Baltic Household Outlook

April 2013 More signs of optimism

Labour market improvement continues; unemployment is decreasing due to job creation and emigration Estonia has a single digit unemployment rate for the first time since late 2008 Due to the faster growth of nominal wages and lower inflation, real wage growth is expected to accelerate Latvia still has the highest tax wedge on labour among the Baltic states, exceeding the EU average Since 2008 the tax wedge for average and low income earners has only decreased in Lithuania, while in Latvia and Estonia the tax wedge has increased Share of savings for retirement in all three countries is growing Lithuania is most sensitive to pension problem today, Latvia has the worst demographic prospects Most favourable institutional conditions to prepare for retirement exist in Latvia, economic in Estonia Households role in accumulation of pensions in all countries has to increase In Estonia and Lithuania, positive developments in housing loan volumes have started to emerge and debt volumes are expected to resume the growth by the end of 2013; Latvia has not reached the bottom of the housing volumes yet In 2012 the drop in average yearly interest rates of housing loans was the largest in Lithuania where the interest rate fell by 1.2 percentage points; in Estonia it declined by 0.9 percentage points and in Latvia by 0.7 percentage points The share of foreign currency loans in Latvia was 89 per cent and in Lithuania 72 per cent at the end of 2012; adaption of euro would eliminate the risks of foreign currency borrowing in Latvia and Lithuania. Indebted households are more vulnerable to unemployment and other income shocks but most households have not secured themselves against negative income shocks Edmunds Rudzitis Socioeconomics Expert SEB Latvia Telephone: +371 67215933 edmunds.rudzitis@seb.lv Julita Varanauskiene Household Economist SEB Lithuania Telephone: +370 52682518 julita.varanauskiene@seb.lt Triin Messimas Household Expert SEB Estonia Telephone: +372 6656175 triin.messimas@seb.ee Merike Kukk Research Scientist Tallinn University of Technology Telephone: +372 6204069 merike.kukk@ttu.ee

Baltic Household Outlook

April 2013

Despite weak external demand, in 2012 the Baltic countries showed solid economic growth. For the second consecutive year, the Baltic countries maintained the leading positions in the European Union

in terms of GDP growth rate. It is expected that 2013 will be another good year for Baltic economies, improving the financial situation of households.

Labour market improvement continues

In all Baltic countries employment continued its upward trend, while the unemployment rate decreased. Estonia was ahead of the other Baltic states in unemployment reduction. Over the last year, the unemployment (job seekers) rate in Estonia decreased by 2.1 percentage points to 9.3 per cent in the fourth quarter. Estonia has a single digit unemployment rate for the first time since late 2008. In Latvia unemployment dropped by 1.2 percentage Unemployment (job-seekers) rate* (%)
21 18 15 12 9 6 3 2Q12 3Q12 4Q11 1Q12 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 4Q10 1Q11 2Q08 3Q08 1Q08 2Q10 3Q10 4Q12 2Q11 3Q11

points to 13.8 per cent in the last quarter of 2012, while in Lithuania unemployment was 0.7 percentage points lower compared to the same period of 2011, reaching 13 per cent. It should be noted that Lithuanias unemployment rate rose by 0.7 percentage points in the last quarter, while in Latvia unemployment crept up by 0.3 percentage points compared with the previous quarter, mainly due to seasonal factors. The reason for the unemployment rate decrease is job creation and emigration as well. At the same time, the labour force participation rate has grown and the number of discouraged workers (hidden unemployment) has decreased. As the economic situation is improving and the labour market looks more hopeful, the discouraged workers are re-entering the labour market. Job creation is expected to continue, albeit at a slower pace, and unemployment could decline at about the same rate that employment increase. According to SEB forecasts, in 2013 the average unemployment rate in Estonia will be 9.8 per cent while in Lithuania and Latvia unemployment will come down to 11.5 and 13.3 per cent respectively.

Latvia

Lithuania

Estonia
* Persons aged 15-74 Source: National Statistics

Moderate improvement in purchasing power

2012 data shows that wage growth continues to gradually recover. In Latvia gross wages increased by 3.7 per cent and in Lithuania by 2.6 per cent. In Estonia wage growth was the fastest among the Baltic countries the average gross wage grew by 5.9 per cent in the last quarter of 2012 compared to the last quarter of 2011. Average gross wages and salaries (%, YoY)
15% 10% 5% 0% -5% -10% -15% 2Q12 3Q12 1Q12 1Q09 2Q09 3Q09 4Q09 4Q08 4Q10 2Q10 4Q12 2Q11 1Q10 3Q10 4Q11 1Q11 3Q11

In Estonia and Latvia nominal wage growth was faster than the increase in consumer prices, improving households purchasing power. In Estonia the real wage growth compared to the same quarter of the previous year was recorded for the sixth quarter in a row. The average real wage increased by 2.1 per cent in the fourth quarter of 2012 compared to the same period of 2011. In Latvia the average real wage rose by 2.5 per cent. Real wage growth has accelerated in the second half of 2012, mostly due to the slower growth rate of the consumer price index. In Lithuania real wages fell by 0.4 per cent in the last quarter compared to the same period of 2011. Although it was the lowest year-on-year decrease in recent years, real wages have been falling for four years. Compared to the last quarter of 2008, real earnings have decreased by approximately 13 per cent in Lithuania. In Latvia and Estonia the real wages is below the pre-crisis level by approximately 10 and 4 per cent respectively.

Latvia

Lithuania

Estonia
Source: National Statistics

2/24

Baltic Household Outlook

April 2013

Real wages (%, YoY)

4%

0%

-4%

-8%

1Q12

3Q12

2Q10

Latvia

4Q10

Lithuania

Estonia
Source: National Statistics

The rise in wages is expected to accelerate in 2013 in all the Baltic countries. Wage growth will be affected by the changes in the minimum monthly wage, especially in Lithuania, adding at least 2 percentage points to the wage growth rate. In January 2013, the minimum monthly wage was increased to approximately 290 euros in Lithuania and to 320 euros in Estonia as well. In Latvia the minimum wage has stayed unchanged at approximately the 285 euros level. Latvia could increase the minimum wage to 320 euros next year. The economic effects of the minimum wage increase have been studied many times in the past. Plenty of researches point to the negative effects on employment,

Tax burden on labour is decreasing

Latvia is going to reduce its PIT rate even further from 24 per cent to 22 per cent in 2014 and then to 20 per cent in 2015. The PIT rate changes may help to reduce the tax burden on labour, having a positive influence on households disposable income. Two different indicators can be used to analyse the tax burden on labour the implicit tax rate and the tax wedge. The implicit tax rate on labour is a measure that estimates the effective average tax burden of labour. The implicit tax rate is calculated by dividing the revenues from taxes on labour by the total compensation of employees. The tax wedge on labour measures the relative tax burden for employed persons and it can be defined as the difference between labour costs to the employer and the net take-home pay of the employee as a percentage of labour costs. The tax wedge can also be calculated for different income levels. Implicit tax rate on labour (%, 2010)
Italy Belgium France Austria Hungary Finland Sweden Czech Republic Germany Estonia Netherlands Slovenia Denmark Spain Latvia Slovakia Luxembourg Lithuania Greece Poland Romania Ireland United Bulgaria Portugal Malta
0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0

4Q12

2Q12

-12% 2Q11 3Q11 3Q10 1Q10 4Q11 1Q11

especially among the low-skilled labour force1. As a minimum wage increase makes the labour force more expensive, it is harder for companies to hire employees, thus employment decreases. The substantial rise in minimum wage may also boost the number of people receiving envelope wages. On the other hand, there are some positive effects from the increase of the minimum wage. The minimum wage increase can reduce poverty and inequality, and forces companies to be more efficient. Besides, the minimum wages are relatively low in the Baltic countries compared to the other EU countries. Latvia has the third lowest minimum wage in the European Union, while Lithuanias and Estonias minimum wages are fourth and sixth lowest. In Estonia gross wages are expected to increase by 7-8 per cent in 2013. In Latvia wage growth is predicted at 4.5 per cent, while in Lithuania the average gross wage will increase by 4 per cent. Although the nominal wage growth will be slightly faster than in 2012, the real wage growth is expected to accelerate as a result of the faster growth of nominal wages and low inflation as well. Disposable income of households will also be positively influenced by some policy changes. In Estonia, a cut in unemployment insurance tax and an increase in social transfers will support consumer spending. In Latvia a decrease in the personal income tax (PIT) rate by one percentage point from January, as well as an increase in some social benefits should put more money into pockets of households, thus supporting private consumption.

