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Baltic Household OutlookOctober 2012
So far - better than expected
THE BALTICS
Estonia posted the biggest increase in employment in the second quarter by3.6 per cent compared to the same period of 2011. In Latvia and Lithuaniaemployment grew by 2.2 per cent and 1.4 per cent respectively.
Growth of real wages has resumed in Estonia and Latvia, while in Lithuaniareal wages remains on downward trend.
Employment growth and rising wages supported the private consumption,moreover in Lithuania and Latvia the household consumption expendituresgrew faster than income.
In the first half of 2012 the growth rate of spending abroad outpaced rise indomestic spending.
Households in all three countries increased their net financial worth.
Due to low interest rates short term deposits were losing their attractiveness,besides holdings of cash were increasing.
The fall of loan volumes is slowing down in Estonia and Lithuania while inLatvia the deleveraging continues at the same speed.
Households benefit from historically low Euribor rates. Households experiencethe lowest mortgage interest rate in Estonia (in June 2012 for mortgage ineuro 2.9 per cent annually) followed by Lithuania (3.2 per cent) and Latvia (3.5per cent).
The household sectors investment rate is lower than the EU average. In orderto increase the useful floor area of dwellings, it should be increased.
Households liquidised extensively their real estate in 2002-2007 and half ofthe additional funds was consumed. Since 2008 households are injectingfunds to the real estate at the expense of their consumption.
Edmunds RudzitisSocioeconomics ExpertSEB LatviaTelephone: +371 [email protected]
Julita VaranauskieneHousehold Economist
SEB LithuaniaTelephone: +370 [email protected]
Triin MessimasHousehold ExpertSEB EstoniaTelephone: +372 [email protected]
Merike KukkResearch ScientistTallinn University of TechnologyTelephone: +372 [email protected]
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Baltic Household Outlook
Even with some slower growth in the first half of 2012,economic conditions in the Baltic countries remainpositive. In the first two quarters of this year Latvia wasthe fastest growing economy among the 27 EuropeanUnion countries, followed by Lithuania and Estonia.In contrast to 2010-2011, when economic recovery ofBaltic countries was mainly driven by strong export
Labour market situation continue to improve in line with
economic growth. Due to seasonal factors and slower
global growth unemployment increased slightly during the
first quarter of 2012. Unemployment started declining
again from April, by mid-2012 reaching the lowest level
since the last quarter of 2008 in Estonia. In Lithuania and
Latvia in the second quarter unemployment rate was at
the lowest level since the first quarter of 2009. Although
unemployment rate has decreased significantly since the
trough of the recession, share of long-term unemployed
persons (persons who had been looking for a job for one
year or more) remains high. In Latvia the share of long-
term unemployed among all unemployed persons was
54.1 per cent, in Estonia and Lithuania 52 and 48 per cent
respectively, reflecting also some structural problems in
labour market.
Estonia posted the biggest drop in unemployment during
the last 12 months in the second quarter unemployment
(job seekers) rate was 10.2 per cent, 3.1 percentage points
lower compared to the same period of 2011. In Lithuaniaunemployment rate declined by 2.3 percentage points to
13.3 per cent while in Latvia decrease in unemployment
level was the smallest among Baltic countries despite the
highest GDP growth rate only by one percentage point
from 17.1 per cent in the second quarter of 2011 to 16.1 per
cent in mid-2012.
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October 2012
Employment continues to grow
growth, in the first half of 2012 export growth rate slowedsubstantially and economy was supported by privateconsumption, the largest gross domestic product (GDP)component. Due to stronger than expected domesticdemand, the GDP growth rate of this year has beenrevised upwards in all three countries.
Unemployment rate* (%)
Latvia Lithuania Estonia
*Persons aged 15-74Source: National Statistics
Slight unemployment changes in Latvia can be explained by
a significant rise in the economic activity, e.g. decline in
number of discouraged workers (those persons who have
lost hope to find a job or do not know where and how to
find a job). In Latvia number of discouraged workers in the
second quarter was 25.4 thousand persons or 4.8 per cent
of the total number of inactive population. Number of
discouraged workers declined by 8.2 thousand compared to
the second quarter of 2011. In Estonia and Lithuania
number of discouraged persons is smaller than in Latvia,
forming approximately two per cent of the total number of
inactive population.
Growing economic activity and gradually declining
unemployment rate reflects positive development in the
labour market. According to Labour Force survey, in Estonia
employment grew by 3.6 per cent year-on-year in the
second quarter of 2012. Latvia and Lithuania posted 2.2 per
cent and 1.4 per cent growth of employment respectively.
Since its labor market bottomed in the first quarter of 2010,
Estonia has recovered 70 thousand of the 109 thousand lostjobs. In Lithuania number of employed persons during the
last nine quarters has increased by 76 thousand. Due to
adjustments in unemployment and employment figures
according to Population Census 2010, in Latvia it is much
harder to evaluate the number of recovered jobs. Compared
to the lowest point of 2010, employment has rebounded by
12.7 per cent in Estonia and 5.7 per cent in Lithuania.
Employment will rise further, albeit at a slower pace amid
moderate GDP growth.
Unemployment rate is expected to decrease in the near
future in all Baltic countries, due to both job creation and
emigration. According to forecasts, average unemploymentrate this year in Estonia will be 10.4 per cent while in
Lithuania and Latvia unemployment will make 13.5 and 15.6
per cent of the economically active population respectively.
Next year unemployment rate is expected to be 9.8 per cent
in Estonia, 12 per cent in Lithuania and 14.2 per cent in
Latvia.
0%
4%
8%
12%
16%
20%
24%
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
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Wages in Estonia had the highest increase among the
Baltic countries in the last quarter wages grew by 6.3 per
cent compared to corresponding period of 2010. In Latvia
gross wages increased by 4.5 per cent and in Lithuania by
2.5 per cent. Wage growth in Estonia during the last two
years was faster than in Latvia and Lithuania, thus
difference between wages in Estonia and other Balticcountries increased. In Estonia average gross wages (EUR
865) is by 28 per cent larger than in Latvia (EUR 676) and
by 37 per cent higher than in Lithuania (EUR 630). Average
gross wages in Latvia is by 7 per cent higher than in
Lithuania; however due to larger tax wedge on the labour
net monthly salaries in Latvia is the lowest among the
Baltic countries. In the first half of2012the average net
monthly wage in Lithuania reached EUR 483 while in
Latvia it was EUR 481.
Gradual growth of real income has resumed in Estonia and
Latvia, while in Lithuania real wages remains on downward
trend. The real wages in Estonia increased for the fourth
quarter in a row, albeit, at a slower pace than in the
previous quarters. In the second quarter real wages
increased 1.1 per cent year-on-year. In Latvia the average
real wage in the second quarter rose by 1.5 per cent year-on-year thus improving purchasing power of labor force.
Average gross wages and salaries (%, YoY)
Source: National StatisticsLatvia Lithuania Estonia
Real wages (%, YoY)
Source: National Statistics
Latvia Lithuania Estonia
There is uneven wage growth across the different sectors
of economy. Besides, labor cost dynamics are influenced
by irregular bonuses and premiums. In the second quarter
of this year the irregular bonuses and premiums per
employee in Estonia grew by 19.9 per cent compared to
the 2nd quarter of 2011, influencing the growth of the
average monthly gross wages. Increase of average gross
wages (excluding irregular bonuses and premiums)
reached 4.6 per cent.
Baltic Household Outlook October 2012
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%
30%
1Q08
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q1 0
2Q1 0
3Q1 0
4Q1 0
1Q1 1
2Q1 1
3Q1 1
4Q1 1
234
256261 264
235 235
216
236
305 305 306
291
150
200
250
300
350
4Q08 4Q09 4Q10 4Q11
Average old-age pensions (in euros)
Source: National StatisticsLatvia Lithuania Estonia
-12%
-8%
-4%
0%
4%
8%
12%
2Q08
3Q08
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
Since the first quarter of 2010 when wages in Estonia
started to grow, average gross wages have grown by 19
per cent. Taking into account consumer price movements,
real wages have increased by 6.7 per cent. In Estonia
households have experienced a quicker improvement in
the purchasing power than in Latvia and Lithuania. In real
terms (deflated by the consumer price index), average net
wages and salaries are approximately 7.5 per cent lower
compared to the second quarter of 2008. In Latvia since
the lowest point of recession average gross and real
wages have increased by 11 and 2.5 per cent respectively,
however purchasing power of workers is far below pre-
crises level. In the second quarter of 2012 average real net
wage was 10.3 per cent lower compared to the same
period of 2008. Among Baltic countries Lithuanianhouseholds have gone through the largest decline in their
income level -- real net wages fell by 14.3 per cent
between the second quarter of 2008 and the same
quarter of this year.
