Baltic Household Outlook: Little change in household income 2011

8/7/2019 Baltic Household Outlook: Little change in household income 2011

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Baltic Household Outlook

April 2011

Summary

Export-led economic recovery through drop in unemployment

and modest wage growth will be reflected in pockets of Baltic

households.

Wage gap between Estonia and other Baltic countries are

increasing; although Lithuania has the lowest average gross

wages, average net monthly salaries in Lithuania are slightly larger

than those in Latvia.

Growing food and energy prices put another strain on the

household budget; increasing share of food, housing and transport

expenditures shows households deteriorating welfare.

Food remains cheaper in Lithuania than in Estonia or Latvia. The

largest increase in food prices was observed in Estonia; however,

food is still the most expensive in Latvia.

Financial safety cushion of Baltic households has increased; net

asset value of Estonian and Latvian households still remains

negative.

Time deposits lost their attractiveness due to low interest rates.Households are looking for investment opportunities with higher

yields or choose to keep their funds in current accounts.

The volume of newly granted loans is still lower than the total loan

repayments by private individuals; however, interest in housing

loans has improved.

Edmunds Rudzitis

Socioeconomics Expert,

SEB Latvia

Telephone: +371 67215933

[email protected]

Julita Varanauskiene

Household Economist,

SEB Lithuania

Telephone: +370 61537746

[email protected]

Hardo Pajula

Economist,

SEB Estonia

Telephone: +372 6655173

[email protected]


2/18

Last year the Baltic economies started to recover

from the free-fall of 2009. The recovery is mainly

export driven though private consumption alsoshows signs of improvement. External demand

made recovery process faster than expected at the

beginning of the year thus making the outlook for

2011 optimistic. With export-led recovery the

growth of unemployment slowed down and the

trend was reversed. The largest drop in

unemployment registered in Estonia the rate of

jobseekers decreased by approximately six

percentage points from its peak in first quarter of

2010. Unemployment rate decreased also in Latvia

and Lithuania.

numbers of jobless people. The bad consequence of

the recession is the growing number of the long-

term unemployed persons.

Baltic Household Outlook April 2011

THE BALTICS

Almost out of the woods

At the same time, total employment is slightly

increasing. The number of new jobs is similar in all

Baltic states since the first quarter of 2010

economies have added nearly 40 thousand jobs.

Compared to the lowest point of 2010, employment

has rebounded by 7.1 per cent in Estonia, 3.8 per

cent in Latvia and 2.9 per cent in Lithuania.

However, the total employment is still gradually

below the peak level of 2007. Compared with the

highest employment level there are still 198

thousand lost jobs (approximately 17 per cent) in

Latvia. Estonia and Lithuania has lost 69 thousand

jobs (10 per cent) and 193 thousand jobs (12 per

cent) respectively. The labour market is not

rebounding fast enough to absorb the large

In Estonia the average unemployment rate maydrop to 12 per cent this year. In Latvia and

Lithuania the fall in unemployment rate will be

modest. In both countries the average

unemployment rate will shrink to approximately

16 per cent level. Although unemployment rate

will decline further from current level in all three

Baltic countries, unemployment figures will

remain high for several years to come.

2

4

6

8

10

12

14

16

18

20

22

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

Latvia Li thuania Estonia

* Persons aged 15-74

Source: National Statistics

-16,0%

-12,0%

-8,0%

-4,0%

0,0%

4,0%

8,0%

1Q

07

2Q

07

3Q

07

4Q

07

1Q

08

2Q

08

3Q

08

4Q

08

1Q

09

2Q

09

3Q

09

4Q

09

1Q

10

2Q

10

3Q

10

4Q

10

Latvia Li thuan ia Estoni a


Unemployment (job-seekers) rate* in Baltics (%)

Changes in employment (%, Y-o-Y)

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10


Latvia Lithuania Estonia

Average gross wages and salaries (%, YoY)

2/18


3/18

Drop in unemployment and increasing number of

employed persons will improve financial situation

of households. Wage and salary statistics also

showed some positive dynamics. In the last quarter

of 2010, average gross wages grew in all Baltic

states. The largest increase was in Estonia average

wages rose by 3.9 percent compared to fourthquarter of 2009, the sharpest upturn since the end

of 2008. In Latvia and Lithuania wage increase

year-on-year was 3.4 per cent and 0.2 per cent

respectively. Besides, in Latvia and Lithuania the

wage increase was registered for the first time since

the first quarter of 2009. Compared to the last

quarter of 2008, Latvia and Lithuania witnessed the

highest rate of gross wage decrease (9 per cent),

followed by Estonia with three per cent wage drop.

According to the statistics, wages in Estonia is

substantially higher than in Latvia and Lithuania.

In the last quarter of 2010 average monthly gross

wage in Estonia reached 814 euros, followed by

Latvia with 647 euros and Lithuania with 614

euros. Even larger wage gap between Estonia and

other Baltic countries display numbers of net

wages and salaries. Net wages are derived from

gross wages and represent the part of pay that

employees can receive. In the fourth quarter of 2010

average monthly net wage in Estonia was 654

euros. Although Lithuania has the lowest average

gross wages, average net monthly salaries in

Lithuania are slightly larger compared to those in

Latvia. At the end of 2010 average net wage in

Lithuania reached 478 euros while in Latvia it was

only 460 euros. Due to larger personal income tax

rate and smaller tax exempt amount, employees in

Latvia receive fewer salaries than those with

identical gross wages in other Baltic countries.