Source: European Commision (Tax reforms in EU Member States 2012)

David Neumark and William L. Wascher. Minimum Wages and Employment. 2007

3/24

Baltic Household Outlook

April 2013

As the tax wedge is more of a theoretical value as opposed to the implicit tax rate which is related to actual tax revenues in the state budget, these two indicators could show substantial differences. The largest gap between the implicit tax rate and the tax wedge is observed in Latvia. The reason for a notable difference between the implicit tax rate and the tax wedge could be explained by the high popularity of envelope wages. According to a study of Stockholm School of Economics in Riga, the estimated proportion of envelope wages in Latvia is higher than in other Baltic countries. The implicit tax rate on labour amounted to 32.5 per cent in Latvia and 31.7 per cent in Lithuania in 2010. In Estonia it was 37 per cent, slightly above the EU (European Union) average. At the same time, the tax wedge of a single average wage earner was the highest in Latvia 44.2 per cent in 2011. It means that single taxpayer at average earnings in Latvia take home only 55.8 per cent of what he cost to his employer. The tax wedge in Lithuania (40.7 per cent) and in Estonia (40.1 per cent) was lower than the EU average (43.7 per cent). As a result of the PIT rate cut to 24 per cent, the tax wedge for average wage earners in Latvia will decrease by 0.6 percentage points. However, Latvia still has the highest tax wedge on labour among the Baltic States. In Estonia, the cut in unemployment insurance tax to 3 per cent (previously 4.2 per cent) will decrease the tax burden on labour. Latvia has also a higher tax burden on low wage earners (using 67 per cent of the average wage as a proxy for this group) compared to Lithuania and Estonia. In Latvia, the tax wedge of the a worker with 67 per cent of average earnings was 43.4 per cent in 2011, whereas in Lithuania and Estonia the tax wedge for lower income workers was 38.9 and 38.8 per cent respectively. In the EU, the average tax wedge for this income group amounted 39.6 per cent. In 2011, Latvia had the seventh highest tax wedge for low-income earners among the EU countries. Tax wedge on labour (%, 2011)
EU-27

The tax wedge of the employed persons with 67 per cent of the average wage income level has increased since 2008 in Latvia and Estonia, while the tax wedge only declined in Lithuania. Between 2008 and 2012 the tax wedge for lowwage earners (67 per cent of the average wage earner) increased by 2.8 percentage points in Latvia and by 2.2 percentage points in Estonia. In 2012, in Lithuania the tax wedge was lower by 1.4 percentage points compared to the level of 2008. Tax wedge of single 67% of average wage earner (%)
44 42 40 38 36 34
2008 2009 2010 2011 2012

Latvia

Lithuania

Estonia
Source: Eurostat, SEB estimates

Lithuania

Estonia

The latest data shows that in the Baltic States the difference in the tax wedges for different income groups is not very notable, meaning that the progressivity remains relatively low. One measure of progressivity compares the tax wedge for single person with no children (dependent persons) earning 167% of the average wage, with the tax wedge of a single person earning 67% of the average. At the EU level, this ratio is 1.19 which means that a 167% earner face a 19% larger tax burden than person earning 67% of the average wage. In the Baltic countries this progressivity ratio is lower the EU average. With the progressivity ratio at 1.03 Latvia has the least progressive labour taxation system among the Baltic countries which means that the tax wedge for high-income earners is very similar to the tax wedge of low-income employees. During the economic downturn the progressivity of labour taxes decreased in Latvia due to reduction in amount of non-taxable minimum. Unlike Latvia, Lithuania has increased the progressivity of labour taxation since 2009, implementing the different amounts of nontaxable minimum. For low wages the non-taxable amount is larger, while for wages above 912.3 euros (3150 litas) a nontaxable amount is not applied. According to different researches, a high level of labour taxation may have negative effects on employment, particularly for the low skilled or for low earners and second-earners, as the labour demand and labour supply of these groups are generally more elastic. The planned PIT rate reductions to 20 per cent in Latvia should reduce the tax wedge on labour, positively influencing the employment. The households in Latvia would benefit from the PIT decrease as a lower tax rate increases their net wage and

Latvia 36 38 40 42 44 46

Tax wedge for single 67% of AW earner Tax wedge for single average wage earner
Source: Eurostat

4/24

Baltic Household Outlook

April 2013

income. On the other hand, the high-income earners benefit the most from the reduction in the PIT rate. Low and average income earners would benefit more from the increase in the amount of non-taxable minimum; therefore

the next steps should be increase of the non-taxable minimum and further rise in the amount of allowance for dependents in line with the abilities of the state budget.

Share of savings for retirement in all three countries is growing

The present issue of the Baltic Household Outlook will include more detailed analysis of the financial assets accumulated for a long-term goal for retirement, i.e., the funds accumulated in Pillar II pension funds, and in the voluntary pension accumulation funds and under the life insurance agreements (measures to be attributed for the Pillar III pension funds). Volumes of accumulated funds for retirement, current and future challenges, institutional and/or economic conditions for households to accumulate funds for retirement and practical use thereof will be reviewed in this section. As compared with the most popular form used for accumulation of the financial assets, i.e., deposits, the value of assets accumulated in Pillar II and Pillar III pension funds and also under the life insurance agreements grew since the year 2008. As compared with the amount accumulated by households in the deposit accounts, the funds accumulated for retirement in Estonia grew from by 25 per cent in the year 2008 to 37 per cent at the end of 2012, in Latvia from 22 per cent up to 44 per cent, in Lithuania from 15 per cent to 25 per cent, respectively. Financial assets per capita (EUR)
6000 5000 4000 3000 2000 1000 0 2008 Estonia 2012 2008 Latvia 2012 2008 2012 Lithuania

Deposits

II pillar pension

III pillar pension

Source: Central banks, SEB estimations

Any measures selected for asset accumulation or keeping depend: 1) on the level of income (until income is low and a sufficient reserve of unforeseen events is not

accumulated, any other more profitable savings or investment instruments do not seem attractive), 2) on economic phase (during the economic downturn, households usually prefer keeping keep cash at home or in deposit accounts with the financial institutions, which offer an opportunity to quickly and conveniently withdraw funds if necessary), 3) on the legal and tax environment (taking into consideration if any tax rebate is applied on any form of asset), 4) on the confidence in the financial institutions (bankruptcy of financial institutions induce people to keep cash at home instead of savings accounts in banks or other financial institutions), 5) on trends in the securities markets (if situation in the markets is unstable, households as a rule withdraw currently invested amounts from such markets or do not invest); in addition to the above, trends in the securities markets make a direct impact on the invested asset value. The value of the financial assets in Estonia per capita is the largest. This may be related to higher household income and also to the higher share of income directed to Pillar II. Seeking to explain the increasing gap between Latvia and Lithuania it is necessary to take into consideration other factors as the household income in both countries differs only slightly. Lower value of deposits in Latvia may be explained by prevailing habit of the Latvian households to keep cash at home, instead of keeping funds in accounts with the financial institutions. A higher Latvian ratio of assets in Pillar II and Pillar III pension funds to deposits results from the above-mentioned lower amount kept in the deposit accounts and slightly different terms for accumulating the pension in Pillar II pension funds. Accumulation of the funds in Pillar II pension funds in Latvia was started three years earlier than in Lithuania, a number of inhabitants automatically (mandatory) become the participants of Pillar II pension funds, and the transferred amount is larger. Value of instalments accumulated in Pillar II pension funds in all three countries is rapidly growing. The value of the above assets is growing as a portion of the social insurance tax is being transferred to Pillar II pension funds: the households are not required to allocate their own income, or instalments of households to Pillar II pension funds make only a portion of the transferred amount. During the economic downturn, the inflows from social insurance funds shrank, however recently are rising again.

5/24

Baltic Household Outlook

April 2013

Lithuania is most sensitive to pension problem today, Latvia has the worst demographic prospects
To identify countrys sensitivity to pension problem, public opinion survey results, current pension situation and forecasts were considered. Household survey2 shows that pension savings in Lithuania seem to be more important for the residents as compared with Latvia and Estonia. Pension savings were mentioned as one of the most important goals by 42 per cent of residents of Lithuania, but in Estonia and Latvia only by 22 per cent and 20 per cent, respectively. Anyway, the short-term goals in all three Baltic countries are considered to be important, i.e., such as a rainy day and sense of security. Main purposes for savings Multi-pillar pension system is one of the measures for overcoming the challenges of changes in the environment. The greatest challenge is the changing demographic situation, i.e., the former pension payment system, which existed under different terms becomes unsuitable as birth-rate is decreasing and life expectancy is rising. Old age dependency ratio
40% 43% 42%

26%

28%

27%

Estonia

38%

37%

20%

Latvia

37%

39%

22%

Estonia

Latvia

Lithuania
Source: Eurostat

2012

2040

Lithuania

39%

59%

42%

Rainy day

Sense of security

Retirement age
Source: SEB

Such great concern of the Lithuanian residents may be explained by todays problems. Average retirement pension in Lithuania in IVQ 2012 totalled EUR 236. It is the lowest pension in the Baltic countries. In Latvia and Estonia the average retirement pension makes EUR 271 and EUR 316, respectively. Compared to an average net salary, the highest pension-to-salary ratio is highest in Latvia (55 percent), lowest in Estonia (43 percent). Lithuanian ratio is 47 percent. This ratio reflects some feeling of (un)fairness which should be the strongest in Estonia. However, absolute size and purchasing power of retirement pension is the highest in the northern Baltic country.

Demographic statistics show that in this respect the most unfavourable situation and perspectives are observed in Latvia. In this country, the ratio of senior people (over the age of 65 years) and people capable for work (15-64 years of age) is the greatest (28 per cent). Population projections show that situation in this country will remain the worst in future. It is forecasted that in the year 2040, this ratio in Latvia will reach 43 per cent. Anyway it should be noted that situation in other Baltic countries is not considerably better. Therefore instead of focusing on differences between countries, the priority should be given to significant changes in the number of the employed and dependents, which also would result in higher taxes for the employed, or lower pensions for the retired. The first and also the second consequence may cause serious economic problems and social turbulences. However any preventive measures taken by the government institutions and households themselves in advance should mitigate negative impact of the demographic changes.