It is expected that labour income will rise gradually. In
Latvia approved Personal income tax cuts (from 25 to 24
per cent in 2013 etc.) are expected to support private
consumption next year. According to forecasts, in Latvia
increase of average gross wages next year will reach 4 to 5
per cent. In Lithuania wage growth is expected lower than
in Latvia and Estonia, reaching 2.5 per cent.
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To spend, or not to spend: that is the question
Since the second half of 2010 the rise in private
consumption has been observed in all three Baltic
countries. In the second quarter of this year the fastest
growth rate of the household spending for goods and
services was registered in Latvia 7.2 per cent up year-on-year. In Lithuania household consumption increased by 4.6
per cent, while Estonia demonstrated slight 1.9 per cent
gain in private consumption. Increase in household
spending fuelled by employment growth and gradually
rising wages. In Lithuania consumption was influenced also
by nominal growth of old-age pensions to the pre-crises
level.
The growth of nominal household expenditure (at current
prices) in Latvia was 10.7 per cent while in Lithuania and
Estonia nominal expenditure rose by 7.2 and 5.7 per cent
respectively. Moreover, in Latvia and Lithuania growth of
consumption expenditures was faster than disposableincome increase. It can be explained by quite large share of
shadow economy (envelope wages) and by improvements
in consumer confidence. Consumers are become less
concerned about the future, making more purchases.
Besides, in Latvia consumption expenditures show that
propensity to consume is starting to prevail over propensity
to save while in Estonia households are more cautious in
their consumption and saving behaviour.
At the same time, growth rates of household consumption
in all three countries remained low compared to those of
boom years as numbers of financially constrained
households with limited spending opportunities stay quite
high and households remain cautious as well. In the near
future, household spending will depend on the growth of
disposable income and inflation as well.
Baltic Household Outlook October 2012
Household consumption expenditure (%, YoY)
Latvia Lithuania Estonia
-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
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
Source: National Statistics
Shopping abroad grew substantially
Consumers shop more outside country statistics continueto show a rapid increase in the number and value of
payment card transactions abroad, incl. in the online stores.
In the first half of 2012 the biggest rise in the number of card
transactions at POS terminals abroad was registered with
payment cards issued in Lithuania 44 per cent year-on-
year. Payment card spending by Lithuanians outside the
country grew by 25 per cent to EUR 248.3 million. Over the
year the number of transactions made in stores abroad with
payment cards issued in Latvia and Estonia went up 19.8 per
cent and 11 per cent respectively. In the first half of 2012 the
total turnover of purchases made abroad with payment
cards issued in Latvia reached EUR 375.6 million (28 percent growth y-o-y) while Estonians spent abroad EUR 261.3
million (20 per cent growth y-o-y).
Changes in numbers of transactions at POS terminals(1H2012 compared to 1H2011)
The growing trend of shopping overseas is due both to the
increase in travelling and more popular online shopping.
The Internet and payment cards have opened up the
opportunity of shopping abroad also for those people who
are not travelling.
The usage of payment cards in local markets has also
increased. Lithuanians have been most active in boosting
the number and value of their purchases by cards in the
first half of 2012 the number of transactions at POS
terminals grew by 18.2 per cent to 56.7 million while
money spent at POS terminals increased by 18.3 per cent
to EUR 849 million. In Estonia the amount and number ofcard transactions at POS terminal rose slower by 14.6
per cent and 9.4 per cent respectively. In Latvia growth
rate was similar to Estonia the number of purchases by
0%
10%
20%
30%
40%
50%
Localmarket
Abroad Localmarket
Abroad
LV LT EE
Source: Central Banks
Abroad Localmarket
Changes in amount of transactions at POS terminals(1H2012 compared to 1H2011)
0%
10%
20%
30%
40%
Localmarket
Abroadmarket
Abroadmarket
Abroad
LV LT EE
Source: Central Banks
Local Local
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cards increased by 9.9 per cent while value of purchases
rose by 13.5 per cent.
The usage of payment cards indicates that consumers find
payment cards more appropriate both for day-to-day
transactions and large purchases. In local markets the
average value of transaction does not differ -- average
sum for a purchase made with a card was approximately15 euros in all three countries. However, Latvias card
holders more frequently use cards for large purchases
abroad, outpacing Lithuanians and Estonians. In Latvia
the average value of purchases abroad is 69 per cent
larger than in Lithuania and approximately two times
bigger than in Estonia.
Although growing trend of payment card usage can be
observed across the Baltic States, the card penetration
and payment preferences of customers differs. Among
Baltic States Estonia has the highest usage level of
payment cards. Payment cards are most frequently used
in Estonia with 59 transactions per card at POS terminals
(including terminals abroad), followed by Latvia with 24transactions per card and Lithuania with 16 transactions
per card.
Baltic Household Outlook October 2012
Average transaction at POS terminals in 1H2012(in euros)
0
20
40
60
80
100
LV LT EE
Local market Abroad
Source: Central Banks, SEB calculations
In all Baltic countries the total amount of money spent on
purchases (both abroad and in the local market) reached
record high levels. At the same time, in Latvia card
spending domestically are still below pre-crises level. Inthe first half of this year value of card transactions in
Latvia was 7.7% lower than in January-June of 2008.
The total value of card payments at domestic POSterminals (mEUR)
0
300
600
900
1200
1500
1H2008 1H2011 1H2012 1H2008 1H2011 1H2012 1H2008 1H2011 1H2012
LV LT EE
Source: Central Banks
Number of transactions per card in 1H2012
0
15
30
45
60
LV LT EE
ATM POS
Source: Central Banks, SEB calculations
Estonia has also the highest turnover per payment card. In
Estonia the amount of purchases made with payment card
on average is two times larger than in Latvia and more
than three times bigger than in Lithuania. Statistics
indicates that consumers in Estonia more frequently use
cards for their purchases while Lithuanians and Latvians
still prefer cash for their daily purchases instead ofpayment cards.
Average turnover per card in 1H2012 (in euros)
0
150
300
450
600
750
900
1050
LV LT EE
Source: Central Banks, SEB calculations
Stabile expectations of the population show that no considerablechange is likely in the financial behaviour in the three Baltic countries
According to the most recent statistical data of Eurostat
consumer opinion poll in September, expectations of the
Lithuanian population regarding the future, though
pessimistic, are rather stable. In September, Lithuanias
Consumer Confidence Index (CCI), eliminating the impact
of seasonality, was -22. In Estonia this indicator in
September was -10, and in Latvia -13. At the same time it
should be noted that the level of pessimism in Lithuania,
which is the most pessimism-ridden among all the three
countries, is weaker than in Spain, which is experiencing
not its best times, and where this indicator has dropped
to as low as -37, or in Portugal (-59), not to mention
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Greece (-76). Also, in Lithuania there is less pessimism
than in neighbouring Poland (-32), which a few years ago
was almost undisturbed by a recession and is probably
more concerned about a potential decline in future.
Among all the three Baltic states Estonia stands out in
that the ratio indicating the consumers opinion about the
probability of at least some savings is better (-26) than
that indicating the consumers intention to make any
higher-price purchases (-43). In Latvia and Lithuania the
situation is reverse the ratio indicating the consumers
intention to make any higher-price purchases in near term
(-15 and -10, respectively) is better compared to the ratio
indicating the consumers opinion about the probability of
at least some savings (-39 and -41, respectively). It may be
assumed that these indicators have been determined by
the level of current income rather than by higher
propensity to spend. Starting from the year 2001, the ratio
of probability of at least some savings has always been
negative in Lithuania and in Latvia, however, the portfolio
of the populations savings with financial institutions has
been mainly increasing. Hence, the population in Latvia
and Lithuania have intentions to make higher-price
purchases without giving up accumulating their savings.
