More signs of optimismBaltic Household
Outlook
Edmunds Rudzitis
SEB LatviaGeneral Trends
3
Economic growth continues
3
Estonia has a single digit unemployment
rate for the first time since late 2008
In 2013, wage growth in the Baltic countries
will be more broad-based
3
6
9
12
15
18
21
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Latvia Lithuania Estonia
Unemployment (job-seekers) rate* (%)
* Persons aged 15-74 Source: National Statistics
Average gross wages and salaries (%, YoY)
-15%
-10%
-5%
0%
5%
10%
15%
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Source: National Statistics
Latvia Lithuania Estonia
2013-04-11 4
Moderate improvement in purchasing power
4
In 2012, the real earnings of employed
persons increased in Estonia and Latvia. In
Lithuania wage growth was slower than
inflation
Despite the latest improvements the real
wages still are below the pre-crisis level in
all Baltic countries. Compared to the last
quarter of 2008, real earnings have
decreased by approximately 13 per cent in
Lithuania. In Latvia and Estonia, real wages
are lower by approximately 10 and 4 per
cent, respectively
Real wage growth rate is expected to
accelerate in 2013
Real wages (%, YoY)
-12%
-8%
-4%
0%
4%
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Source: National Statistics
Latvia Lithuania Estonia
2013-04-11 5
Are labour taxes in the Baltic countries low or high?
5
In Latvia, the tax wedge on labour is above the EU average - approximately 4 percentage
points higher compared to Lithuania and Estonia
Tax wedge on labour (%, 2011)
36 37 38 39 40 41 42 43 44 45
Latvia
Estonia
Lithuania
EU-27
Source: Eurostat
Tax wedge for single 67% of AW earner
Tax wedge for single average wage earner
2013-04-11 6
Tax burden issues
6
Latvia has the largest difference between gross and net salaries
Gross and net salaries (EUR)
805
746 763
560596 584
200
400
600
800
1000
Latvia Estonia Lithuania
Source: SEB calculations
Gross salary Net salary
total labour costs - 1000 EUR
2013-04-11 7
The tax wedge is decreasing again
7
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
In 2013, the tax wedge is lower both in Latvia (PIT cut) and Estonia (cut in unemployment
insurance tax)
Tax wedge of single 67% of average wage earner (%)
34
36
38
40
42
44
2008 2009 2010 2011 2012
Source: Eurostat, SEB estimates
Latvia Estonia Lithuania
Julita Varanauskiene
SEB Lithuania
Financial assets:
longer-term view
• Households are accumulating savings and deleveraging at the same time
• The growth of assets is conditioned by still insufficient reserves for extraordinary events and
by not making any decision yet on use of the funds
• Asset volume in Latvia might be positively influenced by a decision on entering the Eurozone
All the countries still in the asset accumulation mode
Financial assets (2008=100)
90
100
110
120
130
140
150
2008 2009 2010 2011 2012
Latvia Lithuania Estonia
Financial liabilities (2008=100)
60
70
80
90
100
110
2008 2009 2010 2011 2012
Latvia Lithuania Estonia
9
Bigger and smaller winners in asset accumulation race
10
Measures selected for asset accumulation or keeping depend: 1) on the level of income
2) on economic phase
3) on the legal and tax environment
4) on the confidence in the financial
institutions
5) on trends in the securities markets.