Most favourable institutional conditions to prepare for retirement exist in Latvia, economic in Estonia
To identify the country offering the most favourable terms to prepare for retirement, the below three criteria were taken into consideration: 1) amount of instalments transferred to Pillar II pension funds; 2) pension reform stability; 3) stimulus for voluntary accumulation of funds
2

with Pillar III pension funds. Estonia currently is in the leading position by the criterion of instalments transferred to Pillar II pension funds. Primarily, is it related with higher wages in Estonia. Secondly, the amount of instalment to Pillar II pension

Mindshare, 2012 (SEB)

6/24

Baltic Household Outlook

April 2013

funds in Estonia currently is the largest 6 per cent of the wage. A portion of said instalment (2 per cent) is paid by the employee, and the remaining 4 per cent are added by the government (from paid social insurance tax). In Latvia, the instalment makes 4 per cent and total instalment is transferred by the government. It is planned that in 2015 instalment will be 5 per cent while starting from the year 2016, the instalment to be paid to the pension funds will increase up to 6 per cent. In Lithuania, the instalment is the smallest (2.5 per cent). Starting from April of the current year in Lithuania, each participant may pay 1 per cent of his/her wage additionally. In such case, the government will add 1 per cent of the average wage more. Instalments should gradually increase and by the year 2020 should reach 3.5 per cent, if the pension scheme participant does not pay additional instalments himself/herself or 7.5 per cent (3.5+2+2 per cent), if such instalments are paid. Contributions to II pillar pension funds (%)
9 8 7 6 5 4 3 2 1 0 2003 2009 2002 2012 2008 2001 2006 2005 2018 2015 2016 2019 2013 2011 2004 2020 2007 2010 2014 2017

In the long-term the instalment (compared with wage) in all countries will be similar. In Latvia, the total instalment is transferred by the government, in Lithuania (since April 2013) and Estonia a portion is allocated by the employed too. However the stability criterion is rather important for the successful functioning of Pillar II pension funds in future: the lower number of changes making negative impact on the amount to be accumulated and the shorter duration of the exceptional periods. Taking into consideration the economic problems in all three countries, the instalments to Pillar II pension funds were decreased or suspended: in Estonia the instalments were suspended (for one year and a half), in Lithuania and Latvia decreased to 1.5 per cent and 2 per cent, respectively. In Lithuania, since the start of the current year the terms of participation in the pension funds were considerably changed if each participant transfers instalments (from his labour income) to Pillar II pension funds, only then the government will transfer the amount of instalments specified (5.5 percent) in the beginning of the reform of the pension scheme (2004). In all the three countries, those who accumulate pension in Pillar III are offered local tax allowances: taxable income will be decreased by the amount of instalments to the pension funds. Tax allowances will be applied on benefits from such pension funds.

Latvia

Lithuania Estonia

Alternative (LTU) Alternative (EST)

Source: National pension systems

Households role in accumulation of pensions in all countries has to increase

Participation in Pillar II pension funds in Latvia and Estonia for a certain number of inhabitants (depending on age) is mandatory, however in Lithuania it is voluntary. Calculations show that in Latvia the number of participants in Pillar II pension funds reached 1.194 million, Number of participants in Estonia reached 635 thousand, in Lithuania 1.07 million. However it is forecasted that Pillar I and Pillar II pension funds, as compared with the previous wage, will make only a half of former income. The household survey3 performed at the end of the year 2012 shows that households in all three countries, seeking to ensure adequate retirement income, rather often considers an opportunity of working as long as possible. Such option Estonia
Working as long as possible Investments in real estate Family, children Guaranteed savings (deposits)

was mentioned by 43 per cent of residents in Estonia, 48 per cent of residents in Latvia and 45 per cent of residents in Lithuania. In all three countries an option to accumulate funds for retirement by investing in real estate was often mentioned. Such opportunity was indicated by 40 per cent of the survey respondents in Estonia, in Latvia 23 per cent and in Lithuania 33 per cent. Higher volume of savings for retirement in Pillar III pension funds, as compared with residents in Estonia, is expected by residents in Lithuania and Latvia (27 per cent and 32 per cent, respectively) but residents of Estonia more often mentioned the pension accumulation option in savings accounts than in Pillar III pension funds. Lithuania

Latvia
43% 40% 32% 22%
Working as long as possible Family, children Savings in III pillar PF Investments in real estate

48% 32% 32% 23%

Working as long as possible Investments in real estate Savings in III pillar PF By working abroad

45% 33% 27% 27%

Source: SEB

TNS, 2012 (SEB)

7/24

Baltic Household Outlook

April 2013

The survey results coincide with the statistics of the financial assets accumulated by residents. The financial potential of Estonians to accumulate funds for retirement is more solid as their income is higher. But the differences between the voluntarily accumulated funds (under the life insurance agreements and Pillar III pension funds) per capita are less significant. In Estonia, the value of such assets per capita makes EUR 220, in Latvia EUR 209 and in Lithuania EUR 223. But if real estate can be considered as saving for retirement, voluntary saving for retirement age volumes per capita would look differently.

III pillar pension savings (life insurance and funds) per capita (EUR)
250 200 150 100 220 209 134 125 115 50 0 233
+65% +86% +83%

2008 Estonia Latvia

2012 Lithuania
Source: SEB estimates

The above statistics again shows not only the differences between the countries but also that savings of this type in all three countries are insignificant. There are no doubts about necessity of assets for retirement purposes.

In household borrowing signs of recovery starting to emerge

The total loan stock of households is still declining in all Baltic countries. In Estonia, the loan volumes have decreased by -10.5 per cent and in Latvia by -27.6 per cent since the peak in December 2008; in Lithuania the loan volumes have dropped by -15.4 per cent since the peak in January 2009. Recent dynamics of the loan portfolio is far from being homogeneous across the countries. Housing loan that provides the biggest share to the households loan portfolio exhibits de-accelerating speed in the decline. The housing loan volume changed at a yearly rate of -0.6 per cent in Estonia and at -1 per cent in Lithuania. The need for improvements in housing conditions is present in all three countries but the borrowing constraints are driven by income prospects. In Estonia and Lithuania, positive developments in housing loan volumes have started to emerge and debt volumes are expected to resume the growth by the end of 2013. In Latvia, the yearly declining rate of housing loan portfolio is still at a high level, namely at 11 per cent. Some of the decline is induced by the extraction of loan portfolio of Parex Bank at the end of 2011 but still the statistics indicate continuous deleveraging process of households. Changes in housing loan portfolio, Y-o-Y
2% 0% -2% -4% -6% -8% -10% -12% Dec-09 Mar-10 Dec-10 Mar-12 Dec-12 Sep-10 Dec-11 Sep-12 Jun-10 Mar-11 Sep-11 Jun-12 Jun-11

Estonia

Latvia

Lithuania
Source: National Central Banks

The volumes of new loans (including refinancing) issued in Estonia have been constantly higher in 2012 than in 2011: in the first half of 2012 about 20 per cent more new loans were issued than during the same period in 2011. In the second half of 2012 the issued volumes were around 10 per cent higher than a year ago. The turnover of housing loans is on the same level as at the end of 2003 in Estonia and the turnover shows a slightly increasing trend. In Latvia, the disbursement of new loans activated during the first half of 2012 but in the last quarter of 2012 the size of new loans remained on the same level as in previous quarters. The flow of new loans in Lithuania showed the first positive signs at the end of 2012 when the flows were slightly higher compared to the end of 2011. Still, the volumes of new loans are at the same level as at the end of 2004 in Lithuania. However, there are weak signs for recovery of household housing loan appetite in Lithuania and more significant signs in Estonia. If households are not faced with negative shocks induced by the debt crises developments in Europe, we expect Estonian households to activate their borrowing for housing even further in 2013. Lithuania will follow more gradual revival in housing borrowing while Latvia has not reached the bottom of the housing volumes yet. Households are shrinking their consumer credit and other borrowing volumes more vigorously than their housing loan portfolios. The strong declines in 2012 were induced by bankruptcy cases of commercial banks in Latvia and Lithuania at the end of 2011. This incidence distorts the growth rates in Latvia at the end of 2012 but we receive a more accurate picture from Lithuania. While in November 2011 the annual growth rate of consumer credit and other borrowing was -5.1 per cent, then in December 2012 it was still at the same level and in January 2013 it was 5.2 per cent compared to January 2012. The statistics shows that Lithuanians are reducing their consumer debt and other

8/24

Baltic Household Outlook

April 2013

borrowings at a stable -5 per cent. Estonians reduced their stock of consumer credit and other borrowings at the speed of -7 per cent during the first half of 2012 while during the second half of 2012 the speed has increased. At the end of 2012 the volumes of consumer credit and other borrowings were 10.4 per cent smaller than at the end of 2011 in Estonia. Changes in consumer credit and other lending portfolio, Y-o-Y
10% 5% 0% -5% -10% -15% -20% Mar-12 Sep-12 Jun-12 Mar-09 Sep-09 Dec-09 Mar-10 Dec-10 Dec-12 Jun-09 Mar-11 Jun-11 Sep-11 Sep-10 Dec-11 Jun-10

In the aftermath of the crisis the borrowing capacity of many households has become more constrained than a decade ago and it affects the borrowing for consumption the most. Households face more stringent borrowing conditions. Additionally, there are more households who are reluctant to finance their consumption by borrowing; there is more awareness about the interest rates and costs related to borrowing. Therefore, sustainable demand for consumer credit is unlikely to be underway yet. Housing loan is expected to continue to outperform consumer lending in the following years.