Expectations about household's financial situationand general economic situation in the future(September, 2012)
Baltic Household Outlook October 2012
pessimists in Latvia is higher than that of optimists the
indicator is negative (-5). Usually, as regards personal
financial situation, the attitude of the population is more
optimistic than that regarding the countrys situation.
However, a large difference is already a signal of either
excessive optimism as regards personal situation, or
excessive pessimism (sometimes also externally formedattitude) regarding the situation of the whole state.
Consumer sentiment index
-30
-25
-20
-15
-10
-5
0August
September
October
November
December
January
February
March
April
May
June
July
August
September
2011 2012
Latvia Lithuania Estonia
Since the beginning of the year, the ranks of pessimists
thinned the most in Estonia (the indicator improved from -
15 to -10). In Lithuania it has remained nearly unchanged
(respectively -20 and -22). In Latvia, the index improved
from -18 to -13.
Estonian, Latvian and Lithuanian households have
regained their optimism in the first half of 2012 as in the
light of debt crises the fiscal position of the three
countries is better than in several other EU countries. Still,
the confidence slightly worsened at the end of summer in
Lithuania and Estonia. Not so good news from Eurozone
countries, fear of significant increase of energy prices to
households in Estonia, and of approaching expensive
heating season (in Lithuania) could be the reasons of that.
Latvians optimism still seems unabated. This may be
related to increasing purchasing power of the households
due to decreased or approved to decrease taxes (VAT and
personal income tax).
There are not only different trends, other differences can
also be found. One such difference that singles out Latvia
is the difference between expectations of the population
regarding financial future of their households and thecountrys economic situation in future. In Estonia the
indicator that reflects the expectations regarding their
personal financial standing is -5, and that regarding the
countrys economic situation is -6. The differences
between valuations in Lithuania and Latvia are very much
alike. In Lithuania the indicator that reflects the
expectations regarding their personal financial standing is
-12, and that regarding the countrys economic situation is
-19. Whereas in Latvia the indicator that reflects the
expectations of the population regarding family financial
standing is positive (3), which means that the number of
the population that expect improvement in their familyfinancial situation was higher than that of the population
with an opposite opinion. And as regards the development
of the countrys economic situation, the number of
Source: Eurostat
Source: Eurostat
-25
-20
-15
-10
-5
0
5Latvia Lithuania Estonia
Household financial situation General economic situation
Intentions to spend more and probability to save(September, 2012)
-50
-40
-30
-20
-10
0
Estonia Latvia Lithuania
Intentions to spend more on big ticket purchase Probability to save
Source: Eurostat
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borrowing. In case the development of events would take a
worse turn than expected, excessive optimism may
significantly deteriorate a familys financial standing and its
standard of living.
In the current situation, higher savings and lower level of
debt allows households to be more relaxed about their
future. Therefore, we tend to believe that the populationwould be better prepared for a second wave of recession, if
any, than they were four years ago. Nevertheless, as the
behaviour of households during a few recent years has
shown, consumer expenditure mainly depends on current
income. When the latter decrease, people are inclined
rather to limit their consumption expenses than borrow or
eat up their savings. Perhaps hardly anyone would dare
consider such behaviour to be irrational.
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Over the first half-year of the current year, financial assets
of households increased in all countries. In Estonia and
Lithuania it was mainly due to growth in the major part of
financial assets, i.e. in the amount of deposits. In Latvia
deposits growth was lower than growth in II pillar pension
funds. Over time, the impact of changes in financial
markets on asset classes related to securities markets was
different: in the first quarter, the asset value grew as a
result of favourable changes, in the second quarter it
mainly declined again favouring the holders of such assets
only in the very last month of second quarter. Volatilesecurities markets and their performance that is more
often negative than positive had an impact not only on
the fluctuation of the asset value, but also on the
investors behaviour attraction of higher-risk yet, in case
Financial assets of households increased in all countries
Baltic Household Outlook October 2012
of favourable environment, profitable financial
instruments was declining, and investments in these
assets classes were lower as against previous periods.
A rising trend in the amount of cash holdings is also worth
mentioning. The ratio of cash to deposits with financial
institutions in all the three countries is different, the
highest one being in Latvia and the lowest one in Estonia,
however, during recent months, a rising trend in this ratio
has been observed in all the three countries due to several
factors: a decrease in the number of financial service
points resulting in the emergence of households that findit more convenient to have cash; little stimulus to
transform cash into non-cash as interest on deposits has
dropped to record low levels without any perspective of a
rise; and, last but not least, shadow economy.
Expectations of the population regarding future to a fairly
large extent determine its financial behaviour. Mere
opinions, talk or considerations about future cannot make
any significant change in the financial situation (it does not
cause any increase or decrease in a family budget), however,
financial behaviour of the majority of the population may
strengthen or mitigate economy fluctuations. For instance,three years ago, at the very end of 2008, when it became
obvious for everyone that the economic decline is
unavoidable, consumer sentiment worsened dramatically,
the level of consumption dropped immediately, whereas
income was decreasing gradually. On the other hand,
rationally unsubstantiated optimism regarding ones own
financial standing, the economic situation of the country or
changes in the labour market should not be basis for a
decision to spend ones savings or for inadvertent
Over the initial six months of the current year, savings in
deposit accounts of households increased in all the three
Baltic countries. Similarly as over the previous period,
savings of Estonian households were characterised bythe most rapid growth (EUR 240 million or 5.5 per cent),
whereas in Lithuania they were almost half slower (EUR
254 million or 3.3 per cent). During January through June,
the amount of deposits of households with financial
institutions in Latvia increased by EUR 46 million or by 1
per cent.
Preconditions for savings growth in all the countries are
the same: higher income, somewhat lower-pace growth
in households consumption as a result of ended sale
period, moving of financial assets from instruments
related to excessively volatile or disappointing securities
markets investment funds, equity related bonds toregular accounts where the value of the assets
transferred or held is stable.
According to the amount of savings per capita the leader,
as before, is Estonia (EUR 3,410) followed by Lithuania
(EUR 2,652) and Latvia (EUR 2,026).
Deposits are losing their attractiveness
Deposits per capita (Eur)
1980
2586
3126
2026
2652
3410
0
1000
2000
3000
4000
Latvia Lithuania Estonia
June 2011 June 2012
Source: Central Banks, National Statistics
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In January through August, trends in the saving patterns
of households remained similar in all the three Baltic
countries: the share of deposits with agreed maturity
grew as against that of deposits without maturity. The
slight shock in December of last year is related to the
bankruptcy of some banks. At that time, savings that had
previously been in closed banks agreed maturitydeposits accounts were transferred from Lithuanias and
Latvias deposit insurance funds to deposit without
maturity accounts. Since then, in terms of the share of
funds held in deposit without maturity accounts Latvia
surpassed Estonia and is still leading in terms of this
indicator. At the same time Lithuania retained its rank as
the most persistent saver. However, as compared to, say,
the beginning of the year 2011, even Lithuanians are
more often inclined to leave their money in deposit
with agreed maturity. Furthermore, interest rates of such a
level are too low to eliminate the detrimental effect of
inflation on savings, therefore, the actual value of savings
is decreasing.
Possibilities to have higher interest by selecting longer
maturity deposits with agreed maturity do not give ground
for much optimism. Within eight months, in Estonia andLithuania there was a slight increase in the share of
deposits with more than one-year maturity. At the
beginning of the year, the share of such long-term deposits
in Estonia and Lithuania was 18.2 per cent and 17.3 per
cent, respectively. At the end of August these indicators
were, respectively, 19.8 per cent and 20 per cent. Whereas
in Latvia within the eight months there was a drop in the
share of long-term deposits: from 27 per cent down to 24.4
per cent.
