baltic household outlook: more signs of optimism

7/28/2019 Baltic Household Outlook: More signs of optimism

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Baltic Household OutlookApril 2013

More signs of optimism

Labour market improvement continues; unemployment is decreasing due to jobcreation and emigration

Estonia has a single digit unemployment rate for the first time since late 2008

Due to the faster growth of nominal wages and lower inflation, real wagegrowth is expected to accelerate

Latvia still has the highest tax wedge on labour among the Baltic states,exceeding the EU average

Since 2008 the tax wedge for average and low income earners has onlydecreased in Lithuania, while in Latvia and Estonia the tax wedge has increased

Share of savings for retirement in all three countries is growing Lithuania is most sensitive to pension problem today, Latvia has the worst

demographic prospects

Most favourable institutional conditions to prepare for retirement exist in Latvia,economic in Estonia

Households role in accumulation of pensions in all countries has to increase

In Estonia and Lithuania, positive developments in housing loan volumes havestarted to emerge and debt volumes are expected to resume the growth by theend of 2013; Latvia has not reached the bottom of the housing volumes yet

In 2012 the drop in average yearly interest rates of housing loans was thelargest in Lithuania where the interest rate fell by 1.2 percentage points; in

Estonia it declined by 0.9 percentage points and in Latvia by 0.7 percentagepoints

The share of foreign currency loans in Latvia was 89 per cent and in Lithuania72 per cent at the end of 2012; adaption of euro would eliminate the risks offoreign currency borrowing in Latvia and Lithuania.

Indebted households are more vulnerable to unemployment and other incomeshocks but most households have not secured themselves against negativeincome shocks

Edmunds RudzitisSocioeconomics ExpertSEB LatviaTelephone: +371 [email protected]

Julita VaranauskieneHousehold EconomistSEB LithuaniaTelephone: +370 52682518

[email protected]

Triin MessimasHousehold ExpertSEB EstoniaTelephone: +372 [email protected]

Merike Kukk

Research ScientistTallinn University of TechnologyTelephone: +372 6204069

[email protected]


2/24

Baltic Household Outlook

Despite weak external demand, in 2012 the Balticcountries showed solid economic growth. For thesecond consecutive year, the Baltic countriesmaintained the leading positions in the European Union

In all Baltic countries employment continued its upward

trend, while the unemployment rate decreased. Estonia

was ahead of the other Baltic states in unemployment

reduction. Over the last year, the unemployment (job

seekers) rate in Estonia decreased by 2.1 percentage

points to 9.3 per cent in the fourth quarter. Estonia has a

single digit unemployment rate for the first time since late

2008. In Latvia unemployment dropped by 1.2 percentage

2/24

April 2013

Labour market improvement continues

Unemployment (job-seekers) rate* (%)

points to 13.8 per cent in the last quarter of 2012, while in

Lithuania unemployment was 0.7 percentage points lower

compared to the same period of 2011, reaching 13 per

cent. It should be noted that Lithuanias unemployment

rate rose by 0.7 percentage points in the last quarter, while

in Latvia unemployment crept up by 0.3 percentage points

compared with the previous quarter, mainly due to

seasonal factors.

The reason for the unemployment rate decrease is jobcreation and emigration as well. At the same time, the

labour force participation rate has grown and the number of

discouraged workers (hidden unemployment) has

decreased. As the economic situation is improving and the

labour market looks more hopeful, the discouraged workers

are re-entering the labour market.

Job creation is expected to continue, albeit at a slower pace,

and unemployment could decline at about the same rate

that employment increase. According to SEB forecasts, in

2013 the average unemployment rate in Estonia will be 9.8

per cent while in Lithuania and Latvia unemployment will

come down to 11.5 and 13.3 per cent respectively.

in terms of GDP growth rate. It is expected that 2013 willbe another good year for Baltic economies, improvingthe financial situation of households.

3

6

9

12

15

18

21

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Latvia Lithuania Estonia

* Persons aged 15-74

Source: National Statistics

2012 data shows that wage growth continues to gradually

recover. In Latvia gross wages increased by 3.7 per cent

and in Lithuania by 2.6 per cent. In Estonia wage growth

was the fastest among the Baltic countries the average

gross wage grew by 5.9 per cent in the last quarter of 2012

compared to the last quarter of 2011.

Moderate improvement in purchasing power

In Estonia and Latvia nominal wage growth was faster

than the increase in consumer prices, improving

households purchasing power. In Estonia the real wage

growth compared to the same quarter of the previous

year was recorded for the sixth quarter in a row. The

average real wage increased by 2.1 per cent in the fourth

quarter of 2012 compared to the same period of 2011. InLatvia the average real wage rose by 2.5 per cent. Real

wage growth has accelerated in the second half of 2012,

mostly due to the slower growth rate of the consumer

price index. In Lithuania real wages fell by 0.4 per cent in

the last quarter compared to the same period of 2011.

Although it was the lowest year-on-year decrease in

recent years, real wages have been falling for four years.

Compared to the last quarter of 2008, real earnings have

decreased by approximately 13 per cent in Lithuania. In

Latvia and Estonia the real wages is below the pre-crisis

level by approximately 10 and 4 per cent respectively.

Average gross wages and salaries (%, YoY)


-15%

-10%

-5%

0%

5%

10%

15%

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12



3/243/24

The rise in wages is expected to accelerate in 2013 in all

the Baltic countries. Wage growth will be affected by the

changes in the minimum monthly wage, especially inLithuania, adding at least 2 percentage points to the wage

growth rate. In January 2013, the minimum monthly wage

was increased to approximately 290 euros in Lithuania

and to 320 euros in Estonia as well. In Latvia the minimum

wage has stayed unchanged at approximately the 285

euros level. Latvia could increase the minimum wage to

320 euros next year.

The economic effects of the minimum wage increase

have been studied many times in the past. Plenty of

researches point to the negative effects on employment,

1especially among the low-skilled labour force . As a

minimum wage increase makes the labour force more

expensive, it is harder for companies to hire employees,

thus employment decreases. The substantial rise in

minimum wage may also boost the number of people

receiving envelope wages. On the other hand, there are

some positive effects from the increase of the minimumwage. The minimum wage increase can reduce poverty

and inequality, and forces companies to be more efficient.

Besides, the minimum wages are relatively low in the

Baltic countries compared to the other EU countries.

Latvia has the third lowest minimum wage in the

European Union, while Lithuanias and Estonias minimum

wages are fourth and sixth lowest.