Estonia

Latvia

Lithuania
Source: National Central Banks

Households continue to benefit from favourable interest rates of housing loans

As the majority of housing loans in all Baltic countries has been issued in euros and bear a floating interest rate, households gain directly from the low Euribor rates. The most significant fall of the Euribor occurred in 2012 when 6 month Euribor rate fell from 1.67 per cent at the end of 2011 to 0.32 at the end of 2012. Households have experienced reduction in the interest rate of their housing loans in all three countries. While in January 2012 the average yearly interest rate was the lowest in Estonia, at the level of 3.42 per cent, then in January 2013 it was the lowest in Lithuania, at the level of 2.50 per cent. The drop in the average yearly interest rate was most modest in Latvia; within a year it declined by 0.7 percentage points. The drop was the largest in Lithuania where the average interest rate fell by 1.2 percentage points. Euribor rate is expected to remain on low levels but further reductions are less probable. However, as the fall of Euribor rate has not yet penetrated fully into the interest rate of housing loans, the latter has room for further fall at the beginning of 2013. However, the changes are going to be marginal compared to the changes in 2012. Average Interest Rate of Housing Loans
4,5 4 3,5 3 2,5 2 1,5 1 0,5 0 4,20 3,42 2,55 3,50 3,7 2,5

Estonia 2012 January

Latvia

Lithuania 2013 January

Source: National Central Banks

Adaption of euro would eliminate the risks of foreign currency borrowing in Latvia and Lithuania
The borrowing in foreign currency is not a relevant topic in Estonia any more but it is still a very important issue in Latvia and Lithuania. When the credit boom started in 2004, it was mainly driven by foreign currency lending. The share of foreign currency loans has been increasing distinctly in the past decade. At the end of 2004 about 2/3 of household debt portfolio in Estonia was in foreign currency and by 2008 the share reached 4/5 of the total loan portfolio. Since 2011 the share of foreign currency loans has become marginal as all loans in euros were taken as local currency borrowings since the adaption of euro. The share of foreign currency loans in Latvia peaked 9/24

Baltic Household Outlook

April 2013

in 2010 when it reached 90.5 per cent for households and the share is the highest in Central and Eastern European countries. In Lithuania, the move towards foreign currency loans has been much less vigorous: while at the end of 2004 the share of foreign currency loans was 43 per cent, then at the end of 2008 it reached 62 per cent. The composition of the loan portfolio towards foreign currency loans has continued during the economic downturn period reaching 72 per cent at the end of 2012. Loan Portfolio by Currency
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 0% 43% 65% 82% 65% 100% 35% 13%
2012 2004 2008 Latvia

62%

87%

89% 57%

72%

35%
2004

18%
2008 Estonia

38%
2008 Lithuania

Hungary, Romania and Poland, where the exchange rate is floating, economic downturn was accompanied by significant exchange rate depreciation, meaning that foreign currency loans became more expensive than loans in local currency. In these countries the households suffered substantially from the depreciation of currencies. The outrageous developments have taken place in Hungary where in 2012 individuals had to give out 50 per cent more Hungarian forints for one Swiss franc compared to 2008. At the same time majority of the household debt has been given out in Swiss francs. In order to protect households from significant currency depreciations in Hungary, the government passed a law about debt restructuring programme in 2010. According to the programme, households were allowed to pre-pay foreign currency loans at discounted exchange rates to alleviate the impact of the depreciation of Hungarian forint. Loan Portfolio by Currency 2010
Latvia Estonia

11%
2012 2004

28%
2012

Local currency

Foreign currency
Source: National Central Banks

9% 14% 27% 33% 35% 62% 64%

0% 20% 40%

91% 86% 73% 67% 65% 38% 36%

60% 80% 100%

The willingness to borrow in foreign currency, mainly in euros, can be explained by the interest rate spread between local currency and euro loans. As for euro loans, commercial banks have been offering much lower interest rates and households have preferred loans issued in euros to keep their monthly payments lower. For instance, the difference in interest rates was around half percentage points at the end of 2007 and by 2008 the spread increased to four percentage points in Estonia. Even small differences in the interest rate affect significantly the total repayment amount of the housing loans as the maturity can be measured in decades. All countries have been explicitly committed to adopting the euro since joining the EU and in the meanwhile pegged the currency to the euro, hence the exchange rate risks have been considered to be small by households. Although households in the Baltic countries have benefited from the possibility to borrow in euros, it has been different in other Eastern European countries. The foreign currency borrowing has expanded in other EEC countries similar to the Baltic countries. One can see from the figure that the Baltic countries do have the highest share of foreign currency loans; still the other countries have followed a similar development. But the exchange rate risks have been underestimated in some cases, usually in countries with floating exchange rate. In

Lithuania Hungary Romania Poland Bulgaria

Local currency

Foreign currency
Source: European Credit Research Institute

Several studies have investigated foreign currency borrowing in Central and Eastern European countries and the implications on the situation of households during the last decade. The studies conclude that in the countries that experienced depreciation during the recession, the households experienced loan repayment problems more often than in countries with fixed exchange rate. E.g., according to the study of the Austrian National Bank, the incidence of loan arrears is about 12 percentage points higher in depreciation countries than in non-depreciation countries4. Hence, the financial stability of households who have borrowed in foreign currency depends markedly on the strength of the local currency. In this perspective the euro adoption plans in Latvia and Lithuania will lower significantly the risks of the indebted households.

Beckmann, E., Fidrmuc, J. and H. Stix (2012). Foreign Currency Loans and Loan Arrears of Households in Central and Eastern Europe. sterreichische Nationalbank, Working Paper 181

10/24

Baltic Household Outlook

April 2013

Indebted households are more vulnerable to unemployment and other income shocks
Due to deleveraging, debt burden of household sector has decreased debt-to-income ratio (the debt stock compared to yearly disposable income) has declined in all three Baltic countries since 2010. Although households have lowered their loan stock since 2009, their disposable income fell more than their debt volumes, hence the debtto-income ratio increased slightly in 2009. In 2011 (the latest data available) the debt-to-income ratio was the highest in Estonia at 88 per cent, in Latvia at 66 per cent and the lowest in Lithuania at 41 per cent. The ratio is lower than the one of the average Euro area, which is 99 per cent. Gross debt-to-income ratio of households
%
120 100 80 60 40 20 0

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Euro area (17 countries) Latvia

Estonia Lithuania
Source: Eurostat

Within the last decade the debt volumes have increased significantly in the Central and East European countries, where Estonia and Latvia have been the forefront countries. This has been explained by catch-up with the Western European countries where credit is an everyday part of household finances. But the Euro area countries experienced also a decade-long era of generous expansion of household credit. The increase of debt-to-

income ratio from 75 per cent in 2001 to 99 per cent in 2011 denotes that the credit growth outpaced income growth. There is no consensus among economists regarding how much debt is considered to be sustainable. But there is consensus that leverage has added additional component of fragility to household wealth. It has been discussed that opening of credit markets should add more flexibility to households to manage their financial situation. In case of unexpected income decrease or unemployment households are supposed to have an opportunity to borrow to overcome the temporary bad times so that they do not need to give up the usual living standards. In reality, such consumption smoothing does not work in this way, especially during the economic crises. A bulk of households is left without earnings while the banks are concerned about increased borrowing risks and are tightening their credit conditions at the same time. In these circumstances negative income shocks usually make it more difficult and/or more expensive for a household to borrow. Hence, households do need to insure themselves against negative shocks and they cannot rely on the credit markets. Additionally, indebted households are affected more by negative income shocks than households without liabilities. Namely, indebted households have additional compulsory expenses regular debt payments. As their level of compulsory expenses is higher, they have to adjust their other spendings more than the households without liabilities. In order to be less vulnerable to the situations where a household member loses job, households should either insure their risk or own higher buffer stocks. The loan insurance is available only in a limited number of commercial banks in the Baltic countries; hence all the indebted households cannot use it. At the same time the buffer stocks of indebted households are not higher compared to the households without debts. The awareness of the additional risks accompanying borrowing has been low among households.

11/24

Baltic Household Outlook

April 2013

Latvia
Labour market improvement will continue, however, the creation of new jobs is likely to slow. Income tax cut and the increase in allowance for dependents will deliver more broad-based wage growth. Inflation remains low; the growth rate of the average real wage is likely to accelerate. Income growth and sentiment supports spending. In late 2012 consumer confidence hit its highest level since August of 2007. Household financial balance continues to improve, approaching positive net value.

More jobs, more opportunity

Based on the strong economic growth, the labour market situation in Latvia continued to improve. Unemployment continued to decline with a minus of 11.1 thousand compared to 2011. Although the unemployment (jobseekers) rate increased by 0.3 percentage points to 13.8 per cent in the last quarter of 2012, mainly due to seasonal effects, the share of unemployed persons in the economically active population was 1.2 percentage points lower compared to the fourth quarter of 2011. This fairly small decrease in the unemployment rate is partly explained by the rise in economically active persons. According to the Labour Force Survey conducted by the Central Statistical Bureau, the size of the economically active population aged 15-74 has increased by 15.1 thousand persons or 1.5 per cent compared to the last quarter of 2011. The number of economically active persons has increased as a proportion of previously discouraged workers return to a strengthening labour market. Employment has been growing since the middle of 2010. In 2012, the number of occupied posts increased by 4.5 per cent or 36.5 thousand. Although the number of job vacancies has grown by 0.6 thousand or 22.5 percent compared to 2011, the job vacancies rate remained the same (0.4 per cent). Unemployment and vacancies The job creation is also affirmed by the data of the State Revenue Service (SRS) in January of 2013 the number of employees paying state social insurance obligatory contributions reached 769 638; that is 17.5 thousand more compared to the same month of the previous year.

The number of SSIMC payers (in thousands)

1 100 1 000 900 800 700 600

784

711

Jan-09

Jan-06

Jan-08

Jan-10

Jan-05

Jan-07

Jan-04

Source: SRS

18 15 12 9 6 3 0

30 000 25 000 20 000 15 000 10 000 5 000 0

Labour market improvement will continue, however, the creation of new jobs is likely to slow. The number of occupied posts is expected to grow by 20 to 25 thousand during 2013. The largest increase in the number of employed persons is expected in manufacturing, construction and the service sector. Despite quite high unemployment, employers in some sectors including manufacturing, information technology and construction will face labour shortages. The unemployment rate decreased significantly in 20112012, but still remains well above the pre-crisis level. The registered unemployment rate, which now stands at 10.9 per cent with 107 thousand persons registered as without work, is likely to hit single digit levels this year. If the economy can add 20 thousand new jobs a year, it will take approximately three years for the unemployment rate to get back to the pre-crisis level.