Latvia has the largest difference between gross and

net salaries approximately 29 per cent. Both in

Estonia and Lithuania this difference is close to 20

per cent.

Household consumption has recovered in all Baltic

states. Consumption has picked up in line with

lower unemployment and improved consumer

confidence. Households are more optimistic about

overall economic situation and their financial

situation than a year ago. In Latvia householdconsumption expenditure grew most of all

showing increase by 5.1 per cent on annual basis in


-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10



Real wages (%, YoY)

Wages and salaries will continue to grow this year,

primarily in export oriented industries. Nominal

wage increases will reach nearly four per cent this

year. However, inflation is back and employees

real earnings keep falling. Real wages, which take

into account changes of consumer price index,

continue their downward trend. In Estonia the

average real wage has contracted since the last

quarter of 2008 but the pace descent has slowed

from 4.6 per cent at the end of 2009 to 1.3 per cent a

year after. In the last quarter of 2010 the average

real wage dropped by 2.0 per cent in Latvia and 2.9

per cent in Lithuania, continuing their downward

trend for the eighth quarter in a row.

Due to increasing inflation, real earnings of Baltic

households will rise very slowly or will remain

unchanged in 2011.

Average monthly wages (4th quarter of 2010)

647614

814

460478

654

300

400

500

600

700

800

900


Source: National Statisti cs

-29%-22%

-20%

Average gross wage (EUR)

Average net wage (EUR)

3/18


4/18

the last quarter of 2010. Taking into account high

unemployment level, slow income rise and

growing compulsory expenses household

consumption in the Baltics will remain weak in

2011. Despite negative factors influencing private

consumption, it is expected that household

consumption will grow by nearly three per cent in2011.

last year. Compared to 2009, expenditure for these

groups has increased. Share of food, housing and

transport expenses in the household budget has

grown in all Baltic states, forming more than half of

the total consumption expenditures. Increasing

share of the essential goods and services in the

household expenditure reflects the decrease in thequality of life and households deteriorating

welfare, a less money remains for other

expenditures.


25,4 26,6 24,2

16,3 12,9 17,73

13,311,5

13,22

45,0 49,0 44,9

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

*CPI weights


Food and beverages Housing

Transport Other

-30,0%

-25,0%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10



Household consumption expenditure (%, YoY)

According to national statistics, prices of the

essential products and services (food, transport

and housing) have grown considerably over the

Consumption expenditure structure ofhouseholds* (%)


Food prices inflict another strain on the household budget

One of the current forces pushing up inflation in

Baltic states is the rising food prices. Besides, prices

of major food commodities are rising up around

the world. Increasing demand for food in emerging

economies and adverse climatic conditions has

contributed to food product shortages.

Consequently, food prices demonstrate upward

trend. After the turmoil triggered by food prices in

2008 the recession in global economy and good

harvests forced the prices down until the year 2010

show another sharp rise of food prices. In February

of 2011 Food Price Index of the UN Food and

Agriculture Organization rose for the eighth

consecutive month reaching the highest level (in

both real and nominal terms) since January 1990. At

present the overall food price index is 12 per cent

(in real terms) and 5 per cent (in nominal terms)

higher than in 2008.

1161

2661

836

1277

2201

1022

-117

459

-186-200

200

600

1000

1400

1800

2200

2600

3000


Export and import of agricultural and foodproducts (in million euros)


Export

Import

Net balance

4/18


5/18

Although the food price increase negatively affects

the purchasing power of households, agriculture

and food production industries can benefit from

the upward trend of food prices. Agricultural and

food products play a significant role in economics

of three Baltic states, counting for more than 10 per

cent of total export volume. Among Baltic states,Estonia has the lowest share of agricultural and

food products in total export nearly 10 per cent. In

Lithuania and Latvia share of agricultural and food

products export in total formed 18 and 17 per cent

respectively. Export of Baltic agricultural and food

products has rapidly increased over the last years,

partially due to rise of food prices. In 2010 Estonia

demonstrated a 27 per cent increase in export of

agricultural and food products, followed by Latvia

(23 per cent) and Lithuania (22 per cent). At the

same time, import of agricultural productsincreased at a slower pace.

Lithuania is net exporter of food with 460 million

euros surplus. Export of food exceeded imports by

20 per cent in the last year. Despite strong export

growth, Estonia and Latvia still are net food

importers.

In Lithuania, prices of food products are the lowest

among the Baltic states. Despite of food getting

more expensive throughout the year 2010, it was

the slowest pace of growth compared with other

Baltic countries. Food in general and also

compared with different groups of products still

remains cheaper in Lithuania than in Estonia orLatvia. The largest increase in food prices was

observed in Estonia. But food is still the most

expensive in Latvia.


Currently, households are the most anxious about

price increase. According to consumer surveys,

Lithuanias expectations regarding price increase

are the highest. Sensitivity to food prices (products

of first necessity) is strong indeed. Such anxiety is

reasonable as prices of the most common products

such as bread and milk products have already

increased.

-60

-40

-20

0

20

40

60

80

2008 2009 2010 2011

Source: National Statisti cs

Expectations regarding price trends over12 months

Estonia

LatviaLithuania

0

20

40

60

80

100

120

140

0

20

40

60

80

100

120

140

Source: European Commission

Price levels for food (Lithuania 2009=100, in PPP)

Breadandcereals

Meat

Fishandseafood

Milk,cheeseandeggs

Oilsandfats

Fruitsandvegetables

Food

Lithuania

Latvia

EstoniaPoland

However, people in Lithuania are dissatisfied with

the prices of food. In another neighboring country,

i.e., Poland, prices of food are the lowest in the

European Union. So far, Lithuanians try to

minimize their food costs by going to Poland to buy

food for their own needs and also for sale.