In Estonia gross wages are expected to increase by 7-8 per

cent in 2013. In Latvia wage growth is predicted at 4.5 per

cent, while in Lithuania the average gross wage will

increase by 4 per cent. Although the nominal wage growth

will be slightly faster than in 2012, the real wage growth isexpected to accelerate as a result of the faster growth of

nominal wages and low inflation as well.

Disposable income of households will also be positively

influenced by some policy changes. In Estonia, a cut in

unemployment insurance tax and an increase in social

transfers will support consumer spending. In Latvia a

decrease in the personal income tax (PIT) rate by one

percentage point from January, as well as an increase in

some social benefits should put more money into pockets

of households, thus supporting private consumption.

Real wages (%, YoY)

Latvia is going to reduce its PIT rate even further from 24

per cent to 22 per cent in 2014 and then to 20 per cent in

2015. The PIT rate changes may help to reduce the tax

burden on labour, having a positive influence on

households disposable income.

Two different indicators can be used to analyse the tax

burden on labour the implicit tax rate and the tax

wedge. The implicit tax rate on labour is a measure that

estimates the effective average tax burden of labour. Theimplicit tax rate is calculated by dividing the revenues

from taxes on labour by the total compensation of

employees. The tax wedge on labour measures the relative

tax burden for employed persons and it can be defined as

the difference between labour costs to the employer and

the net take-home pay of the employee as a percentage of

labour costs. The tax wedge can also be calculated for

different income levels.

Baltic Household Outlook April 2013


-12%

-8%

-4%

0%

4%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12


Tax burden on labour is decreasing

1 David Neumark and William L. Wascher. Minimum Wages and Employment. 2007

Implicit tax rate on labour (%, 2010)

Source: European Commision (Tax reforms in EU Member States 2012)

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0 40,0 45,0

MaltaPortugalBulgaria

UnitedIreland

RomaniaPolandGreece

LithuaniaLuxembourg

SlovakiaLatviaSpainDenmark

SloveniaNetherlands

EstoniaGermany

Czech RepublicSwedenFinland

HungaryAustriaFrance

BelgiumItaly


4/244/24

As the tax wedge is more of a theoretical value as

opposed to the implicit tax rate which is related to actual

tax revenues in the state budget, these two indicators

could show substantial differences. The largest gap

between the implicit tax rate and the tax wedge is

observed in Latvia. The reason for a notable difference

between the implicit tax rate and the tax wedge could beexplained by the high popularity of envelope wages.

According to a study of Stockholm School of Economics

in Riga, the estimated proportion of envelope wages in

Latvia is higher than in other Baltic countries.

The implicit tax rate on labour amounted to 32.5 per

cent in Latvia and 31.7 per cent in Lithuania in 2010. In

Estonia it was 37 per cent, slightly above the EU

(European Union) average. At the same time, the tax

wedge of a single average wage earner was the highest

in Latvia 44.2 per cent in 2011. It means that single

taxpayer at average earnings in Latvia take home only

55.8 per cent of what he cost to his employer. The taxwedge in Lithuania (40.7 per cent) and in Estonia (40.1

per cent) was lower than the EU average (43.7 per cent).

As a result of the PIT rate cut to 24 per cent, the tax

wedge for average wage earners in Latvia will decrease

by 0.6 percentage points. However, Latvia still has the

highest tax wedge on labour among the Baltic States. In

Estonia, the cut in unemployment insurance tax to 3 per

cent (previously 4.2 per cent) will decrease the tax

burden on labour.

Latvia has also a higher tax burden on low wage earners

(using 67 per cent of the average wage as a proxy for this

group) compared to Lithuania and Estonia. In Latvia, thetax wedge of the a worker with 67 per cent of average

earnings was 43.4 per cent in 2011, whereas in Lithuania

and Estonia the tax wedge for lower income workers was

38.9 and 38.8 per cent respectively. In the EU, the

average tax wedge for this income group amounted 39.6

per cent. In 2011, Latvia had the seventh highest tax

wedge for low-income earners among the EU countries.

Tax wedge on labour (%, 2011)


The tax wedge of the employed persons with 67 per cent of

the average wage income level has increased since 2008 in

Latvia and Estonia, while the tax wedge only declined in

Lithuania. Between 2008 and 2012 the tax wedge for low-

wage earners (67 per cent of the average wage earner)

increased by 2.8 percentage points in Latvia and by 2.2

percentage points in Estonia. In 2012, in Lithuania the taxwedge was lower by 1.4 percentage points compared to the

level of 2008.

Source: Eurostat

36 38 40 42 44 46

Latvia

Estonia

Lithuania

EU-27

Tax wedge for single 67% of AW earner

Tax wedge for single average wage earner

Tax wedge of single 67% of average wage earner (%)

34

36

38

40

42

44

2008 2009 2010 2011 2012

Latvia EstoniaLithuania

Source: Eurostat, SEB estimates

The latest data shows that in the Baltic States the difference

in the tax wedges for different income groups is not very

notable, meaning that the progressivity remains relatively

low. One measure of progressivity compares the tax wedge

for single person with no children (dependent persons)earning 167% of the average wage, with the tax wedge of a

single person earning 67% of the average. At the EU level,

this ratio is 1.19 which means that a 167% earner face a

19% larger tax burden than person earning 67% of the

average wage. In the Baltic countries this progressivity ratio

is lower the EU average. With the progressivity ratio at 1.03

Latvia has the least progressive labour taxation system

among the Baltic countries which means that the tax wedge

for high-income earners is very similar to the tax wedge of

low-income employees. During the economic downturn the

progressivity of labour taxes decreased in Latvia due to

reduction in amount of non-taxable minimum. Unlike Latvia,Lithuania has increased the progressivity of labour taxation

since 2009, implementing the different amounts of non-

taxable minimum. For low wages the non-taxable amount is

larger, while for wages above 912.3 euros (3150 litas) a non-

taxable amount is not applied.

According to different researches, a high level of labour

taxation may have negative effects on employment,

particularly for the low skilled or for low earners and

second-earners, as the labour demand and labour supply of

these groups are generally more elastic. The planned PIT

rate reductions to 20 per cent in Latvia should reduce thetax wedge on labour, positively influencing the employment.

The households in Latvia would benefit from the PIT

decrease as a lower tax rate increases their net wage and


5/245/24

income. On the other hand, the high-income earners

benefit the most from the reduction in the PIT rate. Low

and average income earners would benefit more from the

increase in the amount of non-taxable minimum; therefore

the next steps should be increase of the non-taxable

minimum and further rise in the amount of allowance for

dependents in line with the abilities of the state budget.