Aug-06

Aug-08

Aug-09

Feb-06

Feb-08

Aug-07

Feb-09

Feb-07

Aug-10

Unemployment rate (%; lhs) Number of vacancies (rhs) Source: State Employment Agency

Aug-12

Feb-10

Aug-11

Feb-12

Feb-11

12/24

Jan-12

Jul-09

Jan-11

Jul-06

Jul-08

Jul-05

Jul-04

Jul-07

Jul-10

Jul-12

Jul-11

500

Baltic Household Outlook

April 2013

Moderate growth in purchasing power

In 2012, the average gross wages and salaries increased by 3.7 per cent, which is slightly less than in 2011, when the average gross wages were up 4.4 per cent. In the last quarter of 2012, the average monthly gross wage was 703 euros (494 lats), up by 4 per cent compared to the same period of 2011, approaching the pre-crisis level. Wages are increasing in almost all sectors of the economy. The most rapid increase of wages and salaries was recorded in the transport and storage sector (by 7.7 per cent compared to the previous year) as well as in electricity, gas, steam and air conditioning supply and in public administration (by 4.9 per cent). The average net wages and salaries grew by 3.9 per cent, outpacing the increase in the consumer price index. The average real wages (taking into account the impact of changes in consumer prices) rose by 1.6 per cent. As earnings are increasing slightly faster than prices, workers purchasing power is rising. Dynamics of real wage and real pension (1Q2005=100)
170 160 150 140 130 120 110 100
3Q2009 1Q2009 3Q2008 1Q2008 3Q2006 3Q2005 1Q2006 1Q2005 3Q2007 3Q2010 1Q2007 3Q2012 1Q2010 1Q2012 1Q2011 3Q2011

Average real wage Average real pension

Source: National Statistics, SEB estimates

However, the increase in real earnings remains uneven across different sectors of the economy. Despite the latest improvements in workers purchasing power, the average real wage is 10 per cent lower compared to the end of 2008. In 2013, the average gross wage growth is expected to reach 4.5 per cent. The wages continue to rise both in the private and public sector. Average net wages could increase even faster due to the personal income tax (PIT) being cut by one percentage point and the planned increase in the monthly allowance for dependents from approximately 100 to 114 euros (70 to 80 lats) from July of 2013. According to the amendments in the Law on Personal Income Tax, the PIT rate will be reduced to 22 per cent in 2014 and then to 20 per cent in 2015. The PIT cut and the increase in allowance for dependents will deliver more broad-based wage growth. Although most workers will feel the effect of the decline in labour tax burden, the higher income earners will benefit the most from the reduction in the PIT rate. For instance, a PIT reduction from 25 to 24 per cent implies a 1.3 per cent increase in net salary for a single high income earner. At the same time, average income earners with two or more dependents would only see a 0.5 to 0.7 per cent increase in their net salaries in the first half of 2013. As inflation remains low (average annual inflation is expected to be 1.4 per cent this year), real wages will continue to grow. This should be the third year in a row of positive real wage growth. Besides, the growth rate of the average real wage is likely to accelerate to approximately 3 per cent.

Income growth and sentiment supports spending

In 2012, the consumption expenditures of households in constant prices rose by 5.4 per cent. In current prices household spending grew by 8.6 per cent year-on-year. The increase in consumer spending outpaced the households income growth rate. Income of the working population rose 8.4 per cent year-on-year, while expenditure for benefits and pensions declined slightly compared to 2011. The household spending growth can be explained by the improving situation in the labour market, the increasing value of remittances sent home by emigrants and more positive sentiment regarding the household financial situation. Since the end of 2009, a gradual improvement in the consumer confidence indicator has been observed. In December 2012, consumer confidence hit its highest level since August of 2007. The consumer confidence indicator fell to a five-month low in February of 2013, mainly due to large housing bills which had a negative impact on consumer confidence. Households, despite their less optimistic sentiment in the first months of 2013, continued to have a positive outlook regarding their financial situation. Evaluation of consumers' financial situation (Latvia)
Jan-08 Jan-09 Jan-07 Jan-10 Jan-12 Jan-13 Jul-06 Jul-08 Jul-09 Jan-11 Jul-07 Jul-10 Jul-12 Jul-11

20 10 0 -10 -20 -30 -40 -50 -60 -70 Financial situation over last 12 months Financial situation over next 12
* Balances, i.e. differences between the percentages of respondents giving positive and negative replies

Source: Eurostat

A strengthening labour market is helping to lift the confidence of households. Changes in labour taxation, with more money staying in the pockets of workers, have a positive effect on households sentiment. In February of 2013,

13/24

Baltic Household Outlook

April 2013

households' assessment of their financial situation over the next 12 months remained positive for a ninth consecutive month. The views about households financial outlook and the countrys future economic situation are more positive compared to the same period of 2012. Consumers' unemployment expectations over the next 12 months also showed some improvement, however the views on employment were still rather negative.

It should be noted that with regard to households expectations about unemployment, the overall economic and their own financial outlook vary within different socioeconomic groups and income levels. Consumers representing the highest income quartile are more optimistic regarding the economic and financial outlook over the next 12 months, while expectations of households in the lowest income quartile can be described as rather gloomy.

To save or not to save?

Growth in households financial assets (bank deposits, securities and other financial instruments, private pensions and insurance and savings as well as Pillar II pension capital) continued last year. Deposits of households increased slightly by 2 per cent, however deposit term structure showed substantial changes. Demand deposits grew by 19 per cent, while term deposits shrank by 17 per cent. The share of demand deposits rose to 57 per cent last year. Household deposits (EUR million)
2800 2400 2000 1600 1200 800 400 0 Mar-12 Sep-12 Jun-12 Mar-09 Sep-09 Dec-09 Sep-08 Dec-08 Mar-10 Dec-10 Dec-12 Jun-09 Mar-11 Jun-11 Sep-11 Jun-08 Sep-10 Dec-11 Jun-10

Demand deposits Term deposits Savings accounts

Source: Bank of Latvia

As deposit rates in euros, lats and other currencies have decreased to very low levels, households choose to keep their savings in current accounts and look for other investment or spending opportunities as well. Households increased savings in life insurance, private pension and financial instruments last year, however their share in total financial assets remains rather low. At the same time, cash plays a significant role in household savings. The cash to deposits ratio was approximately 33 per cent last year, with Latvia in the lead among the Baltic countries. Interest rates are expected to be close to zero this year, therefore share of demand deposits in total deposits is likely to increase further. Deposit volume might be influenced by a decision on entering the Eurozone. When final permission to adopt the euro is received, households might prefer to reduce their cash savings. Since 2008 households financial assets have increased by 1.25 billion euros (875 million lats) to 6.67 billion euros (billion lats). The rise of financial assets was mostly on account of the pillar II pension capital (mandatory savings) -- growth by 802 million euros (564 million lats). Over the last four years, the share of pillar II pension capital in financial assets rose from 12 to 22 per cent. Excluding changes in the pillar II pensions, other financial assets (voluntary savings) at the end of 2012 were up by 443 million euros compared to the last quarter of 2008.

Deleveraging continues
Households are saving and deleveraging at the same time. The household loan portfolio continued the downward trend. At the end of 2012 households financial liabilities in commercial banks and leasing companies were 6.72 billion euros (4.72 billion lats). Over the last 12 months, the total amount of loans and leasing granted to households declined by approximately 13 per cent or one billion euros. The household loan portfolio in commercial banks and leasing companies has decreased by 30% from its peak in late 2008. Household loans-to-GDP
50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0%

2000

2002

2004

2003

2005

2006

2001

2007

2008

2009

2010

Source: National statistics, FCMC, SEB estimates

14/24

2012

2011

Baltic Household Outlook

April 2013

Since 2010, household debt-to-GDP ratio has decreased considerably, due to both the decrease in the loan portfolio and GDP (income) growth. Now household debtto-GDP ratio stands at 30 per cent. A lower debt-to-GDP (debt-to-income) ratio suggests that households can better manage their loans; low interest rates are also helping borrowers. In 2012, the 3-month Euribor rate decreased by 1.169 percentage points to a record-low level (0.187 per cent). As a result, the average interest rate for mortgage loans with a maturity of over 5 years fell 1.1 percentage points to 2.67 per cent in December of 2012. Due to the decline of the Euribor, monthly payments for mortgage loans with a floating rate in euro currency fell by 9 per cent on average. Borrowers with larger mortgage loans and longer maturity are benefitting more from the record low Euribor rates. Interest rate on housing loans in euro
10% 8% 6% 4% 2% 01.2008 01.2005 01.2011

newly granted loans to households are significantly lower than before the crisis. In 2012, the amount of new loans granted to households rose by 9.4 per cent compared to the previous year; new housing loans increased by 9.9 per cent. At the same time, in the second half of 2012 the amount of newly granted loans was smaller compared to the corresponding period of 2011. No substantial changes in loan demand are expected in the near future, therefore households loan portfolio will be in the red in 2013. New lending to households and changes in household loan portfolio (in million of lats)
100 50 0 -50 -100 -150 -200 1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012
Changes in household loan portfolio New loans granted to households
Source: FCMC

Annual effective percentage rate for new housing loans Interest rate on housing loans with maturity over 5 years
Source: Bank of Latvia

Despite record low mortgage rates, households are not in a hurry to fill out the mortgage loan application. Household demand for mortgage loans remains weak. Volumes of

Due to a sharp decrease in financial liabilities and a moderate increase in financial assets as well, households financial balance (difference between the financial assets and the financial liabilities) improved by approximately 1.55 billion euros (1.09 billion lats) in 2012. At the end of 2012 the negative difference between financial assets and liabilities was only 57 million euros (40 million lats). Households financial balance will continue to improve and should turn positive in the first quarter of 2013.