Consumer expenditure on different foods (2009)

Bread

andcereals

Meat

Fishand

seafood

Milk,cheese

andeggs

Fruitsand

v

egetables

Sugarand

con

fectionery

Sweets

Lithuania

Latvia

Estonia Source: National Statistics, Eurostat, SEB estimates

5/18


6/18

According to SEB Banks estimates, based on the

data provided by the Statistics Lithuania, the

Lithuanian residents spent more than their

neighbours on bread and cereals, meat and fish

(although these products are cheaper), Latvians

on fruits and vegetables, Estonians on milk, eggs,

cheese and confectionary. Increase in prices duringthe year 2010 (prices of fruits and vegetables

increased by 16 and 20 per cent in Latvia, prices of

milk cheese and eggs by 16.6 per cent in Estonia)

may change diet preferences in the above

countries.

No one can avoid the food expenditure. People

look for ways to decrease their costs by going to

other (cheaper) countries to buy food or by cooking

and baking themselves and also by growingvegetables in their own gardens.


The net financial assets have increased in all the

three Baltic countries due to increase in financial

assets increase and decrease in liabilities. However,

the growth pace was different. The fastest growthwas observed in Estonia (14 per cent). In Latvia and

Lithuania, financial assets grew at the same pace (7

per cent). At the end of 2010 the Latvian and

Estonian households net financial assets were

negative (minus EUR 2 billion and minus EUR 1.5

billion, respectively), although the negative margin

(liabilities exceeding assets) was steadily

decreasing. In Lithuania said assets were always

positive.

Our estimations show that the growth of financial

assets was determined by the same factor

deposits. In Estonia, the volume of deposits

increased by 17 per cent (EUR 614 million). InLithuania, the growth pace of deposits made up 6

per cent (EUR 464 million) and it was the largest

increase compared to all the asset types. In Latvia,

percentagewise the largest growth in 2010 was

registered in households financial instruments

portfolio (23.5 per cent), although in nominal

amounts, the most significant increase was seen in

Tier 2 pensions (EUR 176 million). In Latvia,

deposits grew by EUR 109 million or by 3 per cent.

So we may conclude that in Estonia and Lithuania,households savings increased mostly due to new

inflows into deposits. The Latvian deposits growth

was moderate and investment management results

made a large impact on increase in the Latvian

household financial assets increase. Approxi-

mately 47 per cent of the most significant increase

in pension assets resulted from investment income.

Financial safety cushion has increased

2000

4000

6000

8000

10000

12000

2009 2010 2009 2010 2009 2010

Estonia Latvia Lithuania

Source: SEB estimates

Financial assets structure and dynamics(in million euros)

Other financial assets

Pensions and life insurance savings

Deposits

Time deposits losing their attractiveness

Households deposits during the year 2010

increased in all three countries. However in all the

three growth was registered in demand deposits

rather than time deposits. The most significant

growth was observed in the last quarter. Larger

inflows into residents accounts were typical of the

last month of the year. It signals about the year-end

bonuses back again, also money transfers by those

who work abroad and send money home for

Christmas.

6/18


7/18

Lithuania

Latvia

Estonia

Time deposits lost their attractiveness due to low

interest rates. The correlation between the time

deposit interest rates and the deposited amounts is

high. As the interest rates kept going down, some

people choose to keep their funds in current

accounts or look for other investment

opportunities with higher yields, or even spend

their money on a major purchase.


1000

1500

2000

2500

3000

Source: Bank of Latvia

Household deposits in Latvia(in million euros)

Jun-2008

Dec-2008

Dec-2009

Dec-2010

Demand

Term&savings

Household deposits in Lithuania(in million euros)

2000

3000

4000

5000

6000

Source: Bank of Lithuania

Jun-2008

Dec-2008

Dec-2009

Dec-2010

Demand

Term&savings

1400

1700

2000

2300

2600

Source: Bank of Estonia

Household deposits in Estonia(in million euros)

Jun-2008

Dec-2008

Dec-2009

Dec-2010

Demand

Term&savings

Still cautious regarding borrowing

Dynamics of financial obligations was also

different. Loan portfolios of Lithuanian and

Latvian households shrank by 5.3 percent each.

Estonias households decreased their liabilities by

3.3 per cent. However, since the peak of the credit

cycle (December 2008), the decrease was the largest

in Latvia (10 per cent), followed by Lithuania (9 per

cent), and the lowest in Estonia (6 per cent).

Consumer loans in particular have fallen parti-

cularly sharply. Housing loans account for more

than four fifths of the outstanding household loans,

so their growth rates are very similar to the overall

portfolio.

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

4Q20

08

1Q20

09

2Q20

09

3Q20

09

4Q20

09

1Q20

10

2Q20

10

3Q20

10

4Q20

10

Source: Central Banks

Household loan portfolio changes (y-o-y)

7/18


8/18

Anyway, all the above changes are the first signals

of rising confidence in the future and improving

financial situation. According to the data provided

by SEB bank (Lithuanian) almost all borrowers (95-

99 per cent) who obtained new loans in 2009-2010

timely pay loan installments, i.e., no payments are

overdue for at least one day.