Financial assets per capita (EUR)


accumulated, any other more profitable savings orinvestment instruments do not seem attractive), 2) oneconomic phase (during the economic downturn,households usually prefer keeping keep cash at home or indeposit accounts with the financial institutions, whichoffer an opportunity to quickly and conveniently withdrawfunds if necessary), 3) on the legal and tax environment(taking into consideration if any tax rebate is applied onany form of asset), 4) on the confidence in the financial

institutions (bankruptcy of financial institutions inducepeople to keep cash at home instead of savings accountsin banks or other financial institutions), 5) on trends in thesecurities markets (if situation in the markets is unstable,households as a rule withdraw currently invested amountsfrom such markets or do not invest); in addition to theabove, trends in the securities markets make a directimpact on the invested asset value.The value of the financial assets in Estonia per capita isthe largest. This may be related to higher householdincome and also to the higher share of income directed toPillar II.Seeking to explain the increasing gap between Latvia and

Lithuania it is necessary to take into consideration otherfactors as the household income in both countries differsonly slightly. Lower value of deposits in Latvia may beexplained by prevailing habit of the Latvian households tokeep cash at home, instead of keeping funds in accountswith the financial institutions. A higher Latvian ratio ofassets in Pillar II and Pillar III pension funds to depositsresults from the above-mentioned lower amount kept inthe deposit accounts and slightly different terms foraccumulating the pension in Pillar II pension funds.Accumulation of the funds in Pillar II pension funds inLatvia was started three years earlier than in Lithuania, a

number of inhabitants automatically (mandatory) becomethe participants of Pillar II pension funds, and thetransferred amount is larger.Value of instalments accumulated in Pillar II pension fundsin all three countries is rapidly growing. The value of theabove assets is growing as a portion of the socialinsurance tax is being transferred to Pillar II pension funds:the households are not required to allocate their ownincome, or instalments of households to Pillar II pensionfunds make only a portion of the transferred amount.During the economic downturn, the inflows from socialinsurance funds shrank, however recently are rising again.

The present issue of the Baltic Household Outlook will

include more detailed analysis of the financial assets

accumulated for a long-term goal for retirement, i.e., the

funds accumulated in Pillar II pension funds, and in the

voluntary pension accumulation funds and under the life

insurance agreements (measures to be attributed for the

Pillar III pension funds). Volumes of accumulated funds for

retirement, current and future challenges, institutional

and/or economic conditions for households to accumulate

funds for retirement and practical use thereof will bereviewed in this section.

As compared with the most popular form used for

accumulation of the financial assets, i.e., deposits, the

value of assets accumulated in Pillar II and Pillar III

pension funds and also under the life insurance

agreements grew since the year 2008. As compared with

the amount accumulated by households in the deposit

accounts, the funds accumulated for retirement in Estonia

grew from by 25 per cent in the year 2008 to 37 per cent

at the end of 2012, in Latvia from 22 per cent up to 44

per cent, in Lithuania from 15 per cent to 25 per cent,

respectively.

Share of savings for retirement in all three countries is growing

Deposits II pil lar pension III pil lar pension

Source: Central banks, SEB estimations

Any measures selected for asset accumulation or keepingdepend: 1) on the level of income (until income is low anda sufficient reserve of unforeseen events is not

0

1000

2000

3000

4000

5000

6000

2008 2012 2008 2012 2008 2012

Estonia Latvia Lithuania


6/246/24

To identify countrys sensitivity to pension problem,

public opinion survey results, current pension situation2

and forecasts were considered. Household survey showsthat pension savings in Lithuania seem to be more

important for the residents as compared with Latvia and

Estonia. Pension savings were mentioned as one of the

most important goals by 42 per cent of residents of

Lithuania, but in Estonia and Latvia only by 22 per cent

and 20 per cent, respectively. Anyway, the short-term

goals in all three Baltic countries are considered to be

important, i.e., such as a rainy day and sense of security.

Demographic statistics show that in this respect the most

unfavourable situation and perspectives are observed in

Latvia. In this country, the ratio of senior people (over the

age of 65 years) and people capable for work (15-64 years

of age) is the greatest (28 per cent). Populationprojections show that situation in this country will remain

the worst in future. It is forecasted that in the year 2040,

this ratio in Latvia will reach 43 per cent.

Anyway it should be noted that situation in other Baltic

countries is not considerably better. Therefore instead of

focusing on differences between countries, the priority

should be given to significant changes in the number of

the employed and dependents, which also would result in

higher taxes for the employed, or lower pensions for the

retired. The first and also the second consequence may

cause serious economic problems and social turbulences.

However any preventive measures taken by thegovernment institutions and households themselves in

advance should mitigate negative impact of the

demographic changes.

Main purposes for savings


Lithuania is most sensitive to pension problem today,

Latvia has the worst demographic prospects

2 Mindshare, 2012 (SEB)

39%

37%

38%

59%

39%

37%

42%

22%

20%

Lithuania

Latvia

Estonia

Rainy day Sense of security Retirement age

Source: SEB

Such great concern of the Lithuanian residents may be

explained by todays problems. Average retirement

pension in Lithuania in IVQ 2012 totalled EUR 236. It is the

lowest pension in the Baltic countries. In Latvia and

Estonia the average retirement pension makes EUR 271

and EUR 316, respectively. Compared to an average net

salary, the highest pension-to-salary ratio is highest in

Latvia (55 percent), lowest in Estonia (43 percent).

Lithuanian ratio is 47 percent. This ratio reflects some

feeling of (un)fairness which should be the strongest inEstonia. However, absolute size and purchasing power of

retirement pension is the highest in the northern Baltic

country.

Old age dependency ratio

LithuaniaLatviaEstonia

2012 2040 Source: Eurostat

26%

40%

28%

43%

27%

42%

Multi-pillar pension system is one of the measures for

overcoming the challenges of changes in the environment.

The greatest challenge is the changing demographicsituation, i.e., the former pension payment system, which

existed under different terms becomes unsuitable as

birth-rate is decreasing and life expectancy is rising.

Most favourable institutional conditions to prepare for retirement exist

in Latvia, economic in Estonia

To identify the country offering the most favourable terms

to prepare for retirement, the below three criteria were

taken into consideration: 1) amount of instalmentstransferred to Pillar II pension funds; 2) pension reform

stability; 3) stimulus for voluntary accumulation of funds

with Pillar III pension funds.