Financial assets and liabilities of households (EUR million) IVQ 2008 Financial assets Deposits Securities and financial instruments Life insurance and private pension funds Pillar II pension funds Liabilities Mortgage loans Consumer loans Other loans Leasing Net value of financial assets 5 421 4 109 394 259 660 9 559 7 188 1 121 755 494 -4 138 IVQ 2009 5 677 3 999 375 301 1 002 8 944 6 866 1 012 736 329 -3 267 IVQ 2010 6 117 4 108 485 347 1 178 8 400 6 554 920 682 244 -2 284 IVQ 2011 6 125 4 090 411 377 1 247 7 735 5 985 864 679 207 -1 610 IIQ 2012 6 277 4 136 403 395 1 342 7 023 5 547 800 522 154 -746 IVQ 2012 6 666 4 257 524* 424 1 462 6 723 5 328 770 481 145* -57

* Data as of 30.09.2012 Sources: Bank of Latvia, FCMC, LIA, SEB dzvbas apdroinana, SEB banka estimates

15/24

Baltic Household Outlook

April 2013

Lithuania
Wage increases start to accelerate. Unemployment rate will shrink in the result of economy development and still threatening emigration volume. Consumption volume stopped increasing. Inhabitants accumulated financial assets and repaid debts. Demand for safety remains high, however does not hide willingness to get the best possible interest. Financial obligations of households continue to shrink, however borrowings are growing. Consumer sentiment index the highest since spring 2008.

Wage increases start to accelerate

During the recent quarters, the wage increases stagnated at the level exceeding 2 per cent, and real wage continued to shrink. Nevertheless, the growing number of signs of the gradual melting of the frozen wages and accelerating wage increase is observed. Based on the data of the Statistics Department, the average net wage in the 3rd quarter, as compared with the 2nd quarter of the year grew by 0.8 per cent, and in the 4th quarter as compared with the previous quarter by 2.6 per cent. During a one-year period (from IVQ 2011 until the last quarter of 2012), the average wage after tax increased by 2.5 per cent. Minimum monthly wage (MMW) since 1 August 2012 grew from LTL 800 (EUR 232) to LTL 850 (EUR 246), or by 6 per cent. At the year end, the wage increased should be linked with payments at the year-end: bonuses and other payments. Average salary quarterly change 2012 (%)
3 2,5 2 1,5 1 0,5 0 -0,5 -1 -1,5 -2
Source: Statistics Lithuania

During the current year, several factors will determine increase in wages. Primarily, the wage growth acceleration raises no doubts after increase in minimum monthly wage (MMW) since 1 January 2013 up to LTL 1,000 (EUR 290). MMW change in per cent is really impressive 17.6 per cent, thus it may result in 2 per cent growth of average wage at least. Since the start of the year, when MMW was increased up to LTL 1,000 (EUR 290), any mass dismissal of employees was not observed, while a number of companies started to adjust to the new changes by cutting staff, or by requesting to work longer hours or more intensively, etc. However, we believe that increase in MMW had several positive aspects. Primarily, a portion of formally paid envelope wages was cleared. Secondly, the new MMW requires the employers to revise wages of other employees and especially if the flat wage structure is introduced, i.e., the difference in wages for non-skilled and skilled employees is insignificant. Experts of our bank forecast that in the year 2013, the average wage will grow by 4.0 per cent. If inflation (seeking to introduce EUR in the year 2015) is controlled and does not exceed 2.53.0 per cent, increases in the average wage most probably will be higher. Thus real wage will start to gradually rise and compensate the purchasing power loss incurred in the period of economic stagnation.

Q1

Q2

Q3

Q4

Unemployment rate will shrink in the result of economy development and still threatening emigration volume
Based on the statistical data of the employment research performed by the Statistics Department, the average unemployment rate in the year 2012 made up 13.2 per cent, or was lower by 2.1 percentage points than in the year 2011. In last year, the number of unemployed made up 195.2 thou, or was lower by 30.9 thousand (13.7 per cent) compared with the year 2011. It was undoubtedly influenced by continuing economic development determined by rather solid and stable export volume. Nevertheless in the 4th quarter the local unemployment level stood at 13 per cent, or was higher by 0.7 per cent compared with the 3rd quarter. Seasonality factors, such as reduced number of fixed-term contracts only for summer and autumn, lower volume of operations in some industry sectors (e.g. construction, retail trade) also made relevant impact.

16/24

Baltic Household Outlook

April 2013

Irrespective of the fact that unemployment level makes nearly 13 per cent, the number of sectors (IT, transport, shipbuilding, etc.) complaining about difficulties in finding necessary workers is rising. Such fact is not surprising as emigration reduces the number of potential workers. In the year 2012, 43 thousand of inhabitants emigrated. The above number is lightly lower compared with the year 2011 when 54 thousand of inhabitants left the country, however the

emigration volume remains threatening and the structured unemployment problem becomes even more acute. We forecast that the unemployment in the year 2013 will decrease to nearly 11.5 per cent. Moderate economic growth and continuing emigration of the population in the coming years will ensure a gradual decline in the unemployment level.

Consumption volume stopped increasing

The retail trade turnover volumes were selected for analysis of the household consumption expenditures. After a positive start in the beginning of this year, the retail trade turnover in the second half-year started to stagnate and in December, as compared with the equivalent month of the previous year, nearly stopped (growth made up only 1.4 per cent). Negative impact on consumer expectations was made by spreading news that the heating season in 20122013 will be the most expensive since the date of independence restoration. Retail trade (except motor vehicles) turnover (2010 = 100)sa
130

As compared with the data announced by the Statistics Department, in the beginning of this heating season (in October), the heating power supply costs were higher by 3.7 per cent on average as compared with the previous year. However based on the data of the Lithuanian Heat Suppliers Association, the bill for heating of 60 square meter apartment (in the houses located in the entire territory of Lithuania being monitored by the Association) in January 2013 was higher by 14 per cent on average than a year ago. The heating bills soared as the average monthly temperature determining greater demand for heating power was low. Greater optimism about the internal market consumption volume in the year 2013 may be partially substantiated by a decision to increase MMW. The measures for revenue increase mostly stimulate consumption of low-income families, as the marginal propensity to consume of such families is the largest.

120

110

100 Apr Oct May Nov Mar Aug Dec Sep Feb Jun 2011 2012 2013 Jan Jul

90

80

Source: Statistics Lithuania

Inhabitants accumulated financial assets and repaid debts

Irrespective of higher expenditures at the year-end, the deposits of households with the financial institutions 2nd - 4th quarter grew by LTL 1.2 billion (EUR 348 million) or by 4.4 per cent and at the end of the year amounted to LTL 28.7 billion (EUR 8.3 billion). Liabilities to the financial institutions decreased by LTL 260 million (EUR 75 million) or by 1 per cent. Net financial assets (financial assets minus liabilities) totalled LTL 12 billion (EUR 3.48 million), or nearly LTL 4 thousand (EUR 1.2 thousand) per capita.
Household financial assets and liabilities in MFI (bnEUR)
12 11 10 9 8 7 6 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2008
Assets

2009

2010
Liabilities

2011

2012

Source: Bank of Lithuania, Central Securities Depositor, SEB estimations

17/24

Baltic Household Outlook

April 2013

In the last quarter of the year, the greatest increase in deposits (term and non-term deposits) was observed. Such behaviour of households may be explained by the below reasons:

1) households did not accumulate sufficient reserves for extraordinary events; 2) households are unwilling to invest in high-risk assets; 3) households do not make any decision yet on use of their funds, i.e., the purpose of spending, or the purpose of savings.

Demand for safety remains high, however does not hide willingness to get higher profits
In addition to recently increasing demand for safety, which determines savings behaviour of households, willingness of households to get the best possible interest is observed. The unit-linked insurance premiums and the statistical data of inflows in investment funds prove the above. Thus in December of previous year, the value of insurance premiums under unit-linked life insurance agreements amounted to LTL 65.9 million (EUR 19 million). It was higher than in the year 2011, when the above indicators made up LTL 44 million (EUR 12.8 million). Taxable income is reduced by the amount of premiums paid under the life insurance agreements, and the income tax surplus is refunded in the beginning of the following year. The 31st of December is the last day to get a refund of income tax paid in such year. Unit linked life insurance premiums (mEUR)
25

However the households willing to use the above advantages should have more available funds at the end of the year, should limit spending for consumption needs, and should be prepared to suspend use of insurance premiums for a long-term, i.e., until the insurance agreement expires (exemptions related to the insureds age may be applied), and in the near future only to use the income tax refund (15 per cent of insurance premiums). Inflows in the investment funds are yet another indicator showing the investment expectations. Indicators of the last quarter of the previous year show that the volume of inflows in the investment funds also grew, and in the last quarter the value of inflows in the above funds exceeded the value of outflows. In last quarter of the year, the popularity of investment funds slightly increased after positive developments in the financial markets and disappointment in low interest earned from other forms of savings. Based on information available to us, it is obvious that inflows in the investment funds are rather sensitive to price fluctuations in the securities markets. Therefore it is too early to consider that inflows in the investment funds are long-term or stable investments. Further trends will depend on the events in the securities markets.

20

15

10

0
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011

2012
Source: Bank of Lithuania

Financial obligations of households continue to shrink, however borrowings are growing

The amount of new loans to households granted by financial institutions is smaller, compared to the value of repaid loans. The credit portfolio of households with the financial institutions continued to shrink. However the statistical data of the new loans for January provided by the Association of Lithuanian Banks shows that the value of such loans is growing. In the first month of the year, the value of new consumer loans and the new mortgages grew by nearly 40 per cent as compared with the first month of the year 2012.

