad to a value of 1.6 billion euros in 216, and exports of them were down 5%. The notable reduction in recent years in transit flows has led to a sharp drop in freight by rail and related port services. This led to a decline of 7% in freight transport, while other transport services, which include auxiliary and supporting activities related to transport, were down by 7%. Exports of travel services totalled 1.3 billion euros in 216, which is 3% more than in 215 (see Figure 1.3). More than 6 million visits were made to Estonia during the year, with European Union residents making 73% of all visits. There were 3.1 million overnight visits, and their average length was 4.2 days. The number of same-day visits increased by 3% and made up 47% of the total number of visits. Visits from Finland accounted for 38% of the total number and the share of travel services in total exports in monetary terms reached 4% for Finland (see Table 1.12). Travel services exports to Russia made up 12% of total exports. The peak time for Russian tourists to visit Estonia is at New Year, and so their visits help to lift the seasonal low point for the Estonian tourism sector in the winter. The fastest growth in exports of other services in 216 was the 24% growth posted by exports of construction services, which was led by strong demand from the Nordic countries. Large-scale orders boosted the volume of maintenance and repair services by 21%. Exports of telecommunications, Table 1.12. Travel services by groups of countries European Union countries, of which Volume (EUR Exports Share (%) 955.11 71. European Union countries, of which Volume (EUR Imports Share (%) 811.9 77.4 Finland 543.48 4.4 Finland 195.92 18.7 Germany 88.4 6.5 Latvia 8.91 7.7 Sweden 6.4 4.5 Sweden 73.8 7. Latvia 54.97 4.1 Germany 67.26 6.4 CIS, of which 183.13 13.6 CIS, of which 6.66 5.8 Russia 165.38 12.3 Russia 45.11 4.3 Ukraine 13.1 1. Belarus 5.15.5 Other countries, of which 26.71 15.4 Other countries, of which 176.35 16.8 USA 69.58 5.2 Norway 39.3 3.7 Norway 23.94 1.8 USA 21.17 2. Republic of Korea 21.15 1.6 Turkey 19.7 1.8 Japan 19.91 1.5 Switzerland 13.24 1.3 Total 1,344.95 1. Total 1,48.1 1. ESTONIA S BALANCE OF PAYMENTS FOR 216 17

computer and information services increased by 14%, with sales of computer services increasing particularly strongly. By far the most important buyer of services from Estonia was Finland, which took a little over one quarter of the exports of services. The largest share of sales of services to Finland was travel services, which accounted for 38%, followed by transport services with 24%, other business services with 13% and construction services on 1%. The second most important destination for exports of services was Sweden, which bought 8% of all services. Exports to Sweden were dominated by transport services, which made up 3% of exports in that direction, and other business services, which provided 18%. Construction services, travel services and telecommunications, computer and information services were also exported to Sweden. Services exports to Russia contracted by 5% year on year and were mostly divided between travel services, with 42%, and transport services, with 37%. The volume of transport services continued to decline, but travel services showed some recovery from the low point of 215. Of exports to Latvia, 3% were other business services, 28% were transport services, 17% were travel services, and 12% were telecommunications, computer and information services. Germany climbed to fifth place among export destination countries, with travel services accounting for 3% of exports and transport services for 27%. The drop in the volume of transport services reduced exports of services to Norway. The volume of imports of services was 3.9 billion euros in 216, which was 9% more than in the previous year (see Table 1.13). Transport services accounted for 32% of services imports, followed by travel services with 27% and other business services with 21%. Travel services contributed the most to the growth in imports, increasing by 14% over the year, while imports of other business services increased by 11%. Although there was rapid growth of 26% in imports of processing services and of 53% in maintenance and repair services, these types of services remain only a small share of the total. ESTONIA S BALANCE OF PAYMENTS FOR 216 18 Imports of travel services grew by 14% from a year ago to 1 billion euros. Estonian residents made a total of 3.6 million visits to foreign countries in 216, and European Union countries played host to 8% of the visits, with one visit in five going to neighbouring Finland (see Figure 1.4). Same-day visits accounted for 14% of the total, and there were 4% fewer such visits. There was no change in the number of overnight visits by Estonian residents or in their average length, which remained constant at 3.7 days. Although four fifths of visits by Estonian residents were to countries in the European Union, the Union only provided 77% of total imports of travel services (see Table 1.12). Russia s share of the imports of travel services reached 4%. Table 1.13. Imports of services by major categories Volume (EUR Share (%) Change (%) 215 216 215 216 216/215 Manufacturing services 29.8 37.7.8 1. 26.4 Maintenance and repair services 48.1 73.7 1.3 1.9 53.4 Transport 1,192.5 1,245. 33.4 32. 4.4 passengers 129.3 123. 3.6 3.2-4.9 freight 821.6 861.3 23. 22.1 4.8 other transport services 29.7 215.4 5.9 5.5 2.7 other* 31.8 45.3.9 1.2 42.4 Travel services 917.6 1,48.1 25.7 26.9 14.2 Construction services 15. 117. 2.9 3. 11.5 Telecommunications, computer and information services 35.9 326.7 8.6 8.4 6.8 Other business services 737.8 818.8 2.7 21. 11. Government services 23.1 23..6.6 -.6 Other 28.3 21.5 5.8 5.2-3.3 Total 3,568.1 3,891.5 1. 1. 9.1 * Pipeline transport, transmission of electricity and postal and courier services.