Estonia currently is in the leading position by the criterion

of instalments transferred to Pillar II pension funds.Primarily, is it related with higher wages in Estonia.

Secondly, the amount of instalment to Pillar II pension


7/247/24

funds in Estonia currently is the largest 6 per cent of the

wage. A portion of said instalment (2 per cent) is paid by

the employee, and the remaining 4 per cent are added by

the government (from paid social insurance tax). In Latvia,

the instalment makes 4 per cent and total instalment is

transferred by the government. It is planned that in 2015

instalment will be 5 per cent while starting from the year2016, the instalment to be paid to the pension funds will

increase up to 6 per cent. In Lithuania, the instalment is

the smallest (2.5 per cent). Starting from April of the

current year in Lithuania, each participant may pay 1 per

cent of his/her wage additionally. In such case, the

government will add 1 per cent of the average wage more.

Instalments should gradually increase and by the year

2020 should reach 3.5 per cent, if the pension scheme

participant does not pay additional instalments

himself/herself or 7.5 per cent (3.5+2+2 per cent), if such

instalments are paid.

In the long-term the instalment (compared with wage) in all

countries will be similar. In Latvia, the total instalment is

transferred by the government, in Lithuania (since April

2013) and Estonia a portion is allocated by the employed

too. However the stability criterion is rather important for

the successful functioning of Pillar II pension funds in

future: the lower number of changes making negativeimpact on the amount to be accumulated and the shorter

duration of the exceptional periods.

Taking into consideration the economic problems in all

three countries, the instalments to Pillar II pension funds

were decreased or suspended: in Estonia the instalments

were suspended (for one year and a half), in Lithuania and

Latvia decreased to 1.5 per cent and 2 per cent,

respectively. In Lithuania, since the start of the current year

the terms of participation in the pension funds were

considerably changed if each participant transfers

instalments (from his labour income) to Pillar II pensionfunds, only then the government will transfer the amount

of instalments specified (5.5 percent) in the beginning of

the reform of the pension scheme (2004).

In all the three countries, those who accumulate pension in

Pillar III are offered local tax allowances: taxable income

will be decreased by the amount of instalments to the

pension funds. Tax allowances will be applied on benefits

from such pension funds.


Contributions to II pillar pension funds (%)

0123456789

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Latvia

Estonia Alternative (EST)

Lithuania Alternative (LTU)

Source: National pension systems

Households role in accumulation of pensionsin all countries has to increase

Participation in Pillar II pension funds in Latvia and Estonia

for a certain number of inhabitants (depending on age) is

mandatory, however in Lithuania it is voluntary. Calculations

show that in Latvia the number of participants in Pillar II

pension funds reached 1.194 million,

Number of participants in Estonia reached 635 thousand,

in Lithuania 1.07 million. However it is forecasted that Pillar

I and Pillar II pension funds, as compared with the previous

wage, will make only a half of former income.3

The household survey performed at the end of the year

2012 shows that households in all three countries, seeking to

ensure adequate retirement income, rather often considers

an opportunity of working as long as possible. Such option

was mentioned by 43 per cent of residents in Estonia, 48 per

cent of residents in Latvia and 45 per cent of residents in

Lithuania. In all three countries an option to accumulate

funds for retirement by investing in real estate was often

mentioned. Such opportunity was indicated by 40 per cent

of the survey respondents in Estonia, in Latvia 23 per cent

and in Lithuania 33 per cent. Higher volume of savings for

retirement in Pillar III pension funds, as compared with

residents in Estonia, is expected by residents in Lithuania

and Latvia (27 per cent and 32 per cent, respectively) but

residents of Estonia more often mentioned the pension

accumulation option in savings accounts than in Pillar III

pension funds.

3 TNS, 2012 (SEB)

Estonia

43%

40%

32%

22%

Working as longas possible

Investmentsin real estate

Family, children

Guaranteedsavings (deposits)

Latvia

48%

32%

32%

23%

Family, children

Savings in IIIpillar PF



Lithuania

45%

33%

27%

By working abroad 27%



Savings in IIIpillar PF

Source: SEB


8/248/24

The survey results coincide with the statistics of the

financial assets accumulated by residents. The financial

potential of Estonians to accumulate funds for

retirement is more solid as their income is higher. But

the differences between the voluntarily accumulated

funds (under the life insurance agreements and Pillar III

pension funds) per capita are less significant. InEstonia, the value of such assets per capita makes EUR

220, in Latvia EUR 209 and in Lithuania EUR 223.

But if real estate can be considered as saving for

retirement, voluntary saving for retirement age volumes

per capita would look differently.The above statistics again shows not only the differences

between the countries but also that savings of this type in all

three countries are insignificant. There are no doubts about

necessity of assets for retirement purposes.

III pillar pension savings (life insurance and funds)per capita (EUR)

In household borrowing signs of recovery starting to emerge


2008 2012


The total loan stock of households is still declining in all

Baltic countries. In Estonia, the loan volumes have

decreased by -10.5 per cent and in Latvia by -27.6 per cent

since the peak in December 2008; in Lithuania the loan

volumes have dropped by -15.4 per cent since the peak in

January 2009. Recent dynamics of the loan portfolio is far

from being homogeneous across the countries. Housing

loan that provides the biggest share to the households

loan portfolio exhibits de-accelerating speed in the

decline. The housing loan volume changed at a yearly rate

of -0.6 per cent in Estonia and at -1 per cent in Lithuania.

The need for improvements in housing conditions is

present in all three countries but the borrowing

constraints are driven by income prospects. In Estonia and

Lithuania, positive developments in housing loan volumes

have started to emerge and debt volumes are expected to

resume the growth by the end of 2013. In Latvia, the yearly

declining rate of housing loan portfolio is still at a high

level, namely at 11 per cent. Some of the decline is

induced by the extraction of loan portfolio of Parex Bank

at the end of 2011 but still the statistics indicatecontinuous deleveraging process of households.

The volumes of new loans ( including refinancing) issued

in Estonia have been constantly higher in 2012 than in

2011: in the first half of 2012 about 20 per cent more new

loans were issued than during the same period in 2011. In

the second half of 2012 the issued volumes were around

10 per cent higher than a year ago. The turnover of

housing loans is on the same level as at the end of 2003 in

Estonia and the turnover shows a slightly increasing trend.