In the nearest future, now that the central banks in Europe
and the US are cutting interest rates with the aim to
overcome the economic stagnation, depositors in theBaltic States should no longer expect the level of interest
rates that were offered, for instance, in the period
20082009. The majority of households will most likely
put up with this, and their behaviour will change but
slightly. Some depositors will look for institutions offering
higher interest on deposits. When the interest rates are as
low as they are, interest higher by even one percentage
point may mean double as high income for a depositor.
Some depositors will opt for longer-term saving
agreements. For instance in Lithuania, where the state
borrows from the countrys population by issuing one or
two-year maturity saving bonds, in case of which interest ishigher compared to that offered by the largest banks for
relevant maturity deposits, the value of saving bonds
placed during the second quarter of the current year was
about four times as high as that over the previous period.
Increasingly higher alertness and cautiousness of
households will not provide conditions for other, higher-
risk related forms of saving, namely, investments in
securities and other and financial instruments.
The reason of such behaviour is interest rates. Currently
they are record low in each of the three countries. InAugust 2012, the weighted average of the most popular
maturities (in the range of 6 to 12 months) of new
deposits in Estonia and Lithuania was, respectively 1.38
per cent and 1.83 per cent (in case of Lithuania, interest
rate on deposits in the national currency is provided, as
most of the deposits are of national currency). Interest
rate of such a level is not attractive to depositors and does
not encourage them to execute agreements on deposits
Latvia Lithuania Estonia
Baltic Household Outlook October 2012
Deposits without agreed maturity share
30%
35%
40%
45%
50%
55%
60%
2011 2012
Source: Central Banks
Securities markets were more often disappointing than encouragingThe close of the first quarter of the current year, though
profitable, was marked by little optimism. During the
second quarter more optimism, if at all, could be felt only
at the very end of June. Recent trends in equity markets
indicate that the situation is improving markets are
gradually recovering, prices are increasing. Anyway, one
should bear in mind that prices are still highly volatile, and
risk remains high.
Negatively developing situation in the global markets also
had an adverse effect on the value of the private
individuals financial assets funds accumulated frominvestments under unit-linked life insurance agreements,
in pension funds, investment funds. A decline in the value
of financial assets as a result of unfavourable changes in
the markets is a serious challenge to many investors.
Judging by changes in the financial assets of households
in the three Baltic states, a decrease in the value of assets
related to securities markets was a result of not only a
decline in the market price, but also of a fact that
households simply increased divestments rather than new
investments.
Market indicators that showed no improvement
disappointed investors investing based on unit-linked life
insurance agreements and decreased their appetite for
this type of insurance as a means of saving and investing.In Lithuania during the first half-year of the current year,
the value of insurance premiums paid under unit-linked
life insurance agreements was by one fifth lower as
7/31/2019 Baltic Household Outlook: So far - better than expected
9/299/29
Cash holdings are increasing
against a relevant period a year ago. This year, the
population is more positive towards traditional
endowment insurance. The share of this type of insurance
within the total life insurance portfolio has been
increasing both in terms of the number of new
agreements and the amount of new premiums written.
The statistical data related to premiums written in Latvia
When analysing financial assets of the Baltic states
households, usually we refer to the households savings
and funds held with financial institutions: deposits with
agreed maturity and deposits without agreed maturity,
funds accumulated in pension fund accounts, under life
insurance agreements, investment in securities and other
financial instruments. In the present issue of Baltic
Household Outlookwe have decided to analyse also thereserve of cash held by households.
Based on central banks data, it can be seen that the three
Baltic countries differ in terms of the ratio between cash
held by households and savings in accounts with
monetary financial institutions.
Baltic Household Outlook October 2012
show that during the first half-year of 2012 the share of
unit-linked life insurance was 22 per cent, whereas during
a relevant period a year ago it was higher and accounted
for 30 per cent. According to Estonian data, during the
first half year of 2011 the share of unit-linked life
insurance was 40 percent, while in the first half of current
year 36 percent.
Judging from the perspective of the households,
inclination to hold cash instead of depositing it to
accounts with financial institutions is determined by other
factors as well. One such factor is penetration of financial
services. Eurobarometerdata announced in the spring of
the current year show that the share of private individuals
with a bank account in Estonia, Lithuania and Latvia was
94, 83 and 84 per cent, respectively. Also, Estonians areleading in terms of both the number of ATMs and POS
terminals per 1000 of the population.
During recent years, there has been an increase in the
cash to deposits ratio in each of the three countries. In
Estonia, the lowest cash/deposits ratio (4 per cent) was
achieved at the beginning of 2011. This should be
attributed to the introduction of euro. For households to
exchange their savings in the national currency was more
convenient by bringing it to financial institutions,
therefore, euro adoption served as a factor decreasing the
volume of cash. Recently, however, the cash/deposits ratio
has increased and achieved the level before theintroduction of the euro. The available short Latvias data
history also shows an increase in the share of cash. In
Lithuania, too, cash is increasing as compared to cash in
deposit accounts.
Collapse of banks Snoras and Krajbanka that serviced a
large number of private individuals (households) in
Lithuania and Latvia could contribute to an increase in the
popularity of cash: the amount in cash in deposit accounts
shrank as a result of a loss of uninsured deposits and due
to some panic-stricken depositors who decided to hold
their savings in cash. True, the amount of households
deposits that has been recently increasing in these
countries allows to believe that trust in banks has
regained its previous positions (even though public
opinion surveys would evidence the opposite).
One more purely technical reason is that there were
(and still are) localities, where there is no bank at all after
closing down the units of the bankrupt banks. Besides,
optimisation of the activities of other banks, too, involved
a close-down of economically detrimental units. Electronic
money is not convenient for everyone and in every
situation. Therefore, when the number of customer service
points decreased, some households simply had no otherway out than to hold their money at home instead of an
account with a financial institution.
Cash and deposits ratio
0%
5%
10%
15%
20%
25%
30%
35%
2008 2009 2010 2011 2012
Latvia Lithuania Estonia
Source: Eurostat
The ones who tend to have the least savings in cash are
Estonians. In that country in 2012 cash to deposits withfinancial institutions ratio was 9.7 per cent. In Lithuania
and in Latvia this ratio was 22.4 per cent and 33 per cent,
respectively. To the extent we can judge by the data
available, this pattern of the countries ranking according
to their love for cash has been valid already for quite some
time.
Excessive amount of cash in the economy is used as an
indicator of the size of shadow economy. Research carried
out by scientists of Stockholm School of Economics in
Riga shows that in Latvia the share of shadow economy
(ratio to the GDP) is significantly higher than that in1
Estonia or Lithuania . Consequently, the strongest
inclination of Latvian households to hold funds in cash
echoes the calculated results.
1For futher reading http://www.sseriga.edu/en/research/centre-for-sustainable-business/shadow/.
However, this research does not use currency approach but another methodology.
7/31/2019 Baltic Household Outlook: So far - better than expected
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Households in all three countries continue to adjust their
stock of loans downward, following the trend in most EU
countries. In Estonia the current loan volumes are on thesame level as they were in December 2007 while in Latvia
on the same level as in March 2007 and in Lithuania as in
February 2009. Hence, the household credit market has
fallen back the most in Latvia and in Estonia while the
least in Lithuania. Comparison of deleveraging of different
EU countries indicates that the level of deleveraging
depends on the rates of credit expansion before the crisis.
Estonia and Latvia had one of the fastest expansions and
therefore the adjustment is more profound than in
Lithuania.
Household debt to GDP is the highest in Estonia, 44 per
cent at the end of 2011. In Latvia it is 37 per cent and inLithuania 25 per cent. The debt to GDP level in the Baltic
countries is comparable to other new EU Member states
(e.g. in Poland it is 35 per cent and in Hungary 30 per
cent), being however lower than in the Northern EU
countries: e.g. in Sweden it is 76 per cent and in Germany
56 per cent. In the EU the level of deleveraging is more
closely linked to the degree of credit expansion prior to
the crises than to the current amounts of household debt
to GDP and this applies also to the Baltic countries.
The reduction of housing loan stock is smaller in all
countries while the consumer credit has showed the
deepest slump. One of the reasons for differentdeleveraging speeds is the natural higher rigidity of
housing loans and their longer maturities. Significant
share of the consumer credit stock was issued in 2006-
2007 with maturity around 5 years and as there are more
contracts that are terminated currently, then the natural
deleveraging process is faster.