• Value of the financial assets in Estonia per capita is the largest
• In Latvia, the ratio of assets in Pillar II and Pillar III pension funds to deposits is the highest
• Lithuanians have the largest Pillar III savings
Source: Central banks, SEB estimations
Financial assets per capita (EUR)
0
1000
2000
3000
4000
5000
6000
2008 2012 2008 2012 2008 2012
Estonia Latvia Lithuania
Deposits II pillar pension III pillar pension
Lithuania is currently most sensitive to pension problem
Main purposes for savings
39%
37%
38%
59%
39%
37%
42%
22%
20%
Lithuania
Latvia
Estonia
Rainy day Sense of security Retirement age
Average (net) salary and pension (EUR)
729
490 501
316271
236
Estonia Latvia Lithuania
Average (net) salary Average old age pension
2013-04-11 11
• Pension savings in Lithuania seem to be more important for the residents as compared
with Latvia and Estonia
• Average retirement pension in Lithuania is the lowest
Source: Mindshare, National statistics
Prospects are alarming in all three countries
Old age dependency ratio
26%28% 27%
40%43% 42%
Estonia Latvia Lithuania
2012 2040
Old age dependency ratio projections (2040)
0 10 20 30 40 50 60
GermanyItaly
GreeceNetherlands
AustriaPortugal
SpainSloveniaBulgaria
Sw itzerlandEU (27 countries)
FranceFinlandLatvia
DenmarkLithuaniaBelgium
RomaniaEstonia
Sw edenMalta
Czech RepublicPoland
HungaryUnited Kingdom
Norw aySlovakia
LuxembourgIcelandCyprusIreland
2013-04-11 12
Factors increasing dependency ratios:
• Late marriages
• Low birth rates
• Emigration
• Tax evasion
Source: Eurostat
Preparation for retirement : most favourable institutional conditions in Latvia, economic - in Estonia
Contributions to II pillar pension funds (%)
0
1
2
3
4
5
6
7
8
9
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
Estonia Alternative (EST) Latvia
Lithuania Alternative (LTU)
13
• In the long-term, PF II instalment (rate)
in all countries will be similar
• In Latvia, the total instalment is
transferred by the government
• In Estonia, instalment is the largest due
to the highest income
• The stability criterion is rather important
for the successful functioning of Pillar II
pension funds
• According to LIPFA survey, the largest
part of current II pillar participants will
choose the (dotted ) alternative
Source: National pension systems
Households see several alternatives to increase retirement income
Latvia
48%
32%
32%
23%
Working as long aspossible
Family children
Savings in the III pillarpension funds
Investments in real estate
Lithuania
45%
33%
27%
27%
Working as long aspossible
Investments in real estate
Savings in the III pillarpension funds
By working abroad
Estonia
43%
40%
32%
22%
Working as long aspossible
Investments in real estate
Family children
Guaranteed saving(deposits)
14
What are the most appropriate solutions to increase retirement pension?
Source TNS (SEB)
Triin Messimas
SEB Estonia
Household
Liabilities
2013-04-11 16
In household borrowing signs of recovery starting to emerge
The speed of deleveraging
has slowed down in Estonia
and Lithuania where the
housing loan volumes
decreased by -0.6 per cent
and -1 per cent, respectively,
in 2012. In Latvia, housing
loan volumes continued to
decline at such high level as -
11 per cent in 2012
2013-04-11 16
• The issuing of new housing loans has activated in Estonia, the first positive signs are also
seen in Lithuania
• Latvia has not reached the bottom of housing loan volumes yet
2013-04-11 17
Households are cautious about consumer loans
The stock of consumer and
other credits is continuing
to decrease at the rate of:
• -5% in Lithuania
• -10% in Estonia
• -18% in Latvia
2013-04-11 17
The effect of
Bank Snoras
disappeared
• The awareness of the costs of borrowing has increased
• Households are more reluctant to finance their consumption by borrowing
2013-04-11 18
Households benefited from low interest rates in 2012
In 2012, average interest
rate of housing loans
made the biggest
downward jump. Within a
year it decreased:
� In Estonia by 0.9%
� In Latvia by 0.7%
� In Lithuania by 1.2%
Lithuania had the lowest
average interest rate on
housing loans in January
2013
2013-04-11 18
2013-04-11 19
Foreign currency borrowing in the Baltic States
2013-04-11 19
• Foreign currency borrowing has been most popular in the Baltic states among Central and
Eastern European countries
� Households face high exchange rate risk in the countries with floating exchange rate
� Estonia has eliminated the exchange rate risk by adopting euro
2013-04-11 20
� Since 2000, household indebtedness has substantially increased in all Baltic countries but
also in other European countries
� Indebted households have higher level of compulsory expenses (i.e. debt servicing),
which they have to cover compared to households without liabilities
� Indebted households need either higher buffer stocks or insure themselves against
negative income shocks
2013-04-11 20
Households’ sector
debt-to-income ratio in 2011:
� In Euro area 99.4%
� In Estonia 88.1%
� In Latvia 66.1%
� In Lithuania 41.2%
Indebted households are more vulnerable to income shocks
Thank you