In Latvia, the disbursement of new loans activated during

the first half of 2012 but in the last quarter of 2012 the

size of new loans remained on the same level as in

previous quarters. The flow of new loans in Lithuania

showed the first positive signs at the end of 2012 when

the flows were slightly higher compared to the end of

2011. Still, the volumes of new loans are at the same level

as at the end of 2004 in Lithuania. However, there are

weak signs for recovery of household housing loan

appetite in Lithuania and more significant signs in Estonia.

If households are not faced with negative shocks induced

by the debt crises developments in Europe, we expect

Estonian households to activate their borrowing forhousing even further in 2013. Lithuania will follow more

gradual revival in housing borrowing while Latvia has not

reached the bottom of the housing volumes yet.

Households are shrinking their consumer credit and other

borrowing volumes more vigorously than their housing

loan portfolios. The strong declines in 2012 were induced

by bankruptcy cases of commercial banks in Latvia and

Lithuania at the end of 2011. This incidence distorts the

growth rates in Latvia at the end of 2012 but we receive a

more accurate picture from Lithuania. While in November

2011 the annual growth rate of consumer credit and other

borrowing was -5.1 per cent, then in December 2012 it wasstill at the same level and in January 2013 it was 5.2 per

cent compared to January 2012. The statistics shows that

Lithuanians are reducing their consumer debt and other

Changes in housing loan portfolio, Y-o-Y

Source: National Central Banks

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

Dec-0

9

Mar-1

0

Jun-1

0

Sep-1

0

Dec-1

0

Mar-1

1

Jun-1

1

Sep-1

1

Dec-1

1

Mar-1

2

Jun-1

2

Sep-1

2

Dec-1

2


134

220

115

209

125

233

0

50

100

150

200

250+65%

+86%+83%

Source: SEB estimates


9/249/24

Households continue to benefit from favourable interestrates of housing loans

borrowings at a stable -5 per cent. Estonians reduced their

stock of consumer credit and other borrowings at the

speed of -7 per cent during the first half of 2012 while

during the second half of 2012 the speed has increased. At

the end of 2012 the volumes of consumer credit and other

borrowings were 10.4 per cent smaller than at the end of

2011 in Estonia.

Changes in consumer credit and otherlending portfolio, Y-o-Y

As the majority of housing loans in all Baltic countries has

been issued in euros and bear a floating interest rate,

households gain directly from the low Euribor rates. Themost significant fall of the Euribor occurred in 2012 when

6 month Euribor rate fell from 1.67 per cent at the end of

2011 to 0.32 at the end of 2012. Households have

experienced reduction in the interest rate of their housing

loans in all three countries. While in January 2012 the

average yearly interest rate was the lowest in Estonia, at

the level of 3.42 per cent, then in January 2013 it was the

lowest in Lithuania, at the level of 2.50 per cent. The drop

in the average yearly interest rate was most modest in

Latvia; within a year it declined by 0.7 percentage points.

The drop was the largest in Lithuania where the average

interest rate fell by 1.2 percentage points. Euribor rate isexpected to remain on low levels but further reductions

are less probable. However, as the fall of Euribor rate has

not yet penetrated fully into the interest rate of housing


In the aftermath of the crisis the borrowing capacity of

many households has become more constrained than a

decade ago and it affects the borrowing for consumption

the most. Households face more stringent borrowing

conditions. Additionally, there are more households who

are reluctant to finance their consumption by borrowing;

there is more awareness about the interest rates and costsrelated to borrowing. Therefore, sustainable demand for

consumer credit is unlikely to be underway yet. Housing

loan is expected to continue to outperform consumer

lending in the following years.

-20%

-15%

-10%

-5%

0%

5%

10%

Mar-0

9

Jun-0

9

Sep-0

9

Dec-0

9

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12

Sep-12

Dec-12



3,42

4,203,7

2,55

3,50

2,5

0

0,5

1

1,5

2

2,5

3

3,5

4

4,5


2012 January 2013 January

Average Interest Rate of Housing Loans


loans, the latter has room for further fall at the beginning

of 2013. However, the changes are going to be marginal

compared to the changes in 2012.

Adaption of euro would eliminate the risks of foreign currencyborrowing in Latvia and Lithuania

The borrowing in foreign currency is not a relevant topic in

Estonia any more but it is still a very important issue in

Latvia and Lithuania. When the credit boom started in2004, it was mainly driven by foreign currency lending.

The share of foreign currency loans has been increasing

distinctly in the past decade. At the end of 2004 about 2/3

of household debt portfolio in Estonia was in foreign

currency and by 2008 the share reached 4/5 of the total

loan portfolio. Since 2011 the share of foreign currencyloans has become marginal as all loans in euros were

taken as local currency borrowings since the adaption of

euro. The share of foreign currency loans in Latvia peaked


10/2410/24

in 2010 when it reached 90.5 per cent for households and

the share is the highest in Central and Eastern European

countries. In Lithuania, the move towards foreign currency

loans has been much less vigorous: while at the end of

2004 the share of foreign currency loans was 43 per cent,

then at the end of 2008 it reached 62 per cent. The

composition of the loan portfolio towards foreign currencyloans has continued during the economic downturn

period reaching 72 per cent at the end of 2012.

Loan Portfolio by Currency



35%18%

100%

35%13% 11%

57%38%

28%

65%82%

0%

65%87%

43%62%

72%89%

0%10%20%30%40%50%60%70%80%90%

100%

2004 2008 2012 2004 2008 2012 2004 2008 2012


Local currency Foreign currency

Hungary, Romania and Poland, where the exchange rate is

floating, economic downturn was accompanied by

significant exchange rate depreciation, meaning that

foreign currency loans became more expensive than loans

in local currency. In these countries the households

suffered substantially from the depreciation of currencies.

The outrageous developments have taken place inHungary where in 2012 individuals had to give out 50 per

cent more Hungarian forints for one Swiss franc compared

to 2008. At the same time majority of the household debt

has been given out in Swiss francs. In order to protect

households from significant currency depreciations in

Hungary, the government passed a law about debt

restructuring programme in 2010. According to the

programme, households were allowed to pre-pay foreign

currency loans at discounted exchange rates to alleviate

the impact of the depreciation of Hungarian forint.

The willingness to borrow in foreign currency, mainly in

euros, can be explained by the interest rate spread

between local currency and euro loans. As for euro loans,

commercial banks have been offering much lower interest

rates and households have preferred loans issued in euros

to keep their monthly payments lower. For instance, the

difference in interest rates was around half percentagepoints at the end of 2007 and by 2008 the spread

increased to four percentage points in Estonia. Even small

differences in the interest rate affect significantly the total

repayment amount of the housing loans as the maturity

can be measured in decades. All countries have been

explicitly committed to adopting the euro since joining the

EU and in the meanwhile pegged the currency to the euro,

hence the exchange rate risks have been considered to be

small by households.

