The Estonian Economy newsletter provides the following information: 1) Enterprise investments grew rapidly in 2011 but have slowed in 2012, with manufacturing slowing but energy growing strongly. Investments are being funded more through companies' own funds than loans. 2) Public sector investments are planned to grow 28% in 2012, funded mostly from EU funds and carbon quota sales. 3) Residential real estate transactions and prices have grown steadily for two years, driven by rising costs and demand, though people are relying more on own funds than loans due to low rates. Investments are expected to continue growing if economic conditions remain positive.

1. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department
by Teele Reivik No. 3 • 14 August 2012
Investments are likely to continue growing, but at a
slower pace
 Enterprise investments grew rapidly in 2011 fuelled by recovering foreign
demand and rising exports. The largest amounts of investments were made by
the manufacturing and energy sectors. By the first quarter of 2012, the growth
had slowed in manufacturing but risen strongly in energy sector. The increase
in enterprise investments has not been dependent on loan money; companies
are using more of their own funds.
 Public sector investments are planned 28% larger this year – funds for
increase will mostly come from EU funds and the revenues from sales of CO2
quotas.
 The number of transactions and the prices of residential real estate have been
growing steadily for the past two years. The increase in prices is caused
mainly by the rising costs of materials and labour, as well as by the growth in
demand. Although home loan interest rates are at a record low it seems that
people are using more of their own funds now than in recent years.
Investment share in and contribution to GDP confidence, increased foreign demand and also the
(in real terms)
postponed investments, which were delayed during
15% 45% the crises and then finally made. Although growing,
40% investment share in last year’s GDP was below the
10%
historical1 level and based on that there is a reason
35%
5%
to expect a continuing growth in investments.
30%
0%
Enterprise investments made a strong
25%
2006 2007 2008 2009 2010 2011 2012
comeback in 2011
-5% 20%
After hitting the bottom in the beginning of 2010, the
15%
-10% enterprise investments had made a strong
10% comeback by the end of last year, growing an
-15%
5% average 55%. The rapid increase could be
-20% 0%
explained by recovering foreign demand, which
boosted exports and production and, therefore, laid
GDP annual growth
Contribution to GDP growth a perfect foundation for increasing investment
Share in GDP (rs)
Source: SE volumes. In the first quarter of 2012, however, the
number grew only by 1% in annual comparison.
Investment volumes had made a decent recovery Behind the slowdown is the high base effect2,
by the end of last year after a rapid fall which
started in 2007. As a result of that recovery,
investments started to contribute to GDP growth
positively again (after nearly three years of staying
on the negative side) reaching the pre-crises level 1
10 year average share is almost 30%.
by the end of last year. Behind the grown volumes 2
In the first quarter of 2011, Estonian Air enlarged its
were, amongst other factors, the improved overall fleet which affected strongly the overall investments in
vehicles
Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46-8-5859 1000.
E-mail: ek.sekr@swedbank.com www.swedbank.com
Legally responsible publisher: Cecilia Hermansson, +46-8-5859 7720.
Annika Paabut, +372 6 135 440. Elina Allikalt, +372 6 131 989. Teele Reivik, +372 6 137 925

2. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 3 • 14 August 2012
ongoing uncertainties about the euro area which building the Enefit 280 oil plant, co-generation plant
may be keeping companies from “putting it all out at the rapeseed processor Werol (both by Eesti
there” and also because larger investments could Energia), and the renewal of the distribution
be planned for later this year (investments tend to network (Elektrilevi OÜ). Investments should
be smaller during the first months of the year due to continue to grow in the energy sector as there are
weather conditions). many new and ongoing capital-intensive projects
planned for the near future- amongst others, the
Contributions to enterprise investments annual growth construction of Estlink 2, Harku-Lihula-Sindi high
80% voltage line (both by Elering) and the Auvere power
plant (by Eesti Energia)3.
60%
40% Enterprise investments
(EUR million)
20%
600 3,500
0%
500 3,000
2007 2008 2009 2010 2011 2012
-20%
2,500
-40% 400
-60% 2,000
300
buildings constructions
1,500
v ehichles computers
machinery and equipments land 200
Total 1,000
Source: SE
100 500
The largest investments in 2011 were made in the
0 -
manufacturing and energy sectors, almost 20% and
2007 2008 2009 2010 2011
19% of all enterprise investments. In the
Source: SE Manuf acturing Energy Total (rs)
manufacturing sector roughly three-fourths of
investments were made in equipment and
machinery. Behind these numbers were the Industry confidence
improved economic environments of Estonia’s main 40
trade partners. The resulting increase in foreign
demand caused production volumes to continue 30
growing even more (the growth started in 2010) in 20
the beginning of last year and induced companies
to invest to avoid capacity constraints. Production 10
volumes grew the most in machinery and
0
equipment, which also was the largest export
2006 2007 2008 2009 2010 2011 2012
article. The growth of machinery and equipment -10
slowed at the end of the year and remained low in
-20
the beginning of 2012 due to the decreased
(foreign) demand, grown uncertainty and high base. -30
As of July present year the industry’s confidence
indicator reflects that in the annual comparison the -40
Industry conf idence
expectations on export and production volume have Export expectations
lowered somewhat and so has the general Source: DG ECFIN Production expectations
confidence regarding the sector. Considering the
decreased demand and the sector’s hesitant Although enterprise investments have been growing
attitude about the near-term prospects it may be again since the beginning of last year, this growth
likely that the enterprise investments growth will has not been based on loans. In the boom years
remain slow for a while. the total corporate loan stock peaked at the level of
In the energy sector, investments grew by nearly
55% last year and by 120% in the first quarter of
2012 in annual comparison. This was due to
several large development projects, with many new
ones starting or already started this year- e.g., 3
See also www.energia.ee and www.elering.ee
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3. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 3 • 14 August 2012
EUR 7.6 billion and by mid-2012 the amount had 2010. Since then investments have shown a
fallen to EUR 6 billion. Loan volumes have been growing trend throughout the last year and also in
decreasing steadily since the beginning of 2009, the first quarter of present year. According to the
and loan turnovers have remained modest. One of state budget of 2012 the investments are planned
the main reasons is that banks and companies are to be 28% larger than in the previous year (in
more cautious: requirements for getting a loan are nominal terms). The funds for the increased
stricter and many enterprises do not qualify. But investments will mostly come at the expense of the
investments have been growing (+54% in 2011) local governments and the selling of CO2 quotas,4
while the loan stock has been declining (-8.5% in as well as from EU funds. The largest amounts are
2011) and it may be so because enterprises prefer expected to go to the areas of government of
to use their own finances for making them (which Ministry of Economic Affairs and Communication
has been possible due to grown turnovers and (mostly for the renewal of highways:
profits) or might depend on foreign investments EUR 71 million), the Ministry of Agriculture and the
(e.g. in terms of foreign-owned firms). Nearly 50% Ministry of the Environment (renewal of the water
of all foreign investments in Estonia are direct and waste management infrastructures).
