Estonian Ministry of Finance 2010. Summer Forecast

August 25th 2010

Macroeconomic Forecast

Economic growth by 2% in 2010 and 3,6% in 2011 is relatively good outcome

Inflation 2,6% in 2010 and 2,5% in 2011

Economic growth stronger than expected supported by increased competitiveness and external demand

Current inflation mainly imported, fruther developments in accordance with economic growth and productivity

Employment increase stable, but more restrained than desired

Economic growth in 2010Q2

-3

-2

-1

0

1

2

3

4

5

Estonia Sweden Germany France Lithuania Latvia

2010Q2 Euro area average

1. Macroeconomic Forecast

Andrus SäälikHead of Macroeconomic Policy Department

Fundamentals of Forecast

Recovery from the crisis in 2010. faster than expected (export, industry)

Domestic demand starts to pick up in 2nd half of 2010 supported by investments

Consumption courage is increasing

In 2010. inflation higher than expected (commodities, bad weather conditions), further developments in accordance with economic growth

Uncertainty in respect to 2011. outlook has increased

-16

-12

-8

-4

0

4

8

12

2003 2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*

%

Economic growth (Summer 2010) Economic growth (Spring 2010)

Recovery from crisis is faster

1.1. External environment and trade

-50

-40

-30

-20

-10

0

10

20

30

40

2008 2009 2010

%, y-o-y

-50

-40

-30

-20

-10

0

10

20

30

40

EU total EE FISE LV DE

Exports has recovered rapidly in the EU, the growth rate reached almost 40% in the Baltics.

Source: Eurostat

-40

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010

%

Mineral products Chemical products Plastics and rubber articlesWood and furniture Base metals Machinery and equipmentTransport equipment Other Total export growth

Growth of exports has been strong in last months, being affected by the internal readjustments of companies and the pick up of the foreign demand

1.2. Domestic demand

Consumers confident in state success

Convergence in households’ saving rate

Consumption recovering?

Upwards trend of VAT

-30

-20

-10

0

10

20

30

40

2006 2007 2008 2009 2010

%

Retail trade growthGrowth of VAT receipts from intra-community turnoverPrivate consumption real growth

1.3. Labour market and prices

5000 new wage-earners during one quarter

-15

-10

-5

0

5

10

2004 2005 2006 2007 2008 2009 2010

% y-o-y

Number of payments (Tax Board) Employment (ESA)

Registered unemployment on downward trend since April

0

2 000

4 000

6 000

8 000

10 000

12 000

2005 2006 2007 2008 2009 2010

%

02468101214161820

New registered unemployedRate of registered unemployment in labour force (right scale)Unemployment rate (right scale, ESA)Becoming employed

400

450

500

550

600

650

700

1996 1998 2000 2002 2004 2006 2008 2010* 2012* 2014*

thousand of people

0

3

6

9

12

15

18%

Employment Unemployment rate

Unemployment rate (Spring Forecast) Registered unemployed

Unemployment is falling, but the pace is more restrained than desired

Mostly foreign factors and severe weather conditions, also increases in indirect taxes are

behind the higher inflation

-1

0

1

2

3

4

5

6

-2

0

2

4

6

8

10

12

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

%

Monthly CPI (right sc) CPI Core inflation Euro zone (MUICP)

Inflation will fluctuate between 2.5–3% in near future, in line with the productivity and economic

growth

1.4. Risks

Outside Europe qoq growth loosing pace, pessimism is back

-5

-4

-3

-2

-1

0

1

2

2006 2007 2008 2009 2010

% qoq, SA

-10

-8

-6

-4

-2

0

2

4

EU27 US JP EE (right scale)

Risk scenario: exports will grow just one year?

Risk scenario: exports will grow just one year?

Risks Labour market

Improvement mostly due to seasonal factors

Economic growth based on increasing productivity – need for new workers?

Inflation boosting in short term, 4% at the end of year Several one-off factors and surprises

Expectations

Price convergence is continuing

Export Recovery effect up to 2011

Growth expectations in light of Q2 growth

Public Finance

Sven KirsipuuAdviser Public Finance and Strategies Department

Public Finance keywords in 2010–2014

The growth of economic activity increases the tax revenues

Requested 2011 budget expenditure exceeded the limit-amounts by 4.8 bln EEK

Selling of emmission quotas and associated investments influence the budget position

Budget balance by the end of the forecast period

Tax revenues exceed the budget by 2.0 bln EEK

 2010 budge

t

Spring Foreca

st

Summer

Forecast

Summer vs

Spring

Taxes in total61

767.563

096.463

757.4661.0

incl. PIT3

220.03 210.0 3 150.0 -60.0

CIT2

425.03 400.0 3 190.0 -210.0

Social tax26

970.026

600.026

600.00.0

VAT19

030.019

000.019

400.0400.0

Excise on alcohol2

330.02 540.0 2 600.0 60.0

Excise on tobacco1

830.01 800.0 1 970.0 170.0

Excise on fuel4

870.05 420.0 5 660.0 240.0

Gambling tax 215.0 320.0 307.0 -13.0

Non-tax revenues 22

760.623

552.323

798.7246.4

One-offs increase the deficit in coming years

1.6% 1.6%2.3% 2.6%

-2.8%

-1.7%-1.3%

-1.6% -2.3%

-0.4%0.0%

-10

-8

-6

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*

bln EEK

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%% of GDP

Central government Social Security Funds

Local government General government budget position

No structural problem in the budget

1.6% 1.6%2.3% 2.6%

-2.8%

-1.7%-1.3%

-1.6% -2.3%

-0.4%0.0%

-10

-8

-6

-4

-2

0

2

4

6

8

10

2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*

bln EEK

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%% of GDP

Central government Social Security FundsLocal government General government budget positionStructural budget position