Figure 1.4. Numbers of foreign visitors by country Visits to Estonia by non-residents Visits abroad by Estonian residents USA 3% other countries 9% other countries 12% Finland 2% other EU-28 countries 18% Germany 7% Finland 38% other EU-28 countries 33% Sweden 7% Latvia 13% Latvia 1% Russia 14% Russia 8% Germany 7% The largest supplier of services was Finland, from where 13% of services were imported. The leaders were travel services, which made up 37% of the volume of services bought from Finland, and transport services, which made up 3%. Other business services supplied 18% and telecommunications, computer and information services 6%. The second country for imports of services was Sweden, and the main service types bought from there were transport services, which accounted for 39% of the Swedish total, and travel services, which accounted for 22%. Other business services supplied 15% and telecommunications, computer and information services 13%. Transport services were 32% of the total bought from Latvia, while travel services were 27% and other business services 26%. In Germany too, transport services were the largest group of services, accounting for 38% of all the services imported from Germany, They were followed by travel services with 24%, and other business services with 23%. Other business services were 28% of all the services bought from the United Kingdom, while transport services were 25% and travel services were 19%. The balance on the services account was positive by 1.6 billion euros, or 8% of GDP, in 216. This meant services remained an important source of income for the Estonian economy and they helped to offset the negative balance for goods. Most types of services contributed to the services account surplus (see Table 1.14). At 21%, the largest share of the surplus came from transport services, but the balance for transport services was lower than in 215 at 34 million euros (see Figures 1.5 and 1.6). Table 1.14. Balance of exports and imports of services by major categories (EUR 215 216 Manufacturing services 162.7 14.1 Maintenance and repair services 89.2 92.1 Transport 479.6 339.8 passengers 224.6 241.2 freight -124.8-212.5 other transport services 336.3 295. other* 43.5 16. Travel services 391.9 296.8 Construction services 191.6 251.2 Telecommunications, computer and information services 15.3 192.6 Other business services 232.4 283.1 Government services 19. 18.9 Other -47.6-1.3 Total 1,669.1 1,64.4 * Pipeline transport, transmission of electricity and postal and courier services. ESTONIA S BALANCE OF PAYMENTS FOR 216 19

Figure 1.5. Transport services 2. 1.8 1.6 exports imports balance balance as % of GDP (right scale) 5. 4.5 4. EUR billion 1.4 1.2 1. 3.5 3. 2.5 % of GDP.8.6.4.2. 27 28 29 21 211 212 213 214 215 216 2. 1.5 1..5. Figure 1.6. Structure of transport services by type of transport in 216 8 exports imports balance 7 6 EUR million 5 4 3 2 1-1 -2 sea transport air transport rail transport road transport ESTONIA S BALANCE OF PAYMENTS FOR 216 2 Within this, passenger transport and other transport services were in surplus, but the deficit in freight transport widened substantially. Although the surplus on travel services shrank, the balance was more than 3 million euros and provided one fifth of the surplus on services. Other business services supplied 18% of the total surplus, construction services 16%, and telecommunications, computer and information services 12%. The balance for services was positive with the majority of main trade partners. The largest surpluses were of 98 million euros with Finland, and of 247 million euros with Russia, while the largest deficits were of 74 million euros with Cyprus, and of 6 million euros with Spain. Primary income (excluding investment income), secondary income and the capital account The main source of inflows into primary income excluding investment income, secondary income and the capital account was transfers from the Structural Funds of the European Union (see Figure 1.7). These can be reflected in any of the three accounts depending on whether they are subsidies, consumption expenditures, or capital expenditures. In 216, 572 million euros of transfers from the European Union budget was used, which was 9% less than in the previous year. The main reduction was in the financing of investment expenditures, which was due to the temporary pause in large