Decreasing pessimism may be observed in

households financial behavior. However, changes

are rather slight and related only to such

households who keep deposits in financial

institutions.


The volume of newly granted loans is still lower

than the total loan repayments by private

individuals and also loan write-offs by commercial

banks. Although interest in housing loans in the

second half of 2010 has improved. In Lithuania,

during the last quarter of 2010, housing loan

portfolio slightly increased (by 0.04 per cent).

However, the amounts granted are small

compared with those issued during the credit

boom. The main reasons for modest credit volumes

are the residents falling incomes and peoples

reluctance to assume new burden of debt.

8/18


9/18

LATVIA

In 2010 the total income continued to decline losing

approximately 10 per cent year on year. The labour

market is not recovering fast enough to be able toabsorb the vast numbers of jobseekers;

nevertheless since the 1st quarter of 2010, when

unemployment reached the peak, it has started to

decline as the number of employed persons has

grown together with the total wages and salaries

fund. The number of employed people had risen by

37 thousand compared with 1st quarter. At the

same time, the number of jobseekers had dropped

below 200 thousand by the 4th quarter 193.2

thousand people or 17.2 per cent of the

economically active population were jobless.Unemployment statistics is partially improved due

to the decreasing number of economically active

people. Scarcity of jobs in Latvia drives people out

of the country or makes them loose hope to find

work at all. In Q4 of 2010 there were 55.8 thousand

people who had given up the hope of working

again or 11.6 thousand more, year on year. The

rising number of the long-term jobless and

hopeless people also reflects structural unemploy-

ment problem.

Registered unemployment after standing at thelevel of 14.5 per cent for several months most

probably will start falling in spring yet the decrease

will not be fast. Improvement in the labour market

will be slow due to the rising taxes and tariffs,

government expenditure cuts, consolidation that

will lead to slashing more jobs in the public sector

as well as the price rise of various raw materials.

The unemployment statistics will gradually

improve, also due to emigration, as the people of

Latvia will be able to choose new destinations (e.g.

Germany will open its labour market) in their questof work and income.

spend up to 23.6 per cent of their income for food,

16.3 per cent for housing and 13.3 per cent for

transport, these three largest expense items

amounting in total to 53.2 per cent. The survey of

the households welfare conducted by the Central

Statistical Bureau shows that the rising food prices

is one of the main reasons of the households

deteriorating welfare. If at the beginning of 2010 it

was the shrinking wages and salaries that made life

harder, in the second half of the year, as the prices

for the essential goods soared, the households were

forced to economize on food, buying less, and

cheaper or discounted food products.


Incomes shrink, economic recovery largely unnoticed

Rising costs influence consumptionConsumer prices have returned to the peak

reached in March 2009. Historically highest prices

are now seen in several groups of goods and

services, including food products (e.g. dairy

products, fish, cereals, fruit, soft beverages),

alcohol and tobacco, transport (fuel prices), as well

as education.

The prices of the first necessity products and

services over the year have grown considerably.

Food prices have gained on average 8 per cent,

housing expenses 6 per cent, transport 7 per

cent, thus the share of these costs in the total

household budget has grown. The households

Income of households

0

50

100

150

200

250

300

350

400

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

0

300

600

900

1200

1500

1800

2100

2400

Source: CSPAverage net wage (EUR)

Average pension (EUR)

Overall income of households in m EUR (RHS)

As opposed to 2009 when wages and jobs dropped

significantly, now the situation is better. After the

decline lasting for six consecutive quarters in the

last quarter of 2010 average gross wage rose 3.4 percent compared with Q4 of 2009. Net wages due to

the rise of the personal income tax and the smaller

non-taxable minimum income was still negative in

2010, yet this year net wages may see some

percentage rise. Average pay rise this year may

reach 4-5 per cent. This year the residents incomes

will be bigger than in 2010 yet their expenses will

grow, too, due to the rising prices.

9/18


10/18

Breakdown of financial assets

0%

20%

40%

60%

80%

100%

IVQ 2008 IVQ 2009 IVQ 2010

Pillar II pension funds

Life insurance and private pension savings

Financial instruments

Deposits

In 2011 the rising food and housing prices will be

one of the burning issues. Various food product

prices will increase differently, therefore the

consumers will focus on cheaper products. The

households budgets will perceive the rising

expenses for electricity, natural gas and in autumn

also thermal energy. At least half of all households

will feel the direct influence of the new electricity

tariffs. The electricity tariffs together with the hike

of excise tax on fuel and natural gas in June-July

will deal a double blow to the households: directly- with the rising rates and bills - and indirectly

through the increasing prices of goods and

services. The more expensive electric energy

(electricity tariffs will go up by approximately 30

per cent for small and medium enterprises who by

electricity in the regulated market) will push the

producers costs up and after some time will be

reflected in consumer prices. The changes in tariffs

and taxes will hit hardest those households who

live in privately owned houses heated by natural

gas or electricity and drive cars with petrol engines.

Although this tariff and tax rise was targeted at

affluent residents who can afford to live more

comfortably, e.g. in a private house, in reality the

less well-to-do families with children in whose

budget the transport and housing expenses make a

big portion will face bigger expenses.

Financial safety cushion has increased

The financial assets (bank deposits, financial

instruments, private pensions and insurance

products as well as Tier 2 pension plans) increased

by 418 million to 6.095 billion euros. The largestincrease of assets was seen in Tier 2 pensions 176

million euros. Besides, approximately 47 per cent

of pension amount increase was earned by the

pension managing companies. The next biggest

group were household deposits (EUR 108 million

up) and financial instruments (EUR 88 million up).