Although households in the Baltic countries have

benefited from the possibility to borrow in euros, it has

been different in other Eastern European countries. Theforeign currency borrowing has expanded in other EEC

countries similar to the Baltic countries. One can see from

the figure that the Baltic countries do have the highest

share of foreign currency loans; still the other countries

have followed a similar development. But the exchange

rate risks have been underestimated in some cases,

usually in countries with floating exchange rate. In

Loan Portfolio by Currency 2010

Source: European Credit Research Institute

64%

62%

35%

33%

27%

14%

9%

36%

38%

65%

67%

73%

86%

91%

0% 20% 40% 60% 80% 100%

Bulgaria

Poland

Romania

Hungary

Lithuania

Estonia

Latvia

Local currency Foreign currency

Several studies have investigated foreign currency

borrowing in Central and Eastern European countries and

the implications on the situation of households during the

last decade. The studies conclude that in the countries

that experienced depreciation during the recession, the

households experienced loan repayment problems more

often than in countries with fixed exchange rate. E.g.,

according to the study of the Austrian National Bank, the

incidence of loan arrears is about 12 percentage points

higher in depreciation countries than in non-depreciation4

countries . Hence, the financial stability of households

who have borrowed in foreign currency depends markedly

on the strength of the local currency. In this perspective

the euro adoption plans in Latvia and Lithuania will lower

significantly the risks of the indebted households.

4 Beckmann, E., Fidrmuc, J. and H. Stix (2012). Foreign Currency Loans and Loan Arrears of Households in Central and Eastern Europe. sterreichische Nationalbank, Working Paper 181


11/2411/24

Due to deleveraging, debt burden of household sector has

decreased debt-to-income ratio (the debt stock

compared to yearly disposable income) has declined in all

three Baltic countries since 2010. Although households

have lowered their loan stock since 2009, their disposable

income fell more than their debt volumes, hence the debt-

to-income ratio increased slightly in 2009. In 2011 (the

latest data available) the debt-to-income ratio was the

highest in Estonia at 88 per cent, in Latvia at 66 per cent

and the lowest in Lithuania at 41 per cent. The ratio is

lower than the one of the average Euro area, which is 99

per cent.

Indebted households are more vulnerable to unemploymentand other income shocks

Within the last decade the debt volumes have increased

significantly in the Central and East European countries,

where Estonia and Latvia have been the forefront

countries. This has been explained by catch-up with the

Western European countries where credit is an everyday

part of household finances. But the Euro area countries

experienced also a decade-long era of generous

expansion of household credit. The increase of debt-to-

income ratio from 75 per cent in 2001 to 99 per cent in

2011 denotes that the credit growth outpaced income

growth. There is no consensus among economists

regarding how much debt is considered to be sustainable.

But there is consensus that leverage has added additional

component of fragility to household wealth.

It has been discussed that opening of credit markets

should add more flexibility to households to manage their

financial situation. In case of unexpected income decrease

or unemployment households are supposed to have an

opportunity to borrow to overcome the temporary bad

times so that they do not need to give up the usual living

standards. In reality, such consumption smoothing does

not work in this way, especially during the economic

crises. A bulk of households is left without earnings while

the banks are concerned about increased borrowing risks

and are tightening their credit conditions at the same

time. In these circumstances negative income shocks

usually make it more difficult and/or more expensive for a

household to borrow. Hence, households do need to

insure themselves against negative shocks and they

cannot rely on the credit markets.

Additionally, indebted households are affected more by

negative income shocks than households without

liabilities. Namely, indebted households have additional

compulsory expenses regular debt payments. As theirlevel of compulsory expenses is higher, they have to adjust

their other spendings more than the households without

liabilities. In order to be less vulnerable to the situations

where a household member loses job, households should

either insure their risk or own higher buffer stocks. The

loan insurance is available only in a limited number of

commercial banks in the Baltic countries; hence all the

indebted households cannot use it. At the same time the

buffer stocks of indebted households are not higher

compared to the households without debts. The

awareness of the additional risks accompanying

borrowing has been low among households.

Gross debt-to-income ratio of households

Source: Eurostat


0

20

40

60

80

100

120

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Euro area (17 countries) Estonia

Latvia

%

Lithuania


12/24

Latvia

Labour market improvement will continue, however, the

creation of new jobs is likely to slow.

Income tax cut and the increase in allowance for

dependents will deliver more broad-based wage

growth. Inflation remains low; the growth rate of the average

real wage is likely to accelerate.

12/24

Based on the strong economic growth, the labour market

situation in Latvia continued to improve. Unemployment

continued to decline with a minus of 11.1 thousand

compared to 2011. Although the unemployment (job-

seekers) rate increased by 0.3 percentage points to 13.8per cent in the last quarter of 2012, mainly due to

seasonal effects, the share of unemployed persons in the

economically active population was 1.2 percentage points

lower compared to the fourth quarter of 2011. This fairly

small decrease in the unemployment rate is partly

explained by the rise in economically active persons.

According to the Labour Force Survey conducted by the

Central Statistical Bureau, the size of the economically

active population aged 15-74 has increased by 15.1

thousand persons or 1.5 per cent compared to the last

quarter of 2011. The number of economically active

persons has increased as a proportion of previouslydiscouraged workers return to a strengthening labour

market.

Employment has been growing since the middle of 2010.

In 2012, the number of occupied posts increased by 4.5

per cent or 36.5 thousand. Although the number of job

vacancies has grown by 0.6 thousand or 22.5 percent

compared to 2011, the job vacancies rate remained the

same (0.4 per cent).Labour market improvement will continue, however, the

creation of new jobs is likely to slow. The number of

occupied posts is expected to grow by 20 to 25 thousand

during 2013. The largest increase in the number of

employed persons is expected in manufacturing,construction and the service sector. Despite quite high

unemployment, employers in some sectors including

manufacturing, information technology and construction

will face labour shortages.

The unemployment rate decreased significantly in 2011-

2012, but still remains well above the pre-crisis level. The

registered unemployment rate, which now stands at 10.9

per cent with 107 thousand persons registered as without

work, is likely to hit single digit levels this year. If the

economy can add 20 thousand new jobs a year, it will take

approximately three years for the unemployment rate to

get back to the pre-crisis level.

More jobs, more opportunity

Income growth and sentiment supports spending.