Figure 1.7. Total primary income (excluding investment income), secondary income and the capital account by groups of countries 1,6 European Union institutions European Union countries other countries 1,4 1,2 EUR million 1, 8 6 4 2 inflow 215 inflow 216 outflow 215 outflow 216 infrastructure projects. The general government used a little less than half of the amount of structural transfers, with 35% going on agricultural subsidies and the rest being used in other sectors, mainly for infrastructure development projects. The net outflow of primary income shrank in 216 to 412 million euros, or 2% of GDP (see Table 1.15). Investment income is discussed in more detail in the analysis of direct, portfolio and other investment, and only compensation of employees and other income are considered here. Table 1.15. Components of primary income 215 216 Inflow Outflow Balance Change % 215 216 Change % 215 216 Primary income 99.1 116.5 11.7 1417.4 1518.2 7.1-427.2-411.7 Compensation of employees 38.5 32.7 4. 52.7 64.8 23. 255.8 255.9 Investment income, of which 59.4 587.6 15.3 1331. 1413.7 6.2-821.5-826.2 income on direct investment 33.9 368.5 11.4 1221.1 138.5 7.2-89.2-94.1 income on portfolio investment 124.2 157.8 27.1 69.4 74.4 7.3 54.8 83.4 income on other investment 5.7 57.5 13.3 4.5 3.8-24. 1.3 26.7 Other primary income 172.3 198.2 15.1 33.7 39.7 17.7 138.5 158.5 The inflow of compensation of employees or labour income grew by 4% from a year ago to 32 million euros. Estonian residents earned labour income mainly in Finland, which was the source for 47% of the labour income inflow, followed by Norway at 11%, Sweden at 8%, the United Kingdom at 5%, Germany at 4%, and Latvia at 3% (see Figure 1.8). The flows of labour income from Norway and the United Kingdom were smaller than a year earlier, but more income was received from Finland and Sweden. Some 18% of the inflow of primary income came from European Union agricultural subsidies recorded under other primary incomes. This inflow was worth 198 million euros in 216. The outflow of labour income was 65 million euros in 216, up 23% over the year. In Estonia, labour income was primarily earned by Latvian, Ukrainian, Finnish and Russian residents. The outflow of other income was made up of European Union production and import taxes, which were 4 million euros. The deficit in secondary income in 216 was 2 million euros (see Figure 1.9). The inflow of secondary income grew by 6% to 499 million euros (see Table 1.16), of which 44% went to the general government and the rest to other sectors. Around four fifths of the general government income came from ESTONIA S BALANCE OF PAYMENTS FOR 216 21

Figure 1.8. Labour income inflow by country (%) other countries 21% Latvia 3% Finland 47% Germany 4% United Kingdom 5% Sweden 8% Norway 11% Figure 1.9. Inflow and outflow and balance of secondary income 6 inflow outflow balance 5 EUR million 4 3 2 1-1 27 28 29 21 211 212 213 214 215 216 ESTONIA S BALANCE OF PAYMENTS FOR 216 22 Table 1.16. Secondary income and the capital account (EUR 215 216 Inflow Outflow Balance Change % 215 216 Change % 215 216 Secondary income 472.3 498.5 5.5 462. 5.9 8.4 1.3-2.4 General government 196.6 221.8 12.8 257.2 281.2 9.3-6.6-59.4 Other sectors 275.7 276.7.4 24.8 219.6 7.2 7.9 57.1 Current taxes and subsidies 54. 57.2 6. 91.1 16. 16.4-37.1-48.7 Other current transfers 221.7 219.4-1. 113.7 113.6 -.1 18. 15.8 of which personal transfers 12.5 111.5 8.8 31.8 46.1 45. 7.8 65.4 of which remittances by workers 47.2 47.3.3 4. 4.2 5.3 43.2 43.1 Capital account 48.2 228.6-52.4 56.2 3.1-94.4 424.1 225.4 foreign assistance, while the rest was mostly tax payments by non-resident employees. Half of the amounts coming in to other sectors was foreign assistance. Remittances to Estonia from workers abroad stood at 47 million euros, or 22% of secondary income. The outflow of secondary income was 51 million euros, of which 56% or 281 million euros came from the general government. The majority of this was Estonia s contribution to the European Union.