Long-term savings (private pensions and life

insurance savings) also were positive over the

year the portfolio grew by 46 million euros.

Percentagewise, the largest growth in 2010 was

registered in households financial instrumentsportfolio 23.5 per cent up. Tier 2 pension capital

has risen by 17.5 per cent. The total amount of

financial assets (including Tier 2 pensions) has

reached its highest value so far, whereas, excluding

Tier 2 pension capital, the total amount of the

households financial assets at the end of 2010 was

only slightly smaller than in Q3 of 2008 when therecord volume was registered.


Consumer price changes (per cent)

-20,0%

-10,0%

0,0%

10,0%

20,0%

30,0%

40,0%

Source: CSP

2011 II compared to 2008 II

2011 II compared 2009 II

Food

Alcohol,tobacco

Clothingandfootwear

Housing

Householdequipment

Healthcare

Transport

Communication

Recreation,culture

Education

Hotels,restaurants

Other

Share of the first necessitygoods and services in household expenses

0,0%

5,0%

10,0%

15,0%

20,0%

25,0%

30,0%

Source: CS P

Food Housing Transport

2005

2006

2007

2008

2009

2010

2011

Source: SEB estimates

10/18


11/18

Residents reduce their liabilities; reluctant to assume new ones

Over the year SEB Pension Fund had signed 2886

new private pension agreements whereas SEB Life

Insurance signed 9307 new insurance policies,

which was only slightly less than in 2009. Due to the

shrinking employers contributions to Tier 3

pensions of their employees the total amount of

contributions in 2010 were less than in 2009. Thenumber of active participants of pension plans

(those who made contributions themselves or their

employers did it) decreased whereas the number of

passive participants (those who had made no

contributions lately and had not reached the

retirement age yet) grew. Regarding the life

insurance savings, in 2010 the amount of signed

policies rose compared with 2009. A bigger number

of people last year chose the unit-linked life

insurance savings these policies accounted for

more than 20 per cent of the underwritten lifeinsurance premiums. Although peoples risk

appetite over the last years has increased, generally

households have low risk tolerance and tend to

choose safer investment projects.

The households financial liabilities since Q4 2008

have continued to shrink; over the year fell by 459

million to 8.156 billion euros. The volume of newly

granted loans to households is still smaller than the

total amounts repaid by private individuals on

their outstanding loans and also loan write-offs of

commercial banks. Consequently, the total amount

of loans issued to households in 2010 decreased by

5.3 per cent (approximately 5 per cent drop was

registered in 2009). Consumer loans are fallingfaster percentagewise than the volume of housing

loans in 2010 consumer loans dropped by 9 per

cent while housing loans were 4.5 per cent down.


Deposits less attractive due to low rates

Households deposits during this year have grown

by 2.7 per cent. At the end of 2010 the total amount

of deposits reached the highest level sinceNovember 2008 staying behind the pre-crisis level

by approximately 9 per cent. The increase is mostly

in the demand deposits rather than in term

deposits. Over the year the volume of demand

deposits has increased by 21.9 per cent, whereas

term deposits have shrunk by 10.1 per cent.

The correlation between the term deposit rates and

the deposited amounts is very close indeed. As the

rates of term deposits in lats plummeted and

foreign term deposit interest rates kept going

down, some people chose to keep their funds incurrent accounts or look for other investment

opportunities with higher yields than the term

deposits, or even spend this money on a major

purchase. The short-term deposit rates have

dropped to their historically lowest levels whereas

the long-term deposit rates in lats and foreign

currencies the lowest levels since 2005. It is

notable also that the term deposit rates in lats are

lower than the rates for euro deposits, whereas a

year ago they were considerably higher. Further

fall of deposit interest rates is unlikely and in thesecond half of 2011 they may even slightly go up.

Dynamics of household deposits(EUR million)

0,00

300,00

600,00

900,00

1200,00

1500,00

1800,00

Demand deposits

Term deposits

Savings accounts Source: LB

Jan.09

Apr.09

Jl.09

Jan.10

Apr.10

Jl.10

Okt.10

Jan.11

Dynamics of household loans (per cent)

Source:FCMC

changes over previous quarter

changes YoY

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

AQ2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

11/18


12/18

Although the interest in housing loans in the

second half of 2010 was revived, the amounts

granted are small compared with those issued

during the credit boom. The main reasons of

modest credit volumes are the residents falling

incomes, a big share of wages paid in envelopes

(the banks demand to disclose the borrowersofficial income) and the peoples reluctance to

assume new burden of debt.

Recession has changed the peoples priorities and

attitude to financial obligations therefore the

borrowers profile has changed too. According to

SEB banka data over the last five years average

housing loan amounts have decreased by more

than half (from approximately 70 thousand euros

in 2006 to 31 thousand euros in 2010). The maturity

of the loan has decreased too in 2010 housing

loans were granted for 14.4 years compared with

the average maturity of 17.7 years in 2006. The

borrowers often take loans for renovation of the

existing dwelling rather than for buying another

(bigger or newer) place of residence.

The first two months of 2011 show further decreasein the private individuals credit portfolio by 6.2

per cent compared with the same period in 2010. In

view of a number of factors that curb lending

(including the possible rise of interest rates), it is

most likely that the declining trend of the total

loans issued to households will continue in 2011,

yet toward the end of the year decline rate will

somewhat slow down.