investments (FDI) and last year, the largest
Looking forward, the government recently approved
amounts of FDI came from Finland and Netherlands
a substantial real estate investment plan (2013-
and were made in the manufacturing, real estate,
2016), according to which (amongst many other
and wholesale and retail sectors. In annual
objects) the construction of the Estonian National
comparison the FDI decreased 70% in the first
Museum, Tallinn Prison and the European IT
quarter of 2012. Behind that fall might again be
agency building will be supported. Nevertheless, it
previously mentioned concerns over the euro area
is likely for public sector investments to decrease
which made foreign investors to pull back and wait
for the next few years due to the end of the CO2
for things to clear up. Despite the overall decrease
projects and EU programming period (2007-2013).
which affected also the real estate and wholesale
The next programming period starts in 2014.
and trade sectors, FDI in the manufacturing sector
grew. Behind that growth were new and ongoing Residential real estate sector on its way to
construction projects for new plants or expansions a full recovery
of existing ones (e.g. ABB, Incap Estonia, Lappset
OY). The further growth or decline of FDI depends The growth of notarised purchased-sale
5
mostly on the economic developments in the other transactions of real estate has been rather stable
EU countries (mainly Sweden and Finland) where in the past two years and has reached about the
roughly 90% of FDI to Estonia are coming. same level as in 2002-2003. In annual comparison
the number of transactions had increased 22% by
Enterprise investments and loan stock the first quarter of 2012. Behind this rise might be
(EUR millions) the people’s growing confidence in their financial
situation: wages have been increasing and there
1,000 8,000
are more jobs available (which results in the
900 increase of household disposable incomes). Prices
7,500
in residential real estate have also been increasing:
800 according to the Estonian Land Board data, the
7,000
price index of apartments sold as dwellings grew
700 almost 12% in the second quarter of 2012 in annual
6,500
basis. This may be explained by the rising prices of
600
materials and labour, increasing demand and also
6,000
500 changes in the quality of real estate sold.
5,500 Although home loan interest rates are at a record
400
low, the loan volumes have been decreasing and
300 5,000 turnovers have remained modest. Considering that
2007 2008 2009 2010 2011 2012
Source: SE, BoE Enterprise inv estments Loan stock (rs)
Public sector investments to grow 28% 4
Synopsis of the state budget 2012
The public sector cut back its investments during http://www.fin.ee/riigieelarve-2012 „Lühiülevaade 2012
aasta riigieelarvest”
the crises years- they fell 35%, from 5
In this case registered immovables with residential
EUR 825 million in 2008 to EUR 557 million in buildings and apartments
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4. The Estonian Economy
Monthly newsletter from Swedbank’s Economic Research Department, continued
Nr 3 • 14 August 2012
the trend for residential real estate transactions is This is expected to happen in 2013-2014 depending
moving up we may find an indication that a large on how and when the euro area debt crises will be
number of those transactions might be financed solved. Public sector investments are likely be more
with peoples’ own funds. modest next year due to the end of the CO2
projects and decreasing EU funds. Residential
Positive outlook despite the slower growth investments are anticipated to continue a steady
rate growth if wages keep rising, the employment keeps
Even though the investment growth rate is slowing, increasing and consumer confidence growing.
our outlook remains positive: in April Swedbank Although there is a high probability of loans
Economic Outlook we anticipated investments to becoming more expensive in the near future, if their
grow over 10% next year (our new SEO will be turnovers were to increase, there is room for even
released at the end of this month). Enterprise further growth.
investments are likely to increase more when the
ongoing uncertainties surrounding the euro area
start to dissolve and companies feel more secure.
Swedbank
Economic Research Department Swedbank’s monthly newsletter The Estonian Economy is published as a service to our
SE-105 34 Stockholm customers. We believe that we have used reliable sources and methods in the preparation
Phone +46-8-5859 1028 of the analyses reported in this publication. However, we cannot guarantee the accuracy or
ek.sekr@swedbank.com completeness of the report and cannot be held responsible for any error or omission in the
www.swedbank.com underlying material or its use. Readers are encouraged to base any (investment) decisions
on other material as well. Neither Swedbank nor its employees may be held responsible for
Legally responsible publisher
losses or damages, direct or indirect, owing to any errors or omissions in Swedbank’s
Cecilia Hermansson, +46-8-5859 7720
monthly newsletter The Estonian Economy.
Annika Paabut +372 6 135 440
Elina Allikalt +372 6 131 989
Teele Reivik +372 6 137 925
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