0%

10%

20%

30%

40%

1995 1997 1999 2001 2003 2005 2007 2009 2011* 2013*

% of GDP

Labour taxes Consumption taxes Capital taxes European Union

Tax burden set to decline

Res

erve

s

-20

-15

-10

-5

0

5

10

15

2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*

Deb

t

% of GDP

Central government Social Security Funds Local government Net assets/debt

Estonia still has net assets by the end of 2010

Thank you!

Main indicators

2009 2010*

2011*

2012*

2013* 2014*

Economic growth -14.1 2.0 3.6 4.0 3.8 3.5

GDP in current prices

214.8 218.2 230.4 245.5 261.5 278.3

CPI -0.1 2.6 2.5 2.6 2.7 2.7

Domestic demand -23.9 -0.2 4.3 4.1 4.7 4.6

Export -11.2 15.1 9.0 6.7 7.1 6.5

Employment growth

-9.2 -5.0 0.8 1.6 1.8 1.7

Real wage growth -4.5 -3.2 0.1 1.0 1.6 1.5

Unemployment rate

13.8 17.5 15.4 13.6 11.4 9.4

Current account 4.6 4.3 2.3 0.3 -2.1 -4.4

-6

-4

-2

0

2

4

6

8

2008 4 7 10 2009 4 7 10 2010 4 7 10

%

MoF BoE COM IMF OECDSwedBM SEB Nordea Danske IER

Forecast of Estonian economic growth for 2010

-6

-4

-2

0

2

4

6

8

2008 4 7 10 2009 4 7 10 2010 4 7 10

%

MoF BoE COM IMF OECDSwedBM SEB Nordea Danske IER

Forecast of Estonian economic growth for 2011

Economic growth in different regions

-20

-15

-10

-5

0

5

10

15

20

2004 2005 2006 2007 2008 2009 2010

%

Latvia Lithuania Finland Sweden USA

In 2010 foreign demand stronger than expected

2.82.6

1.30.3

-1.5

1.0

-1.0-1.0

-0.5

1.0

-2

0

2

4

Spring2008

Summer2008

Autumn2008

January2009

March2009

June2009

July2009

Nov2009

Febr2010

July2010

Estonian export markets' GDP - 2010, % Export markets' GDP - 2011, % 2012

Estonian exports growth vs developments of main trading partners

Spare production capacities’ reserve still there, export orders strong

40

50

60

70

80

90

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

current operating capacity, %

-30

-20

-10

0

10

20

30

40

50

60

70points

Industry Wood industryBuilding materials industry Export orders will over the 3 months (rhs)

2010–11: after crisis fast recovery

Current account surplus will turn to deficit because of the rise in import volumes and

increasing profitability of foreign investments

Share of private consumption remains lower

-25

-20

-15

-10

-5

0

5

10

15

2001 2003 2005 2007 2009 2011 2013

%

40

42

44

46

48

50

52

54

56% of GDP

Private consumption real growth, % Real GDP growth, % Private cons/GDP, %, rhs

Investments presumably recover

-40

-30

-20

-10

0

10

20

30

40

2001 2003 2005 2007 2009 2011 2013

20

22

24

26

28

30

32

34

36

GFCF real growth, % Real GDP growth, % GFCF/GDP, %, rhs

Employment by sectors

0

40

80

120

160

2005 2006 2007 2008 2009 2010

thousands of people

Agriculture ManufacturingConstruction Wholesale and retail tradeTransportation and storage Public administrationEducation Healthcare

Wage decline stopping

-10

-5

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010

%, y-o-y

Average payment (Tax Board) Average wage (ESA)

Average payment by sectors

0

10

20

30

40

2008 2009 2010

thousand EEK

Financial sector Info and communication EnergyManufacturing Construction

Average payment by sectors (2)

0

5

10

15

20

25

2008 2009 2010

thousand EEK

Public administration Education

Average wage

25

30

35

40

45

50

55

2004 2005 2006 2007 2008 2009 2010* 2011* 2012* 2013* 2014*

% of GDP

-8

-4

0

4

8

12

16

Wage costs Real wage growth, % (rhs) Productivity growth, % (rhs)

Changes in tax policy– excise duty increases, VAT, state duties.

Other administrative changes – electricity, water, gas, heat energy.

Other goods and services – close to core inflation (2009-2010 without VAT increase).

Contribution to CPI