Financial vulnerability decreases

As the liabilities shrink and the savings grows the

households net financial assets has risen by 876

million euros. However, the households net

financial assets are still negative with liabilities

prevailing over assets. This negative margin at the

beginning of 2011 amounted to approximately 2.06

billion euros, although since the end of 2008 it has

been steadily decreasing (over two years the

financial balance of households has improved by

approx. 1.58 billion euros). As opposed to theprevious years, when the households debt burden

grew due to the fact that outstanding loans

decreased slower than incomes, this year the debt

burden (debt-to-income) is likely to decrease. The

debt burden may decrease both thanks to the rising

incomes and due to further decrease in the total

loan portfolio of private individuals.

The important factor influencing the borrowers

financial stability is the interest rates. The rise of

euro interest rates may make a negative impact on

the financial strength of the borrowers as the rise of

euro interest rate by a mere percentage point

means several tens of millions of lats in additional

expenses per year. The rise of the credit interest

rates in addition to the rise of food, housing and

transport prices will reduce the households

opportunities to put aside some money for savingstherefore this year a fast rise in financial assets of

households and positive financial balance can

hardly be expected.

Financial assets and liabilities of households (EUR million)

Financial assets

Deposits

Securities and financial instruments

Savings under life insurance agreements

and private pension funds*


Liabilities

Mortgage loans

Consumer loans

Other loansNet value of financial assets

* SEB banka estimatesSources: Bank of Latvia, FCMC, LIA, SEB dzvbas apdroinana

IVQ 2008

5 421

4 109

394

259

660

9 064

7 188

1 121

755-3 643

IIQ 2009

5 576

4 026

392

277

881

8 860

7 045

1 080

735-3 284

IVQ 2009

5 677

3 999

375

301

1 002

8 615

6 866

1 012

736-2 938

IIQ 2010

5 895

4 099

404

310

1 083

8 457

6 757

942

758-2 561

IVQ 2010

6 095

4 108

463

347

1 178

8 156

6 554

920

682-2 062

12/18


13/18

Q32008 Q42008 Q12009 Q22009 Q32009 Q42009 Q12010 Q22010 Q32010 Q42010

6

7

8

9

10

11

Increasing consumer confidence is followed by

changing household financial behaviour

Net financial value is still increasing due to

further increasing assets and decreasing

liabilities

However, borrowing for housing loans is more

active and these loans quality is very good

Composition of household financial assets is

still very conservative although forms of long-

term saving products became more trendy due

to low interest rates and stronger confidence in

future income

Back-on-track is mainly illustrated by re-gained

consumer confidence Consumer surveys show thatafter a sharp drop in 2008, the confidence level is

gradually rising since the very beginning of 2010.

LITHUANIA back on track


2008 2009 2010 2011

-60

-50

-40

-30

-20

-10

0

Consumer confidence level

Source: Department of Statistics

The changes are rather slight, and the pessimists

would say that the changes are insignificant. In

general, the situation is still not satisfactory: the

unemployment rate still remains too high, the price

levels increase faster than income, lack of jobs and

low income push people to leave their country.

Although decreasing pessimism may be also

observed in households financial behaviour. Of

course, it is related only to such households who

have assets and keep thereof in financial

institutions.

More positive news came in the middle of the year

the unemployment rate stopped growing, the

average salary started to increase and consumption

also started to grow.

Number ofunemployed,thousands

Average salary,euros

324.2

463.9

311.3

477.8

Mid-year

2010End of

2010

Change,

%

-4

+3

Source: Department of Statistics

Following the dynamics of changes in net financial

assets of households, we may notice the

breakpoint in the last quarter of 2008, when a more

difficult period began. Value of financial assets

stopped collapsing and financial liabilities stopped

shrinking. Then the first priority was given to

safety. People tried to save as much as they can and

preferred to lower their debts to financial

institutions, as their prospects for future income,

due to galloping unemployment, were very

unclear.

Another break-even point, marking the end of the

forced savings is still ahead. The nearest change to

be observed assets will be related to increased

liabilities but nor to decreased assets.

Financial assets break-even point still ahead

Financial assets and liabilitiesof households (EUR billion)

Financial liabilitiesFinancial assets Source: SEB bankas

13/18


14/18

The largest growth of deposits in banks is

observed. During the second half of the year,

households accounts were replenished by 0.3 bn

EUR. Life insurance and pensions were the second

the most popular form of savings. Investment

funds showed positive performance results. Only

savings bonds, which were very popular 3 years

ago however became less popular due to lower

than expected results, showed negative results (i.e.,

inflows were lower by 0.12 bn EUR compared to

outflows).

Composition of financial assets still very conservative...


The most significant increase in deposits was

noticed in December. Such seasonality may be

noticed every year, although in the years 2008 and

2009 it was lower.

-150

-100

-50

0

50

100

150

200

250

300295

12

51 48

-118

Deposits Investmentfunds

Life insurance

and privatepensions

II pillarpension

funds

Bonds

Households new savings (EUR million, 2H2010)

The level of deposits growth in December of the

year 2010 is still lower than pre-crisis levels of the

years 2005, 2006 or 2007. However it signals about

the yearend bonuses back again, also money

transfers by those who work abroad and send

money home for Christmas.

0

50

100

150

200

250

300

350

400

450

202

382

401 401

176

288305

2004

2005

2006

2007

2008

2009

2010

Change of deposits in December compared toNovember (EUR million)


Nevertheless, term deposit portfolio is still

shrinking. The main reason is too low interest rates.