The speed of deleveraging has been the highest in
Lithuania where the consumer credit portfolio decreased
in June 2012 by 22 per cent compared to the June 2011.
However, most of the decrease has been induced by the
exclusion of Snoras Bank loan portfolio from the statistics
in November-December 2011 due to its bankruptcy. InLatvia the respective decreasing rate was 10 per cent year-
on-year and in Estonia 7.5 per cent year-on-year. The
changes in the growth rates are more informative than
absolute changes. In Estonia the decreasing rate is
slowing down: for comparison, in June 2011 the rate was
11.2 per cent year-on-year. During 2012 also Lithuania is
showing a slower speed of deleveraging while in Latvia the
speed remains the same. Surprisingly, although Estonia
experienced the most vigorous consumer credit volume
increases in 2005, the downturn after the recession is not
deeper than in other Baltic countries.
The demand for new loans is still modest as the current
economic situation does not promise any significant wage
increases in any of the Baltic countries and therefore
households have less arguments to consume the future
income now, i.e. to borrow. As long as the households do
not have good reasons to shift consumption from the
future to the current period, the consumer credit volumes
continue to decline.
Still, a fraction of households would like to borrowregardless of their future income prospects, but the
commercial banks pay more attention to the income risks
of households when evaluating the creditworthiness of
customers. Therefore some households use a very
expensive credit from unregulated credit providers instead
of regulated providers. There is no official data about the
loan volumes issued by unregulated credit providers in
Estonia and Latvia (also called SMS loans). In Lithuania
LVLKA (Association of consumer leasing and credit
companies) provides regular information for main fast
loan providers that cover over 80 per cent of the market.
According to their statistics the fast consumer loanvolumes at the end of the first quarter of 2012 reached
EUR 67.7 million, being 9.9 per cent of the consumer credit
volume of regulated providers. Quarterly new fast loans
are issued in the amount of EUR 20 million and the loan
stock is continuing to increase while the consumer credit
volumes of regulated providers are decreasing. The total
amount of consumer loans of regulated and unregulated
providers is decreasing in Lithuania, although some revival
of issuing consumer credit has been noted (more in the
country overview).
Continuing deleveraging indicates altered long-termbehaviour of households
Baltic Household Outlook October 2012
Changes in consumer credit portfolio, Y-o-Y
-40%
-20%
0%
20%
40%
60%
80%
100%
120%
140%
160%
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Source: Central Banks
Estonia Latvia Lithuania
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Regarding housing loans, Latvia has experienced the
highest growth rates in 2007 while currently it is
experiencing the biggest reduction in the growth rates.
The housing loan portfolio in Latvia decreased in June
2012 by 11.2 per cent year-on-year compared to 1.5 per
cent in Estonia and 1.6 per cent in Lithuania. The fall of
loan volumes in Latvia is partly explained by the extractionof loan portfolio of Parex Bank but still the data shows
significant deleveraging of households. The evolving of
housing loan volumes depends mainly on the current
needs and possibilities for improvement of
accommodation. The possibilities rely on the income
prospects and the costs of different tenure status that are
affected by real estate prices. The housing choices and
their impact on household financial behaviour is analysed
in the following section.
The structure of loan portfolio resemblesthe one of the Northern countries
In all three countries the housing loans provide the
biggest share of the households loan portfolio and the
share has been increasing: in June 2012 the share was
highest in Estonia, 84 per cent of total loan portfolio, while
in Latvia it was 81 per cent and in Lithuania 79 per cent.
The biggest shift in the share of housing loans has
occurred in Lithuania where the share has increased from
69 per cent at the end of 2008 to 79 per cent in June 2012.
The change in Lithuania is once again affected by thebankruptcy of Snoras bankas, but the changing loan
structure indicates that developments on the housing and
interest rate market affect households to large extent. The
structure of loan portfolio in the Baltic states resembles
most the one of the Northern EU countries where housing
loans make up of the total loan portfolio. In Southern
EU countries the share of housing loans is approximately
70 per cent while in the New Member States it is around
60 per cent.
Baltic Household Outlook October 2012
The process of restoring household balance sheets has
led to major shrinkage in leasing volumes. At the end of
2008 the share of leasing volumes out of all household
liabilities was around 5 per cent in all Baltic countries,
namely 6.5 per cent in Estonia and 5.2 per cent in Latvia.
In Lithuania the statistics is from second quarter 2009 and
shows the leasing share of 4.6 per cent. In the second
quarter of 2012 the share has plummeted to 1.5 per cent
in Lithuania and to 2.2 per cent in Latvia. In Estonia theshare has decreased to 4.6 per cent. Leasing volumes have
decreased more rapidly than consumer credit volumes.
Changes in housing loan portfolio, Y-o-Y
-20%
0%
20%
40%
60%
80%
100%
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Source: Central Banks
Estonia Latvia Lithuania
Structure of household loan portfolio
81% 84% 79% 81% 69% 79%
11% 9% 12% 12%14%
8% 8% 8% 8% 16% 12%
9%
0%
20%
40%
60%
80%
100%
120%
2008 IIQ 2012 2008 IIQ 2012 2008 IIQ 2012
Estonia Latvia Lithuania
Housing loans Consumer loans Other loansSource: Central Banks
Share of leasing in portfolio of household liabilities
6,5%
4,6%5,2%
2,2%
4,6%
1,5%
0,0%
1,0%
2,0%
3,0%
4,0%
5,0%
6,0%
7,0%
2008 IIQ
2012
2008 IIQ
2012
IIQ
2009
IIQ
2012
Estonia Latvia Lithuania
Source: Central Banks
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Households have benefited from the historically low level
of 6 month Euribor that determines the housing interest
rates. In all countries the majority of housing loans
contracts are based on flexible interest rates and
households experience Euribor movements directly via thechanges of their interest rates. In October 2008 the 6-
month Euribor rate was at its highest: 5.18 per cent
annually. It decreased sharply at the beginning of 2009 and
Households experience most favourable mortgage interest rates
Baltic Household Outlook October 2012
6-month Euribor interest rate (%)
0
1
2
3
4
5
6
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Jan-11
Apr-11
Jul-11
Oct-11
Jan-12
Apr-12
Jul-12
Source: European Banking Federation
reached extraordinary low levels at the beginning of 2010
when 6 month Euribor was below 1 per cent annually. The
rate encountered some increase until July 2011 when it
reached 1.8 per cent annually. A year later, in June 2012 the
6 month Euribor was 0.9 per cent and it has decreasedsubsequently reaching 0.48 per cent in September 2012.
Accordingly, in half a year the interest rate of housing loans
has decreased in all countries more than 0.5 percentage
points in June 2012. SEB Estonia has calculated that their
mortgage customers save on an average around 435 EUR
per year due to lowering interest rates (more in the section
about Estonia). Comparing the housing loans in euros in all
three countries, then in June 2012 the lowest average
interest rate was in Estonia: 2.9 per cent annually. In
Lithuania the average interest rate of euro housing loans
was 3.22 per cent and in Latvia 3.5 per cent annually. Thelow mortgage interest rates support the revival of housing
credit market, although the demand for loans will remain
more modest than during the economic upswing.
Households are more concerned about their future debt
burden as their income risk has increased.
High home-ownership in all Baltic countries
All Baltic countries are characterised by high private
ownership of housing stock. In Estonia and Latvia 97 per
cent and in Lithuania 89 per cent of the housing stock isowned by private sector, i.e. mostly by households. The high
ownership is the result of restitution process that ensured a
tenure structure with a high proportion of owner occupation
which is higher than in many West European countries. The
latest available data is from 2010 and it shows that 85.5 per
cent of the Estonian population and 84.1 per cent of Latvian
population live in owner-occupied accommodation while
the share in Lithuania is even higher at 93.1 per cent. In EU
on average the owner occupation is at 70.7 per cent.
Latvia has the highest share of population occupying flats at65.4 per cent while Lithuania has the lowest share at 57 per
cent. Still it is far from the EU average of 41.8 per cent. InBaltic countries the importance of flats is graduallydecreasing; most significant change has occurred in Latvia,where in five years the share of population occupying flatshas decreased by three percentage points. The averagetrend in EU is the opposite the share of population residingin flats has been increasing.