18/24

Baltic Household Outlook

April 2013

New housing loans (mEUR)

34,0 27,2 24,7

New consumer loans (mEUR)

10,7

7,7 6,7

Jan2011

Jan2012

Jan2013

Jan2011

Jan2012

Jan2013

Source: Lithuanian Bankers Association

In addition to the improving financial position, revitalisation of the residential property development sector should be mentioned. The number of issued dwelling construction permits was higher by 38 per cent than one year ago, and the number on finalised construction projects by 3 per cent. Till today, the improvements of the above-specified construction indicators do not result in value growth of the new mortgages (agreements). Primarily, those who build or buy the newly constructed dwellings not always apply for loans. Secondly, the household demand for loans in future will increase, when the dwelling is constructed or equipping process is started. Thus if the existing environment (local economy forecast, situation in the labour market), household income expectations and borrowing requirements do not significantly deteriorate, the volume of the new loans should rise, and the credit portfolio should stop shrinking.

Consumer sentiment index the highest since spring 2008

Financial behaviour of households is determined not only by financial potential but also by prevailing sentiment: when more difficult period is expected, the households start cutting their costs and accumulate savings to ensure financial safety, and repay loans. If households decide that the most difficult period is over and the near future is secure, their behaviour is less constrained. Households do not change their current savings habits; however they make proactive plans for future. In the beginning of the year, the consumer sentiment index calculated by the Statistics Department reached the level of spring 2008 (-10). Irrespective of the fact the number of pessimists is higher that the number of optimists, increasing number of households does not expect any improvement or deterioration of the current situation. Consumer sentiment index
2008
0

2009

2010

2011

2012

2013

-10
-10

-10

-20

-30

-40

-50

-56
-60
Source: Statistics Lithuania

Households financial assets, liabilities and net asset value (EUR million) 2008 2009 2010 Financial assets Deposits 2Q2011 4Q2011 2Q2012 4Q2012 10028 7720 322 207 599 1180 7560 5934 691 935 2468 10420 7974 345 197 623 1281 7492 5892 679 921 2928 10 900 8 322 332 201 653 1392 7417 5873 656 888 3483

8830 9614 10096 10200 7152 7392 7856 580 183 514 945 241 264 618 1117 7893 263 259 626 1159 7850 5982 871 997 2350

Bonds (Lithuanian corporate bonds and Government bonds) 493 Units of investment funds offered by the banks Savings under life insurance agreements Pillar II pension funds Liabilities Mortgage loans Consumer loans Other loans Net value of financial assets 121 420 644

8740 8362 7917 6055 6027 5983 1265 1026 932 1420 1309 1002 90 1252 2179

The review of the financial assets of households is based on information announced by SEB Bank, Bank of Lithuania, Lithuanian Banking Association, Statistics Lithuania and Lithuanian Central Securities Depositor on the financial assets of residents with the financial institutions, i.e., funds in deposit accounts, investment in bonds, shares, investment funds, pension funds, funds accumulated under life insurance agreements and liabilities to the financial institutions.

19/24

Baltic Household Outlook

April 2013

Estonia
More certainty on the labour market, still the unemployment rate is twice as high as before the recession The increase in electricity prices has affected households sentiment, the beginning of 2013 shows some recovery Households follow restrained borrowing decisions: the interest for housing debt and leasing is increasing while the demand for consumer debt is continuously modest Unfavourable era for deposits as the interest rates are at historically low levels

More certainty on the labour market

Estonian households have experienced modest improvements on the labour market. According to the data of Statistics Estonia, the unemployment rate has been decreasing to 9.3 per cent by the end of 2012 with the number of unemployed being 63,700. There are 10,200 employed more than a year ago and since the end of 2011 the unemployment rate has decreased by 1.1 percentage points. The situation is sounder than in many EU countries; the average EU unemployment rate has increased slowly since 2011. By the end of 2012 it had reached 10.7 per cent, that is the highest level in the last decade. Estonia is among the few countries where the unemployment rate has decreased during the last halfyear and the labour market is gradually returning to normal. Unemployment rate (%)
30 25 20 15 10 5 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
2006 2007 2008 2009 2010 2011 2012

There are still 63 thousand unemployed on the market; 36 per cent have been unemployed less than 6 months, 12 per cent between 6-11 months, 17 per cent between 12-23 months and 35 per cent of the unemployed have been searching for a job for more than 24 months. Long-term unemployment is still a big issue. The share of those being unemployed between 12-23 months has decreased since the beginning of 2012 but the share of those being unemployed for more than 24 months is showing an increasing trend. This segment of labour force continues to exhibit minimum purchasing power. Share of the unemployed by duration (%)
40% 35% 30% 25% 20% 15% 10% 5% 0%
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4

2006

2007

2008

2009

2010

2011

2012

12-23 months More than 24 months

Source: Estonia Statistics

Total population (15-74) Male Female

Source: Statistics Estonia

The unemployment among male has decreased at significant speed during last years in Estonia. The gap of unemployment rate between men and women has diminished and resembles the pre-crises situation. During the recession cyclical unemployment was considerably higher among men than among women, the gap reached 10.6 percentage points in the first quarter of 2010. The gap decreased rapidly in 2010 and it has been less than 3 percentage points in recent years. In the third quarter of 2012 the unemployment rate of men was slightly lower than that of the women. It shows that the unemployment is distributed evenly across genders as it was before the crises. However, the level of unemployment is still two times higher than during pre-crises period.

For those who are working, the gross wages are increasing slightly faster than the inflation rate; hence on average the real purchasing power is increasing. The average gross wages increased by 5.9 per cent at the end of 2012 compared to a year ago, reaching the level of EUR 916. The real wages that adjusted to the inflation rate increased on yearly basis 2.1 per cent, that is the same growth rate as at the end of 2011. While the nominal wages turned into growth in the second quarter of 2010, the real wages started to grow from the third quarter of 2011. The real wages have shown modest increase of 1-2 per cent year-on-year since then. However, we have to emphasize that the pace of recovery is uneven across sectors and a bulk of households still experiences decline in real wages. In January 2013 the minimum wage increased by 15 per cent to the level of EUR 320. This should have some

20/24

Baltic Household Outlook

April 2013

positive effect on the economic situation of low wage earners. To summarise, the conditions on the labour market should further normalise, although the process is expected to be lengthy and unveven across segments. Changes in Gross and Real Wages
25% 20%

yearly growth rate, %

15% 10% 5% 0% -5% -10% Q4 Q4 Q4 Q4

2008

2009

2010

2011

2012

Changes in gross wages Changes in real wages

Source: Estonia Statistics

The increase in electricity prices has affected households sentiment

In the following section we are commenting on the seasonally not adjusted consumer confidence indices provided by the Estonian Institute of Economic Research. Households perception about their future economic situation in the following 12 months experienced a sharp drop in October when the balance fell from -5 in September to -14 in October 2012. The drop was related to the news about substantial increase in the electricity prices from the beginning of 2013. According to the Eurobarometer Survey conducted in November 2012 the rising prices were the main concern for Estonian households. Compared to the households in other countries, the Estonian households together with Lithuanian and Slovakian ones named most frequently the inflation to be the biggest problem that the households face. The assessment about households economic prospects has improved since the beginning of 2013 and the balance has reached +1 in March 2013. Still, one has to keep in mind that the households economic outlook among different quartiles shows big discrepancies: the index was at 22 in the highest income quartile while at -25 for the lowest income quartile in February 2013. The changes within different income groups diverge. Consumer survey results
net balance of respondents, % 80 60 40 20 0 -20 -40

Q4

Q2

Q2

Q2

Q2

Q2

Q3

Q3

Q3

Q3

Q3

Q1

Q1

Q1

Q1

Q1

The assessment about the countrys future economic situation followed similar slump in October 2012 (from -3 on September to -12 in October) and reached higher levels at the beginning of 2013 compared to the beginning of 2012. In March 2013 the index of countrys economic outlook was at 6. The movements of the index have been driven by the same forces as the assessment about the households economic outlook, mainly by the impact of the increase in the electricity prices on the economy. According to the Eurobarometer Survey, the rising prices were pointed out as the most important issue for the country. For comparison, in most other European countries unemployment is seen as the main issue of a country. The inflation expectations were driven sharply up in October 2012 when the respondents, who believed that the prices will increase, exceeded the ones who expected the price decrease by 49 percentage points. In March 2013 the balance was at 31, i.e. the index was 8 points higher than in March 2012 and 13 points higher than in March 2011. The unemployment expectations have decreased since the peak in February 2012 by 17 points and the balance is at 1 in March 2013. Consumer survey results
net balance of respondents, % 20 10 0 -10 -20 -30
Jan-11 Apr-12 Apr-09 Oct-09 Jan-09 Oct-12 Oct-11 Jan-12 Jul-09 Apr-11 Jul-12 Jul-11 Apr-08 Oct-08 Jan-08 Jan-10 Apr-10 Oct-10 Jan-13 Jul-08

-40

Apr-12

Apr-09

Oct-09

Jan-09

Oct-12

Oct-11

Jan-12

Jul-09

Apr-11

Jan-11

Jul-12

Jul-11

Apr-08

Oct-08

Jan-08

Jan-10

Unemployment expectations Inflation expectations

Oct-10

Apr-10

Jan-13

Jul-08

Jul-10

Source: Statistics Estonia

Economic situation of households Economic situation of country

Jul-10

Source: Statistics Estonia

21/24

Baltic Household Outlook

April 2013

Households continue to show a lingering reluctance to consume. The index reflecting households purchasing plans in the next 12 months fell from -36 in August 2012 to -43 in September 2012. There was a slight improvement at the end of 2012 and at the beginning of 2013 when the index increased from -42 in November 2012 to -33 in December 2012. In February 2013 it has relapsed to the level of -38 and in March it is slightly up at -35. The retail sales growth in real prices has grown in recent months by 4-5 per cent compared to the same period a year ago. It shows that temporary drawbacks in consumer confidence have not affected households consumption pattern. Neither the plans for home improvements nor for car purchase show any upward trend but fluctuate on a certain level. However, there seem to be slightly more households who plan home improvement compared to the second half of 2012. In January 2013 the balance was at -43 while in January 2012 it was at -58. The consumption of households will continue on a stable track and no extraordinary upward shifts are expected.