In late 2012 consumer confidence hit its highest level

since August of 2007.

Household financial balance continues to improve,

approaching positive net value.


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)

Unemployment and vacancies

The job creation is also affirmed by the data of the State

Revenue Service (SRS) in January of 2013 the number of

employees paying state social insurance obligatory

contributions reached 769 638; that is 17.5 thousand more

compared to the same month of the previous year.

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)


13/2413/24

Dynamics of real wage and real pension (1Q2005=100)

In 2012, the consumption expenditures of households in

constant prices rose by 5.4 per cent. In current prices

household spending grew by 8.6 per cent year-on-year. The

increase in consumer spending outpaced the households

income growth rate. Income of the working population rose8.4 per cent year-on-year, while expenditure for benefits and

pensions declined slightly compared to 2011.

The household spending growth can be explained by the

improving situation in the labour market, the increasing value

of remittances sent home by emigrants and more positive

sentiment regarding the household financial situation.

Since the end of 2009, a gradual improvement in the

consumer confidence indicator has been observed. In

December 2012, consumer confidence hit its highest level

since August of 2007. The consumer confidence indicator fell

to a five-month low in February of 2013, mainly due to large

housing bills which had a negative impact on consumerconfidence. Households, despite their less optimistic

sentiment in the first months of 2013, continued to have a

positive outlook regarding their financial situation.

A strengthening labour market is helping to lift theconfidence of households. Changes in labour taxation, with

more money staying in the pockets of workers, have a

positive effect on households sentiment. In February of 2013,

Income growth and sentiment supports spending


However, the increase in real earnings remains uneven

across different sectors of the economy. Despite the latest

improvements in workers purchasing power, the average

real wage is 10 per cent lower compared to the end of

2008.In 2013, the average gross wage growth is expected to

reach 4.5 per cent. The wages continue to rise both in the

private and public sector. Average net wages could

increase even faster due to the personal income tax (PIT)

being cut by one percentage point and the planned

increase in the monthly allowance for dependents from

approximately 100 to 114 euros (70 to 80 lats) from July of

2013. According to the amendments in the Law on

Personal Income Tax, the PIT rate will be reduced to 22 per

cent in 2014 and then to 20 per cent in 2015. The PIT cut

and the increase in allowance for dependents will deliver

more broad-based wage growth. Although most workerswill feel the effect of the decline in labour tax burden, the

higher income earners will benefit the most from the

reduction in the PIT rate. For instance, a PIT reduction

from 25 to 24 per cent implies a 1.3 per cent increase in

net salary for a single high income earner. At the same

time, average income earners with two or more

dependents would only see a 0.5 to 0.7 per cent increase

in their net salaries in the first half of 2013.

As inflation remains low (average annual inflation is

expected to be 1.4 per cent this year), real wages will

continue to grow. This should be the third year in a row of

positive real wage growth. Besides, the growth rate of theaverage real wage is likely to accelerate to approximately 3

per cent.

Moderate growth in purchasing power

In 2012, the average gross wages and salaries increased by

3.7 per cent, which is slightly less than in 2011, when the

average gross wages were up 4.4 per cent. In the last

quarter of 2012, the average monthly gross wage was 703

euros (494 lats), up by 4 per cent compared to the sameperiod of 2011, approaching the pre-crisis level.

Wages are increasing in almost all sectors of the economy.

The most rapid increase of wages and salaries was

recorded in the transport and storage sector (by 7.7 per

cent compared to the previous year) as well as in

electricity, gas, steam and air conditioning supply and in

public administration (by 4.9 per cent).

The average net wages and salaries grew by 3.9 per cent,

outpacing the increase in the consumer price index. The

average real wages (taking into account the impact of

changes in consumer prices) rose by 1.6 per cent. As

earnings are increasing slightly faster than prices, workerspurchasing power is rising.

100

110

120

130

140

150

160

170

1Q2005

3Q2005

1Q2006

3Q2006

1Q2007

3Q2007

1Q2008

3Q2008

1Q2009

3Q2009

1Q2010

3Q2010

1Q2011

3Q2011

1Q2012

3Q2012

Source: National Statistics, SEB estimates

Average real wage

Average real pension

Evaluation of consumers' financial situation (Latvia)

* Balances, i.e. differences between the percentages of respondents giving positiveand negative replies

-70

-60

-50

-40

-30

-20

-10

0

10

20Jul-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

Jan-13

Financial situation over last 12 months

Financial situation over next 12

Source: Eurostat


14/2414/24

households' assessment of their financial situation over the

next 12 months remained positive for a ninth consecutive

month. The views about households financial outlook and

the countrys future economic situation are more positive

compared to the same period of 2012. Consumers'

unemployment expectations over the next 12 months also

showed some improvement, however the views onemployment were still rather negative.

It should be noted that with regard to households

expectations about unemployment, the overall economic and

their own financial outlook vary within different

socioeconomic groups and income levels. Consumers

representing the highest income quartile are more optimistic

regarding the economic and financial outlook over the next

12 months, while expectations of households in the lowestincome quartile can be described as rather gloomy.

Growth in households financial assets (bank deposits,

securities and other financial instruments, private

pensions and insurance and savings as well as Pillar II

pension capital) continued last year. Deposits of

households increased slightly by 2 per cent, however

deposit term structure showed substantial changes.

Demand deposits grew by 19 per cent, while term depositsshrank by 17 per cent. The share of demand deposits rose

to 57 per cent last year.

To save or not to save?

Household deposits (EUR million)

As deposit rates in euros, lats and other currencies have

decreased to very low levels, households choose to keep

their savings in current accounts and look for other

investment or spending opportunities as well. Households

increased savings in life insurance, private pension and

financial instruments last year, however their share in total

financial assets remains rather low. At the same time, cashplays a significant role in household savings. The cash to

deposits ratio was approximately 33 per cent last year,

with Latvia in the lead among the Baltic countries.

Interest rates are expected to be close to zero this year,

therefore share of demand deposits in total deposits is

likely to increase further. Deposit volume might be

influenced by a decision on entering the Eurozone. When

final permission to adopt the euro is received, households

might prefer to reduce their cash savings.

Since 2008 households financial assets have increased by

1.25 billion euros (875 million lats) to 6.67 billion euros

(billion lats). The rise of financial assets was mostly onaccount of the pillar II pension capital (mandatory

savings) -- growth by 802 million euros (564 million lats).

Over the last four years, the share of pillar II pension

capital in financial assets rose from 12 to 22 per cent.