Share of population in owner-occupied accomodation
85,5 84,1
93,1
70,7
0
20
40
60
80
100
Estonia Latvia Lithuania EU 27
countries
2010 Source: Eurostat
In the Baltic countries there are more households that residein flats (vs. houses) than there are in the EU countries inaverage and this is induced by existing large flat stock.
Share of population occupying flats (vs. houses)
6668
58
41
65 65
57
42
0
10
20
30
40
50
60
70
80
Estonia Latvia Lithuania EU 27 countries
2005 2010 Source: Eurostat
The living conditions have been more modest in Eastern
European Countries compared to Western Europe. The
average useful floor area of dwellings per capita has been
7/31/2019 Baltic Household Outlook: So far - better than expected
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increasing and in 2011 reached in Estonia 30.1 m2 and in
Lithuania 25.5 m2. The most recent data for Latvia stems
from 2009 and gives 27.2 m2 as useful floor area per
capita. In Western European countries the useful floor
area is around 40 m2. Hence, when comparing the living
conditions, there is further space for improvement in all
Baltic countries.
Baltic Household Outlook October 2012
High ownership of housing indicates that the
developments on the real estate market have strong
impact on the housing wealth of households. Rapid
increase in real estate prices until 2007 increased the total
housing wealth of households; consequently the real
estate owners could feel themselves wealthier.
But the wealth added by real estate price increases is
ambiguous. Theoretically a dwelling is not just an asset
but represents compulsory expenses, as households need
accommodation and hence to consume housing services.As tenants households cover the costs of housing services
while the owner of a dwelling covers the costs of all the
future housing services at the time of purchase. In
perfectly functioning markets dwelling prices equal the
present value of total user cost of the housing service. It
means that increases or decreases in real estate prices
should not affect the lifetime wealth of households:
increasing real estate prices lead to proportionally higher
housing costs in the future that a household should
alternatively cover. Hence, increasing house prices could
create the perception of being wealthier but there is no
real win for households. Households benefit from housingprices only if they trade to smaller dwelling, i.e. lower
consumption of housing services which also means that
they accept lower welfare. In principle, households cannot
Useful floor area of dwellings per capita, in sq m
27
2322
30
27
25
30
27
0
5
10
15
20
25
30
35
Estonia Latvia Lithuania
1999 2009 2011
Source: National statistics
investment in dwellings. The investment rate in Latvia
and Lithuania has been significantly below the EU
average: in 2010 at 3.8 per cent and 3.5 per cent
respectively, while the EU average is at 8.3 per cent. In
Estonia the investment rate exceeded the EU average
during the expansion period, peaking 17.6 per cent in
2006 but fell slightly below the EU average levelconcurrently with the downturn of economy. In 2010 the
investment rate of households in Estonia was at 7.6 per
cent. The peak in Latvia occurred in 2007 when
households invested 8.2 per cent of their disposable
income and in Lithuania in 2008 at 6.2 per cent. In order
to increase the living conditions, the households should
increase the investment rate in all Baltic countries.
Gross investment rate of households
0
4
8
12
16
20
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Source: Eurostat
European Union (27 countries) Estonia
Latvia
%
Lithuania
Households have invested a remarkable share of their
income into dwellings. The gross investment rate of
households to disposable income contains mostly
Do house price increases make households wealthier?feel themselves wealthier from real estate price increases
or poorer from real estate price decreases.
Looking at the average apartment prices in Tallinn, Riga
and Vilnius estimated by Ober-Haus by using a common
methodology, the increases in the prices until 2007 were
one of the highest in the EU. Riga has experienced the
sharpest growth when the price in 2007 was threefold of
the price in 2004. However, in the mid of 2009 the flat
prices in Riga were back on the level of mid-2004 and so
was the housing wealth of the owners. The apartmentprices in Tallinn present a similar pattern while in
Lithuania the slump has been less profound.
Average flat prices in the capital regions
0
500
1 000
1 500
2 000
2 500
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Tallinn Riga
Source: Ober-Haus
Vilnius
EUR per sq m
13/29
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Furthermore, high volatility of house prices suggests that
there is a bulk of households who buy the dwelling at a
very high price that is more expensive that would be the
rental costs after the decline of the housing price. Hence,
Baltic Household Outlook October 2012
the high volatility of housing prices does not induce
additional gain to households but adds risks for predicting
housing costs and making optimal choices about housing
ownership.
Housing stock as a cash machineHigh private ownership of housing stock has enabled
households to use housing as a cash machine in good
times. After the restitution process a bulk of households
owned excess dwellings and land that they could use for
generating additional incomes. During the period of
increase in real estate prices in 2004-2007, the sale of real
estate property turned to be very favourable. A measure
that estimates the liquidisation of households housing
assets is called Housing Equity Withdrawal (HEW). HEW is
an aggregate measure of flow of funds for the whole
household sector, taking also into account the additional
funds of credit. As households invest into dwellings, their
funds are negative. But if the issued mortgage loans
exceed the amount that the household sector invests in
housing assets, HEW turns to be positive, i.e. some funds
are withdrawn from housing. On individual level this can
occur when a household purchases real estate from
another household and finances the purchase by
mortgage. On the other hand, the household who is
selling the real estate does not invest the amount into
housing assets but uses it for other purposes. Summing
the transaction, the household sector has been able to
liquidise the housing asset by the borrowed amount.
Another evidence of withdrawing equity from housing
occurs when household sells real estate to another sector
(f.in. land to the enterprise sector, a construction
company).
The flows of Housing Equity Withdrawal have been
calculated for Estonia by Madis Aben, Merike Kukk and2
Karsten Staehr . The calculations show that there has
been considerable liquidisation of housing assets in 2002-
2007 with peak in 2006 when HEW amounted to app 20%
of household sectors disposable income, i.e. households
had significantly more money at their disposal than theirearnings reveal. Furthermore, the estimations in the study
disclose that in 2002-2007 approximately half of the
liquidised funds were used for consumption, i.e. the rest
was saved or invested. There has been a remarkable
redistribution of real estate ownership, mainly thanks to
The situation has changed since 2009 when the Housing
Equity Withdrawal turned negative, i.e. households were
investing money into real estate. They have invested
approximately 5% of their annual disposable income into
real estate. According to the estimations of Aben et al.
there is almost one-to-one negative relationship between
HEW flows and consumption in 2009-2011, the money,
which the households were investing into real estate, was
mainly withdrawn from consumption. The results
underline that at the current moment households are
increasing the share of real estate assets in their balance
sheets that is also impeding the growth of householdconsumption. As Latvia and Lithuania have experienced a
similar restitution process and stimulation of real estate
market from the beginning of 2000-s, one can assume
similar relationship between Housing Equity Withdrawal,
consumption and saving dynamics as in Estonia.
Changes in consumer credit portfolio, Y-o-Y
-10
-5
0
5
10
15
20
25
2004 2005 2006 2007 2008 2009 2010 2011
HEW / Disp Income HH saving rate
Source: estimations of
Aben, Kukk and Staehr
2Aben, Madis, Kukk, Merike, and Karsten Staehr (2012). Housing Equity Withdrawal and Consumption Dynamics in Estonia 20012011.
Research in Economics and Business: Central and Eastern Europe, Vol. 4, No. 1, pp. 1940.
the restitution process where households obtained
excess real estate that has been liquidised in favourable
conditions.
14/29
7/31/2019 Baltic Household Outlook: So far - better than expected
15/29
Latvia
Since the lowest point of employment, the number of
employed persons has increased by almost 74 thousand
In the first half of 2012 household income grew by
6.6 per cent compared to the first six months of 2011
Workers' purchasing power continues to improve; theaverage real wage showed an increase of 1.5 per cent
year-on-year
15/29
The Latvian economy increased by 5.9 per cent during the
first half of this year. Economic growth is also reflected in
the labour market -- the number of unemployed persons
shrinks and new jobs are created. The Labour Force Survey
carried out by the Central Statistical Bureau (CSB) showed
a rise in the number of employed people by 19 thousandor 2.2 per cent compared to the second quarter of 2011.