Interest rates on the most popular (up to 6 months)

term deposits make an average of 1 per cent, that is

lower than inflation forecast (according to SEBs

forecast 3.5 per cent next year). Only the volume

of deposits with the longer maturity (over 1 year) is

increasing. The above trend started in the

beginning of 2010 and got even faster at the

beginning of the year 2011. Although ECB rate hike

forecasts may stop said trend.

Long-term savings signal better perspective on the

financial situation and income in the future. As

investors who choose long-term investments (life

insurance, pension funds and mutual funds too)

must be prepared to freeze the money for longer

...although forms of long-term savings products became trendy

periods to get tax allowances and/or to wait for

more favourable time to sell the securities at a

profit.

Term deposits by maturity (EUR million)

up to 1 year

over 1 year

0

1000

2000

3000

4000

5000

6000

2008

2009

2010

2011


Sources: Bank of Lithuania, LBA, ISC, CSD

14/18


15/18

The best illustration of the preparedness to freeze a

portion of income or savings is behaviour of those

who invest through insurance companies. At the

end of the year, payments into the insurance funds

increased threefold compared with the average

monthly payments. The level of new payments was

the same as in 2007.

This form is subsidized by income tax deductions

on condition that investment maturity makes at

least 10 years. So willingness to earn at least 15 per

cent (equivalent of tax deduction) was much

stronger than fear and willingness to keep cash on a

hand.


Net inflows into investment funds (EUR million)

2007

2008

2009

2010

10,0

12,0

14,0

16,0

18,0

20,0

22,0

24,0

26,0

Source: Insurance Supervisory Commission

January

February

March

April

May

June

July

August

September

October

November

December

Credit portfolio started to decrease at the end of

2008 and such trend is still observed. However,

analysis of different types of loans shows that

decrease in the housing loan portfolio was the

slowest. During the last quarter of 2010, it slightly

increased (by 0.04 per cent).

Changes in borrowing behaviour

Anyway, all the above changes are the first signals

of increasing confidence in the future, however the

improvement is not clearly observed yet. Also we

may notice that a certain stagnation of household

consumption observed during the year 2009 has

ended.

Quarterly change s of loan portfolio

-8,0%

-6,0%

-4,0%

-2,0%

0,0%

2,0%

4,0%

6,0%

8,0%

10,0%


3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

Consumer credits

Housing loans

Other

It would be too pessimistic to forecast a new

bubble, as repayment of the newly granted loans

(2009-2010) are very disciplined. According to SEB

Banks data almost all borrowers (95-99 per cent)

timely pay loan instalments, i.e., no payments

overdue for at least one day. So actually, loans are

granted only to those who ensure timely

repayments.

93,8%94,9%

93,5% 93,4%

92,0%

87,8%87,1%

89,1%

94,6%

98,5%

80%

82%

84%

86%

88%

90%

92%

94%

96%

98%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: SEB bankas

Share of customers making payments on timeby the year the loan was issued

1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010

-25%

-20%

-15%

-10%

-5%

0%

5%

10%

15%

Yearly household consumption changes (%)

Source: Department of Statisti cs

15/18


16/18

People got back to normal life, although the new

normality demonstrates that lower incomes still

persist. However the new features of behaviour can

be identified: during 2009 and 2010, the volumes of

purchase via post or via the Internet were

gradually rising, people have learned to find goods

and to buy such goods from other locations, i.e.,from abroad. Footprints of the Lithuanians to

Poland aiming to buy food, clothes, domestic


appliances are still clearly visible. People have

learned how to find ways to cut their expenditures

and increase income by extending maturity of

deposits, profiting from tax allowance as they are

not so concerned about immediate availability of

cash . The above changes may also be deemed to be

positive changes although not of such scale that wewish to see.

Financial assets, liabilities and net asset value of households mEUR

Financial assets

Deposits

Bonds (Lithuanian corporate bonds

and Government bonds)

Equities (Lithuanian equities)

Units of investment funds offered

by the banks

Savings under life insurance agreements*


Liabilities

Mortgage loans

Consumer loans

Other loans

Net value of financial assets

2008

9136

7151

492

522

121

206

644

8740

6.055

1265

1420

396

2009

9994

7392

580

633

183

261

945

8362

6.027

1026

1309

1632

1H 2010

10096

7560

366

668

208

278

1016

8144

6007

929

1208

1952

2H 2010

10680

7856

241

879

264

323

1117

7917

5985

842

1090

2763* Source: SEB bankas

16/18


17/18

Estonian households have benefitted from the

latest favourable labour market developments.

The headline unemployment rate has fallen by

more than six percentage points from its peak in thefirst quarter of the last year with the second half of

2010 showing particularly strong recovery. The

number of the jobless has thus come down from 137

thousand to 93 thousand more than 30 per cent.

Year-on-year employment growth turned positive

in the last quarter of 2010. Compared with the peak

in the third quarter of 2008 there are still 67

thousand jobs lost (more than 10 per cent).

However, the total employment has rebounded by

approximately 7 per cent which has brought the

number of employed back to where it was in thethird quarter of 2009. By and large it seems that the

export-led recovery has reached the labour market

with somewhat greater vigour than we initially

expected. This means among other things that

employment gains are so far heavily skewed

towards manufacturing sector. This sector

contributed 2.5 percentage points to the growth

rate of total employment in the fourth quarter. To

the extent that total employment grew by 2.1 per

cent, it means that the other major activities are on

the aggregate still shedding labour.