Consumption plans
40 net balance of respondents, % 30 20 10 0 -10 -20 -30 -40 -50
Apr-09 Oct-09 Jan-09 Oct-12 Apr-12 Oct-11 Jan-12 Jul-09 Apr-11 Jan-11 Jul-12 Jul-11 Apr-08 Oct-08 Jan-08 Jan-10 Apr-10 Oct-10 Jan-13 Jul-08 Jul-10

Plans major purchases in the next 12 months Now is good time for buying durables
Source: Statistics Estonia

Households follow restrained borrowing decisions

Estonian households continue to be more prone to improve their balance sheets. The deleveraging rate is declining slowly; the total loan stock of households changed by -1.8 per cent year-on-year in February 2013 compared to -2.7 per cent in February 2012. At the same time the deposit volumes are continuing to grow but at a lower speed: the deposit volumes expanded by 6.9 per cent year-on-year in February 2013 compared to 10 per cent year-to-year in February 2012. At the end of 2012 debt-to-deposit ratio was 1.47 which means that the liquid and riskless financial assets covered 2/3 of the households total liabilities. The debt-to-deposit ratio is on the same level as it was at the end of 2005 and has decreased from the peak in 2008 by 0.67 points. The ratio has been falling more slowly compared to the rise during the economic boom period. The debt-to-deposit ratio will continue to decrease gradually as households keep on building up their stock of financial assets. Ratio of loans to deposit
2,50 2,13 2,00 1,50 1,13 1,00 0,50 0,00
2004 2005 2006 2007 2008 2009 2010 2011 2012

At the end of 2012, the household loan stock was EUR 6.84 billion to which the housing loan contributed EUR 5.85 billion and the other loans (consumer credit and other borrowing) added EUR 1.6 billion. Additionally, leasing stock was at the level of EUR 384 million. The volumes of consumer credit and other borrowing are declining at a faster speed than the volume of housing loans: at the end of 2012 the housing loan portfolio fell by -0.6 per cent yearon-year while the volumes of the rest of the loans fell by 10.4 per cent year-on-year. The drop of the housing loan portfolio is explicitly slowing down and the volume is expected to turn to positive by the end of 2013. The stock of consumer credit and other loans has witnessed a pronounced retrenchment at -10 per cent year-on-year and the trend is expected to continue. Y-o-y changes in loan portfolio
15% 10% 5% 0%

2,12

2,01 1,83 1,61 1,47

-5% -10% -15% -20% -25% Mar-12 Sep-12 Jun-12 Mar-09 Sep-09 Dec-09 Mar-10 Dec-10 Dec-12 Jun-09 Mar-11 Jun-11 Sep-11 Sep-10 Dec-11 Jun-10

1,81 1,45

Y-o-y change of housing loan Y-o-y change of consumer credit and other loans Y-o-y change of leasing
Source: Bank of Estonia

Source: Bank of Estonia

22/24

Baltic Household Outlook

April 2013

The volumes of leasing increased in the fourth quarter of 2012 by 3 per cent year-on-year. It has experienced the sharpest drop in 2009-2010 when households postponed their car purchase decisions. By now some households have reviewed their delayed decisions. Although the consumer survey does not show any upsurge in the plans of purchasing a car, the sales of new cars has shown positive movements and leasing volumes follow the same dynamics. When looking at the quarterly turnover of household borrowing, the growth in new lending (including refinancing) picked up gradually in 2012. In the third quarter of 2012 about EUR 221 million loans were delivered that is 9.5 per cent more than at the same time in 2011. In the fourth quarter of 2012 about EUR 212 million loans were provided that is 7.4 per cent more than at the same time in 2011. The main contribution to the flow of new borrowing comes from housing loans where the quarterly turnover has exceeded EUR 150 million that is 11 per cent higher than the turnover of the respective quarters in 2011. The new volumes of housing loans are at the same level as they were at the end of 2003 and they show a slightly increasing trend. However, the growth rates are far from the unsustainable rates experienced in 2004-2006. Taking into account the adjusted future prospects of households, similar growth rates as in the run-up to the crisis will not be experienced in Estonia in the upcoming years. The quarterly turnover of consumer credit and other loans has been between EUR 50-60 million for the last three

quarters of 2012 and the issuing of new loans is on the same level as it was in the middle of 2005. Due to limited rise in real wages, some households who have felt constrained in their consumption would like to use a consumer credit to fulfil their consumption plans. But these households face also credit constraints. Some other households who would be capable to borrow prefer not to finance their consumption by loans. Additionally, households have become more aware about the costs of borrowing. Hence, the turnover of consumer credit and other loans is expected to remain subdued. Quarterly volume of new loans
m EUR 800 700 600 500 400 300 200 100 0
2004Q1 2006Q1 2008Q1 2004Q3 2006Q3 2008Q3 2009Q1 2009Q3 2005Q1 2005Q3 2007Q1 2007Q3 2010Q1 2010Q3 2011Q1 2011Q3 2012Q3 2012Q1

Housing loan Consumer and other loans

Source: Bank of Estonia

Unfavourable era for deposits

Deposits have been for households the most preferred means to keep their savings. Households hold about 2/3 of their liquid financial assets in deposits. The deposit volumes demonstrate solid growth but the speed is decelerating: while at the end of 2011 the growth rate was 10 per cent year-on-year, then at the end of 2012 the growth rate was 7.7 per cent year-on-year. In February 2013 the growth rate dropped to 6.9 per cent compared to a year ago. The current growth rates are lower than the ones during 2003-2004 when the deposits expanded at the speed over 10 per cent year-on-year. The slowdown of the growth rate has several reasons. First, there are more households who are not able to save after covering the compulsory expenses. According to a survey conducted by SEB in November 2012, about 2/3 of the households have to watch their spendings. On the other hand, those households that are able to save do not need to increase their buffer-stocks markedly as the current level is consistent with the stable economic situation of the households. Second, the interest rates of term deposits have dropped to very low levels and saving in deposits has become unfavourable. The yearly interest rate that the main commercial banks offer for new deposits with maturity over one year is around half per cent. Taking into account incessantly high inflation rate, that was 3.9 per cent in 2012, savings in the deposits lose their value at noticeable speed. Unfortunately, there are no alternatives for riskless investments where the return would exceed the inflation rate. According to the survey of SEB, if households were planning to save, majority of households would put their money to a saving account or deposit. Most of the households avoid risky investments; only 5 per cent of respondents would invest their money in products with higher risk. Household deposits
3000 2500 2000 mEUR 1500 1000 500 0 Jan-09 Jan-12 Jul-09 Jan-11 Jul-12 Jul-11 Jan-06 Jan-08 Jan-10 Jan-07 Jan-13 Jul-06 Jul-08 Jul-07 Jul-10

Demand and overnight deposits Term deposits

Source: Bank of Estonia

Due to the low interest rates households have cut back their savings on term deposits and keep more money on demand deposits. In December 2012 the volume of demand deposits was EUR 2.6 billion while the volume of term deposits was EUR 2.0 billion. Since the end of 2011, 23/24

Baltic Household Outlook

April 2013

EUR 430 million was added to the volume of demand deposits while the volume of term deposits has dropped by EUR 98 million. The trend has continued the first months of 2013. Taking a closer look at the maturity of the term deposits one can see that the share of short term deposits has plummeted only 14 per cent of all term deposits are kept with the maturity less than 3 months. For comparison, at the end of 2009 the share was 33 per cent. Households preferred to keep short-term savings on term deposits to earn some return on their savings. By now the gain has diminished and households do not bother to open short term deposits but leave the money on demand deposits instead. The structure of the term deposits
100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 12.06

The statistics from National Accounts reveals that households have decreased their saving rate, i.e. the rate showing how much households saved out of their disposable income. The saving rate was negative during the economic growth period 2003-2007. In 2009 it was at a record high level of 11.4 per cent, but still lower than the EU average that was 13.2 per cent. In 2010 the saving rate started to fall again and the latest data available shows that the household sector saved 5.5 per cent of their disposable income in 2011. The share is again much lower than the average EU saving rate that has exceeded the level of 10 per cent during the last decade; in 2011 the average EU saving rate was 11 per cent. In 2011 lower saving rate than in Estonia is observed in Latvia (-1.6 per cent), Lithuania (1.2 per cent) and Poland (2 per cent); all other EU countries experience higher saving rates. Gross household saving rate
15
%

26,1% 10,5%

14,4% 32,8% 17,7% 16,1%

10

47,6% 36,6% 15,8% 12,9%

12.09

54,2%

5 0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

15,3%
12.12

-5 -10

up to 3 months 3 to 6 months

6 to 12 months Over 1 year

Source: Bank of Estonia

European Union (27 countries) Estonia

Source: Eurostat

Financial assets, liabilities and net asset value of household sector (EUR mln) 2008 Financial assets Demand and overnight deposits Term and other deposits with maturity II pillar pension funds III pillar pension (Funds + insurance) Other investment via financial institutions* Other securities** Financial liabilities Housing loans Consumer loans Other loans Leasing Net value of financial assets 5067 1635 1966 728 179 121 438 8252 6209 856 647 539 -3185 2009 5583 1616 2076 947 214 281 449 7940 6111 765 618 446 -2357 2010 6049 2054 1860 1068 254 307 506 7614 5973 671 600 370 -1565 2011 6448 2219 2110 1130 255 256 479 7402 5882 599 582 338 -954 IIQ 2012 6731 2464 2105 1279 263 247 373 7293 5833 594 529 338 -562 IVQ 2012 7160 2649 2012 1466 283 332 419 7253 5846 608 451 348 -93

Source: Bank of Estonia, Estonian Central Register of Securities, SEB calculations * Private portfolios, foreign investment funds and unit-link insurance ** Registered at Estonian Central Register of Securities

24/24