However CSB data dont reflect the changes in the number
of temporary workers who have been engaged in state
work programs. Thus the employment growth rate year-
on-year, excluding the impact of the state temporary work
programs, was higher than 2.2 per cent.
Changes in the legally employed people can better be
described by the State Revenue Service (SRS) data on the
state social insurance mandatory contributions (SSIMC).
The number of SSIMC payers in the second quarter grew
by approximately 25 thousand people year-on-year. In July
the number of SSIMC payers reached 784 thousand,increasing by 3 per cent or 23 thousand persons
compared to the same period of 2011. Since March 2010
(the lowest point of employment) the number of labour
tax payers has increased by almost 74 thousand.
previously did not believe they could find a job are now
trying to re-enter the labour market, increasing the total
labour supply. The share of economically active population
increased to 66.5 per cent (a year ago it was 64.9 per cent),
while the number of discouraged workers declined to 25.4
thousand versus 33.7 thousand a year ago.The job seekers rate is also higher due to statistical data
adjustments according to the Population Census. Due to
the gap between the census data and that previously used
(the lower number of economically active population and
changes in the age structure of the population), the job
seekers rate turned out to be higher. In the first quarter of
2011 the job seekers rate was one percentage point higher
compared to that previously published. This means that in
the first quarter of 2010 (the peak of unemployment level),
the unemployment rate was above 21 per cent. The
registered unemployment figures showed even greater
adjustments the data review led to an increase of 1.3percentage points. Consequently, the registered
unemployment rate at the end of June was 11.9 per cent,
that is only 0.7 of a percentage point lower year-on-year.
During the first quarter of 2012 an increase in the
registered unemployment rate was seen, mainly due to
seasonal factors. In the second quarter the unemployment
rate resumed its downward trend. Since the beginning of
the year the number of unemployed people fell by more
than 19 thousand. The registered unemployment rate in
early October fell to 10.9 per cent of the economically
active population. In the first eight months of this year
unemployed status was granted to 72 thousand people, 12thousand or 14 per cent less than in the same period of
2011. The number of unemployed people who lost their
status during the first eight months was also less than in
the corresponding period of 2011 92 thousand versus 114
thousand. 45 per cent of all unemployed people who had
lost their status found a job.
The labour market improvements are also confirmed by an
increasing number of vacancies. According to State
Employment Agency (SEA) data, in August, the job
vacancies totalled 5192, the highest level since November
of 2008. The actual number of vacancies in the economy is
higher than SEA reported as employers are not willing toseek managers and high qualified professionals among the
unemployed persons.
Baltic Household Outlook October 2012
Growth means more jobs
784
711
500
600
700
800
900
1 000
1 100
Jan-04
Jul-04
Jan-05
Jul-05
Jan-06
Jul-06
Jan-07
Jul-07
Jan-08
Jul-08
Jan-09
Jul-09
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Jul-12
Source: SRS
The number of SSIMC payers (in thousands)
The average inflation rate remains low, albeit an increase
in housing costs puts a strain on household budgets
Due to a better mood, consumers spending growth
surpasses income growth
Household financial balance continues to improve, albeitthe total debt of households is larger than the volume of
savings
Despite the relative good employment growth, the
unemployment (job seekers) rate in the second quarter was
16.1 per cent, only one percentage point less than in the
second quarter of 2011. The steady unemployment rate in
an environment of strong economic growth can beexplained by the rise in economic activity and employment
participation rate. Some of discouraged workers who
7/31/2019 Baltic Household Outlook: So far - better than expected
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Improvement in purchasing power
Employment and wage growth contributed to the increase inhousehold income. In the first half of 2012, the regular income(wages, pensions and benefits) of households showed a 6.6per cent increase compared to the first half of 2011. Incomegrowth of the working population in the first half of 2012reached 8.5 per cent year-on-year. The total expenditure forbenefits and pensions declined slightly compared to thecorresponding period of 2011. Thus the purchasing power ofthese socio-economic groups has not improved.Workers' average real wages (taking into account the impact
of changes in consumer prices) in the second quarterincreased by 1.5 per cent. In the second half of this yearaverage real wages continue to grow both in the private andpublic sector. Besides, household real income was positivelyinfluenced by a VAT reduction as of July 1, from 22 to 21 percent. Inflation remains relatively low; therefore purchasingpower will continue to improve. It is expected that personalincome tax (PIT), cut by one percentage point from January of2013, will improve the purchasing power of employed people.
Baltic Household Outlook October 2012
unemployed persons were 44.9 per cent of all of the
registered unemployed people, 0.9 percentage point
higher than in August of the last year when 44 per cent of
unemployed persons had their unemployed status for
more than one year. At the same time, there is a lack of a
qualified workforce in some industries and economic
sectors.Labour markets indicators will continue to improve.
Besides, the growing opportunities of finding a job
stimulate more and more discouraged workers to re-enter
the labour market, increasing the number of economically
active people and employment participation rate as well. It
is expected that in the second half of the year the
unemployment (job seekers) rate will decline to 14.6 per
cent. Considering the higher unemployment rate in the
first half of this year, the average rate of job seekers in
2012 would be 15.6 per cent.
Unemployment and vacancies
0
3
6
9
12
15
18
Feb-06
Aug-06
Feb-07
Aug-07
Feb-08
Aug-08
Feb-09
Aug-09
Feb-10
Aug-10
Feb-11
Aug-11
Feb-12
Aug-12
Source: State Employment Agency
0
5 000
10 000
15 000
20 000
25 000
30 000
Unemployment rate (%; lhs) Number of vacancies (rhs)
Household consumption and income(labour costs, social benefits); million EUR
1000
1500
2000
2500
3000
3500
4000
2Q05
4Q05
2Q06
4Q06
2Q07
4Q07
2Q08
4Q08
2Q09
4Q09
2Q10
4Q10
2Q11
4Q11
2Q12
Source: CSB, SSIA, SEB estimates
Consumption Income
Despite the increase in vacancies, the share of long-term
employment is very high. At the end of august, long-term
Although the average inflation rate is lower compared to
the previous year, expenditure on first necessities show
significant changes. In 2011 the growing food prices
served as a major driving force of inflation, whereas this
year the largest price increase related to housing. Housing
expenses will be one of the major financial issues for
households this winter. Depending on the severity of
winter, utility bills could increase to a record level.
Heat prices in Riga in the last quarter of this year will be
20.4 per cent higher than in October-December of the last
year, while in the first quarter of 2013 the growth rate of
heating tariffs could reach 6-7 per cent year-on-year.
Consequently, in this heating season, housing
expenditures are expected to be higher than previously.
The housing expenses could rise at an even quicker pace
than heat prices. In the case of a severe winter, heat bills
could increase by 40-50 per cent in December compared
to the last month of the previous year.
Taking into account the structure of household
consumption expenditures, the price hike of housing costs
will be felt more by low-income households and retired
people.
The challenge housing bills
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Baltic Household Outlook October 2012
Higher purchasing power is one of the factors that have a
positive impact on retail sales. Households have increased
their consumption more rapidly last year than was
forecasted. Household final consumption expenditure at
constant prices in the first half of 2012 increased by 6.3per cent compared to the first six months of 2011. The
total spending at current prices demonstrated a 10.2 per
cent increase year-on-year. These data indicates that
consumer spending growth outpaced the income growth
rate.
Household spending was not only supported by the
growth of workers income, but also the remittances from
abroad and the shadow economy as envelope wages
shows up in the household consumption. Spending is also
supported by improvements to consumer confidence.
Since the end of 2009, a gradual improvement in the
consumer sentiment index has been observed. In
September, consumer confidence hit its highest level
since December of 2007. In addition, consumers'
assessment of their financial situation over the next 12
months in September remained positive for a fourth
consecutive month.