Stronger demand for workers has generated a

multi-speed labour market where excess demand

in some segments exists side by side with the excess

supply in other parts. All in all money wages areonce again drifting slightly upwards. The year-on-

year growth rate of the average nominal wage

turned positive already in the second quarter of the

last year (after having fallen for five consecutive

quarters). In the fourth quarter it rose already by

3.9 per cent, the sharpest upturn since the end of

2008. But inflation is still ahead of wage growth, so

that real earnings keep falling. The average real

wage has contracted since the last quarter of 2008

but the pace descent has slowed from 4.6 per cent at

the end of 2009 to 1.3 per cent a year later.Manufacturing was again the primary engine

behind the nominal wage growth throughout 2010,

but in the last quarter it was also strongly

supported by construction sector.

If labour market gives some reasons to cheer the

steady drop in real income notwithstanding then

the support from credit and money market is much

weaker. Consumers continue to dump debt. The

total outstanding loan balance of household sector

has shrunk form EUR 7.7bn at the peak of creditcycle (December 2008) to EUR 7.2bn in this

February (a cumulative decline of 6.5 per cent).

The year-on-year growth rate plunged below zero

in the middle of 2009 and the rate of contraction has

now stabilised around 3.3 per cent. Consumer

credits have fallen particularly sharply, their stock

is now 25 per cent lower than at the peak and the

double-digit rate of decline shows no signs of

abating. The housing loans account for more than

four-fifths of the outstanding household loans, so

that their time path and growth rates are verysimilar to the overall portfolio. The stock of

deposits held by households which over 2009 and

2010 grew only very sluggishly (it virtually ground

to a halt at the end of 2009), turned decisively up in

the lasts months of 2010. In February households

had EUR 4.3bn in their bank accounts (up from

EUR 4.0bn just four months earlier). The observed

upswing was primarily due to demand deposits,

the volume of which rose to EUR 2.1bn a more

than 10% increase from October of 2010.

ESTONIA

-20%

-10%

0%

10%

20%

03.98 09.00 03.03 09.05 03.08 09.10

50 0

60 0

70 0

80 0

Employment a nd unemployment

Source: Estonia Statisti cs

inthousands

Unemployment rate,% (LHS)

Y-o-Y employment growth (LHS)

Total employment (RHS)

17/18


18/18

On the whole, the willingness to consume iscrawling back, albeit from a very low level. Thus,the year-on-year growth rate of retail sales has beenabove zero since the last autumn; with this Januarybeing the only exception. The growth rate peakedin November at 6 per cent and has since then fallen

to 2 per cent in February as consumers take time togrow used to new bank notes and coins (althoughretailers say that the switchover-generatedbacklash has been weaker than initially feared).

The recovery is most visible in the car sales whichwere up by almost 60 per cent in February,although here the base effect had a particularlylarge impact. Although the passenger car sales asmeasured by new registrations are have indeedrecoiled from their most depressed levels in 2009,they are still barely a third what they were in thebest months of 2007 and 2008. But the car dealers

claim that they have hit the bottlenecks, as the


unprecedented downturn has dealt a severe blowto the lean supply chains of car manufac-turers.

Consumer confidence which improved rapidlyfrom the spring of 2009 to the summer of 2010 hassince then fluctuated around a more or less stable

level. The same applies to the unemploymentexpectations most of the surveyed do not seem toexpect further rapid labour market improvements.As regards prices, inflationary expectations havealso stabilised, after having surged in the first halfof 2010. Hence we seem to have reached a stagewhere the further developments in householdsector as in the rest of the economy are heavilydependent on balance of payments flows.

Although the export recovery has beenexceptionally strong, current account surpluseshave not been large enough to cover persistently

large financial account shortfalls. If these trendscontinue, the associated drain of domestic liquiditymight nip the incipient revival of domestic demandin its bud.

Household loans and deposits

0

2

4

6

8

10

0 4.9 8 1 2.9 9 0 8.0 1 0 4.0 3 1 2.0 4 0 8.0 6 0 4.0 8 1 2.0 9

-20

0

20

40

60

80

Loans (LHS) Deposits (LHS)

Loans (RHS) Deposits (LHS)Source: Estonia Statistic s

EURbn

y-o-ygrowthrate,&

-60

-30

0

30

60

90

Consum er confidence

Unemployment expectations

Inflation expectations

Consumer survey results

Source: Estonia Statistic s

01.02

11.02

09.03

07.04

05.05

03.06

01.07

11.07

09.08

07.09.

05.10

03.11

netbalan

ceofrespondents,%

* Source: FSA

Financial assets, liabilities and net asset value of households mEUR

Financial assets

Domestic investment funds

Pension funds

Other

Private portfolios

Demand deposits

Time deposits

Liabilities (loans)

Net value of financial assets

IVQ 2008

4 192

70

792

121

83

1 399

1 725

7 629

-3 438

IIQ 2009

4 875

64

920

147

58

1 508

2 179

7 502

-2 626

IVQ 2009

5 048

70

1 022

319

64

1 489

2 083

7 412

-2 364

IIQ 2010

5 272

70

1 073

351

70

1 770

1 936

7 240

-1 968

IVQ 2010

5 739

77

1 163

256

58

2 077

2 109

7 244

-1 505

SEB 2011This edition is intended for general circulation only and does not constitute a personal recommendation. The information in this document was obtained from sourc es believed tobe reliable but its accuracy or completeness cannot be guaranteed Any opinions expressed herein are given in good faith but are subject to c hange without notice

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