At today’s sitting of the Riigikogu, the Governor of the Bank of Estonia Ardo Hansson presented the central bank’s annual report for 2018. Hansson noted that, although the economic growth had slowed down, the economy was enjoying relatively good times.
Speaking of the public finances, Hansson said that, in the estimation of the Bank of Estonia, at that point, it was not reasonable to boost economic growth by increasing government expenditure. Reserves should be accumulated in good times, and it would not be reasonable to take loans at that point. The Governor of the central bank said that interest rates were indisputably favourable, but unfortunately, not always were there favourable conditions for spending the money borrowed. Figuratively speaking, more kilometres of highways can be built for the same money in more adverse times than at present, Hansson said.
In his report, Hansson said that Estonia’s economic growth was slowing down. He noted that the economy had grown by nearly 5% in 2017, by 4% last year, and by around 3% this year. In the estimation of the Bank of Estonia, further economic growth will remain at around 2%. Noticeably faster growth is unattainable with the current technology, labour force, development level and skills. Therefore, the Bank of Estonia is expecting a moderate cooling of the economy in the near future.
Hansson said that domestic price pressure was also expected to grow, because the rise in salaries would be transferred to the prices of services sooner or later. Over the last eight years, salaries have risen by around 6–7% a year in Estonia, while the rise has been 1.5–2% a year in the euro area at the same time. The Governor of the Bank of Estonia said that the rapid salary growth had been positive for Estonian contractors, but employers’ profitability was under pressure and that was holding back investments. In the estimation of the central bank, salary growth is being curbed owing to factors such as the slowing down of the economic growth, positive net migration, and the social insurance reforms, which have brought new people to the labour market. The growth of labour costs is however underpinned by the raising of the minimum rate of salaries in education and healthcare, and the rise in the minimum salary.
The Bank of Estonia is of the opinion that the financial situation of the Estonian banking sector is good as a whole, and the risks threatening it are small. Hansson said that the capacity of the banks to fund investments also remained good. At the same time, in his words, there are certain signs of diminished competition, and the risk to reputation arising from money laundering suspicions may weaken it in the future. Although salaries are growing rapidly and interest rates are low, banks have not fuelled a real estate boom with lending activities, Hansson said. He added that the Bank of Estonia was following the developments in order to take steps when necessary.
The Governor of the central bank pointed out that labour force and the funding of investments had concentrated in the construction and real estate sector. Therefore the sector was growing much faster than the economy as a whole, and labour market tensions were particularly acute there. The influx of foreign labour is indeed connected to the construction sector, in Hansson’s words. In his words, this sector tends to undergo cycles, which means that a backlash may occur at some point when demand decreases or the loan paying capacity of construction and real estate companies deteriorates. Bad loans emerge then, and employees lose their jobs.
In Hansson’s words, the Estonian economy and the work of the central bank is also affected by Luminor Bank’s entry to the market. He explained that when Nordea and DNB had combined their operations, the Estonian banking sector had grown significantly. The new bank had brought all its Latvian and Lithuanian business into an Estonian legal person. This means that the wellbeing of the Estonian banking sector will begin depend more on what is going on in Latvia and Lithuania, Hansson said.
During the debate, Maris Lauri took the floor on behalf of the Reform Party Faction, and said that all risks had to be taken into account in order to ensure financial stability. In her words, the Riigikogu should deal more with the problems of crowdfunding and high-risk financial sector enterprises. Lauri stressed that the Bank of Estonia was an adviser to the Government, and the Government should not make important economic policy decisions without hearing the position of the central bank.
Kersti Sarapuu took the floor on behalf of the Estonian Centre Party Faction. In her words, it is important that Estonia learn from money laundering cases and draw conclusions for the future. She underlined that Estonia’s debt burden was the lowest in the European Union, and the public finances of Estonia were in good order. From the past year, Sarapuu highlighted positively the Port of Tallinn’s entry on the stock exchange which had had a significant impact on capital markets.
Speaking on behalf of the Social Democratic Party Faction, Riina Sikkut said that, for shaping knowledge-based policies, it was important to use the data of the Bank of Estonia. She referred to the analysis by the central bank that said that the people who were making contributions to the second pension pillar were saving more for their pension than those who were not making the contributions. Sikkut said that the Government had to responsibly keep in mind a long perspective and that which was important in regard to the future pensions of all people.
Sven Sester spoke on behalf of the Faction Isamaa. He said that the Bank of Estonia had been successful in ensuring financial stability. Sester noted that the euro area asset purchase programme did indeed stimulate the economy, but it also had risks, such as a potential rise in real estate prices, and postponement of certain decisions to a more distant future. However, in his words, the commercial banks of Estonia are among the best capitalised in Europe, and they have good cooperation with the Bank of Estonia.
Video recordings of the sittings of the Riigikogu can be viewed at: https://www.youtube.com/riigikogu
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