Consumers increase spending as income grows and the mood brightens
Financial situation over last 12 months
-60,0
-50,0
-40,0
-30,0
-20,0
-10,0
0,0aug.0
8
okt.08
dec.08
feb.0
9
apr.09
jn.0
9
aug.0
9
okt.09
dec.09
feb.1
0
apr.10
jn.1
0
aug.1
0
Source: Eurostat
Over the last 12 months household financial assets (bank
deposits, securities and other financial instruments,
private pension and insurance savings, 2nd pillar pension
savings) increased by 163.5 million euros (114.9 million
lats) up to 6.277 billion euros (4.411 billion lats) at end-
June.
Excluding the increase in pillar II pension assets of
approximately 123.8 million euros (87 million lats) from
the household financial balance, households' financial
assets over the last 12 months only increased by 39.7
million euros (27.9 million lats). Deposits increased by
27.9 million euros (19.6 million lats). Long-term savings
(life insurance and private pension savings) grew a bit
more than deposits by 34.7 million euros (24.4 million
lats). At the same time, the total value of securities and
investment funds declined compared to the first half of
2011.
More money in current accounts and under the mattress
0%
20%
40%
60%
80%
100%
IIQ 2009 IIQ 2010 IIQ 2011 IIQ 2012
Pillar II pension funds
Life insurance and private pension funds
Securities and financial instruments
Deposits
Breakdown of financial assets
Source: SEB estimates
Household deposits (EUR million)
0
300
600
900
1200
1500
1800
2100
2400
Jun-08
Sep-08
Dec-0
8
Mar-0
9
Jun-09
Sep-09
Dec-0
9
Mar-10
Jun-10
Sep-10
Dec-1
0
Mar-11
Jun-11
Sep-11
Dec-1
1
Demand deposits Term deposits Savings accounts
Source: Bank of Latvia
The financial behaviour of households is influenced by
record-low interest rates. Due to the low deposit rates
people are not willing to put money into a deposit. Over
the last year the total amount of money of households
located in commercial banks increased slightly, moreover
demand deposits became more popular than termdeposits. At the end of August, the total amount of
demand deposits was 2.18 billion euros (1.53 billion lats),
while term deposits was only 1.76 billion euros (1.24 billion
lats). The difference between demand and term deposits
reached 407 million euros (286 million lats). The situation
was the opposite year ago. At the end of August 2011 the
amount of term deposits exceeded demand deposits by
90.2 million euros (63.4 million lats). During the last 12
months, term deposits decreased by 11 per cent or 215.4
million euros (151.4 million lats), while demand deposits
increased by 15 per cent or 281.7 million euros (198 million
lats). The share of current accounts in the total volume of
7/31/2019 Baltic Household Outlook: So far - better than expected
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Debt burden continues to decline
18/29
The downward trend of the total portfolio of loans andleasing issued to households continues. Over the last 12months, the amount of loans and leasing decreased by 1032million euros (725 million lats) to 7.023 billion euros (4.936billion lats) at end of June. Since the last quarter of 2008 thehousehold debt portfolio has decreased by 27%. The rapid
The financial balance of households continues to improve. Aslight increase in financial assets along with the decline infinancial liabilities has reduced the negative differencebetween the financial assets and the financial liabilities ofhouseholds. At the end of June 2012 the negative differencebetween financial assets and liabilities amounted to 746million euros (525 million lats), approximately 869.4 millioneuros (611 million lats) less than at the end of 2011. The mostsignificant impact on households' financial balance relatedto the household debt reduction of approximately 711.4million euros (500 million lats).
Baltic Household Outlook October 2012
64 million lats) in cash at the end of the first quarter. The
amount of cash is increasing, occupying a larger share in
the financial assets portfolio of households. In the last
quarter of 2010 the total amount of cash was 1.028 billion
euros (722 million lats), while in the second quarter of
2011 cash holdings of households was 1.106 billion euros
(777 million lats).Over the last 12 months the amount of cash increased by
approximately 284.6 million euros (200 million lats).
Taking into account household cash holdings, the
household total financial assets are approximately 7.68
billion euros (5.4 billion lats). The proportion of cash in the
Financial assets and liabilities of households(EUR billion)
3 000
3 800
4 600
5 400
6 200
7 000
2010IVQ
2010IQ
2011IIQ
2011IIIQ
2011IVQ2011
IQ2012
IIQ2012
Financial assets
Financial liabilities
IVQ 08 VQ 09 IQ 10 IIQ 10 IIIQ
Source: SEB estimates
total portfolio of financial assets is approximately 18 per
cent, significantly more than in other European countries.
Reasons for the popularity of cash we can find in the past
and today as well. A willingness to keep money at home is
influenced by Parexbank problems and the Krajbanka
collapse. According to different studies (Mudd and Valev,
2009; Osili and Paulson, 2008) turmoil in the bankingsector has a lasting impact on the financial decisions of
households. Another contribution to the popularity of
cash is the very low deposit rates as well as the relatively
large proportion of shadow economy.
decline was also influenced by cancelation of the licenses oftwo commercial banks (Parex Bank (now Reverta) in Marchand Krajbanka in May). The figures of these two banks wereexcluded from the total banking sector data, for that reasonthe outstanding volume of domestic credit in the Latvianbanking system has reduced. At the same time, these twoinstitutions had household loans of several hundreds ofmillions of lats, therefore the total aggregate credit portfolioof commercial banks and leasing companies does notreflect the total household debt levels.Newly issued loans can not compensate the amortisationprocess of the credit portfolio and the loan write-offs. Theamounts of newly granted loans to households aresignificantly lower than five years ago. In the first half of2012 the commercial banks granted 125.2 million euros (88
million lats) to households as newly issued loans. This yearhousehold lending activity grew by 35.4 per cent comparedto the same period of 2011, when 92.5 million euros (65million lats) was issued as household loans. Both thehousing and consumer credit growth rate was similar.Housing purchase and repair loans increased by 37.2 percent year-on-year, while consumer loans grew by 33.1 percent.The total amount of loans to households continues toshrink. The decreasing trend of housing and other loans willcontinue in the near future, however, the rate of decrease isgetting smaller. Household debts are also located as off-
balance items which do not appear on the balance sheets ofcommercial banks. Dark horse is a payday loan marketwhich has been gaining in recent years in contrast to adecline in the commercial banks' loan portfolios. Thus, thehousehold debt deleveraging process is slower and thehousehold's financial balance is worse than the statistics ofthe banking system shows.
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Baltic Household Outlook October 2012
Financial assets and liabilities of households (EUR million)
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
* SEB banka estimates
Sources: Bank of Latvia, FCMC, LIA, SEB dzvbas apdroinana
IVQ 2008
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
IIQ 2011
6 148
4 108
461
361
1 219
8 055
6 247
891
692
225
-1 907
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
19/29
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Over the past several months, an unfading discussion is
taking place in Lithuania, i.e., whether Lithuania is already
hit by the second wave of crisis, or it may be expected in
the near future, or the crisis did not start or it may not start
at all. The dispute whether we are in the crisis or not now
shows that the countrys economic situation is not so
dramatic so far.
Lithuania
Differences of opinion on the discussion subject might
occur. Probability exists that the optimists in the business
community believe that the current situation is new
normal, while pessimists speaking about the crisis see
potential threats to their future. Positive mood among
businessmen and employers is not always supported by the
recruited persons and employees who never see real
increase in income, or by those who are unable to find work.
So far so good
Labour market within two quarters of the current year was
going in different directions. In the first quarter of the
current year, the average salary as compared with the end
of the year 2011 was shrinking. Such phenomenon, when
salary in the first quarter of the year is lower than at the
year end, is continuously observed. Mostly it is related to
bonuses and various wage premiums. In the second
quarter the average net salary increased again and
amounted to EUR 484.5 (LTL 1,673). However, as
compared with the end of the year, it was still lower by
EUR 4.5 (LTL 15.6), or by 0.9 per cent. In terms of realsalary, in the first half-year, the purchasing power of the
average salary (or real salary) decreased by 3 per cent.
Baltic Household Outlook October 2012
Wage: rise does not meet expectations
Average net salary and real salary dynamics (Eur)
300
350
400
450
500
550
2008 2009 2010 2011 2012
Net Salary Net real salary
Source: National Statistics
Starting from 1 August, the Government has decided to
increase minimum monthly wage from EUR 231.7 (LTL
800) up to E