Excluding changes in the pillar II pensions, other financial

assets (voluntary savings) at the end of 2012 were up by

443 million euros compared to the last quarter of 2008.


Households are saving and deleveraging at the same

time. The household loan portfolio continued the

downward trend. At the end of 2012 households

financial liabilities in commercial banks and leasing

companies were 6.72 billion euros (4.72 billion lats).

Over the last 12 months, the total amount of loans and

leasing granted to households declined by

approximately 13 per cent or one billion euros. The

household loan portfolio in commercial banks and

leasing companies has decreased by 30% from its peak

in late 2008.

Source: Bank of Latvia

0

400

800

1200

1600

2000

2400

2800

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

Sep-12

Dec-12

Demand deposits

Term deposits

Savings accounts

Deleveraging continues

Household loans-to-GDP

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

Source: National statistics, FCMC, SEB estimates

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012


15/2415/24

Since 2010, household debt-to-GDP ratio has decreased

considerably, due to both the decrease in the loan

portfolio and GDP (income) growth. Now household debt-

to-GDP ratio stands at 30 per cent.

A lower debt-to-GDP (debt-to-income) ratio suggests that

households can better manage their loans; low interest

rates are also helping borrowers. In 2012, the 3-monthEuribor rate decreased by 1.169 percentage points to a

record-low level (0.187 per cent). As a result, the average

interest rate for mortgage loans with a maturity of over 5

years fell 1.1 percentage points to 2.67 per cent in

December of 2012. Due to the decline of the Euribor,

monthly payments for mortgage loans with a floating rate

in euro currency fell by 9 per cent on average. Borrowers

with larger mortgage loans and longer maturity are

benefitting more from the record low Euribor rates.

Interest rate on housing loans in euro

newly granted loans to households are significantly lowerthan before the crisis. In 2012, the amount of new loansgranted to households rose by 9.4 per cent compared to theprevious year; new housing loans increased by 9.9 per cent.At the same time, in the second half of 2012 the amount ofnewly granted loans was smaller compared to thecorresponding period of 2011. No substantial changes inloan demand are expected in the near future, thereforehouseholds loan portfolio will be in the red in 2013.


Despite record low mortgage rates, households are not in ahurry to fill out the mortgage loan application. Householddemand for mortgage loans remains weak. Volumes of

2%

4%

6%

8%

10%

Source: Bank of Latvia

Annual effective percentage rate for new housing l oans

Interest rate on housing loans with maturity over 5 years

01.2

005

01.2

008

01.2

011

New lending to households and changes in householdloan portfolio (in million of lats)

-200

-150

-100

-50

0

50

100

1Q2011 2Q2011 3Q2011 4Q2011 1Q2012 2Q2012 3Q2012 4Q2012

Changes in household loan portfolio

New loans granted to households

Source: FCMC

Due to a sharp decrease in financial liabilities and a

moderate increase in financial assets as well, households

financial balance (difference between the financial assets

and the financial liabilities) improved by approximately

1.55 billion euros (1.09 billion lats) in 2012. At the end of2012 the negative difference between financial assets and

liabilities was only 57 million euros (40 million lats).

Households financial balance will continue to improve

and should turn positive in the first quarter of 2013.

* Data as of 30.09.2012Sources: Bank of Latvia, FCMC, LIA, SEB dzvbas apdroinana, SEB banka estimates

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

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

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

IVQ 2012

6 666

4 257

524*

424

1 462

6 723

5 328

770

481

145*-57


16/24

Lithuania

During the recent quarters, the wage increases stagnated

at the level exceeding 2 per cent, and real wage continued

to shrink. Nevertheless, the growing number of signs of

the gradual melting of the frozen wages and accelerating

wage increase is observed.

Based on the data of the Statistics Department, theaverage net wage in the 3rd quarter, as compared with the

2nd quarter of the year grew by 0.8 per cent, and in the

4th quarter as compared with the previous quarter by

2.6 per cent. During a one-year period (from IVQ 2011

until the last quarter of 2012), the average wage after tax

increased by 2.5 per cent. Minimum monthly wage (MMW)

since 1 August 2012 grew from LTL 800 (EUR 232) to LTL

850 (EUR 246), or by 6 per cent. At the year end, the wage

increased should be linked with payments at the year-end:

bonuses and other payments.

Average salary quarterly change 2012 (%)

During the current year, several factors will determine

increase in wages. Primarily, the wage growth acceleration

raises no doubts after increase in minimum monthly wage

(MMW) since 1 January 2013 up to LTL 1,000 (EUR 290).

MMW change in per cent is really impressive 17.6 per

cent, thus it may result in 2 per cent growth of average

wage at least.

Since the start of the year, when MMW was increased up

to LTL 1,000 (EUR 290), any mass dismissal of employees

was not observed, while a number of companies started to

adjust to the new changes by cutting staff, or by

requesting to work longer hours or more intensively, etc.

However, we believe that increase in MMW had several

positive aspects. Primarily, a portion of formally paid

envelope wages was cleared. Secondly, the new MMW

requires the employers to revise wages of other

employees and especially if the flat wage structure is

introduced, i.e., the difference in wages for non-skilledand skilled employees is insignificant.

Experts of our bank forecast that in the year 2013, the

average wage will grow by 4.0 per cent. If inflation

(seeking to introduce EUR in the year 2015) is controlled

and does not exceed 2.53.0 per cent, increases in the

average wage most probably will be higher. Thus real wage

will start to gradually rise and compensate the purchasing

power loss incurred in the period of economic stagnation.

Demand for safety remains high, however does not

hide willingness to get the best possible interest.

Financial obligations of households continue to shrink,

however borrowings are growing.

Consumer sentiment index the highest since spring2008.

Wage increases start to accelerate.

Unemployment rate will shrink in the result of economy

development and still threatening emigration volume.

Consumption volume stopped increasing.

Inhabitants accumulated financial assets and repaiddebts.

16/24


Wage increases start to accelerate

-2

-1,5

-1

-0,5

0

0,5

1

1,5

2

2,5

3

Q1 Q2 Q3 Q4

Source: Statistics Lithuania

Unemployment rate will shrink in the result of economy developmentand still threatening emigration volume

Based on the statistical data of the employment research

performed by the Statistics Department, the average

unemployment rate in the year 2012 made up 13.2 per

cent, or was lower by 2.1 percentage points than in the

year 2011. In last year, the number of unemployed made

up 195.2 thou, or was lower by 30.9 thousand (13.7 per

cent) compared with the year 2011. It was undoubtedly

influenced by continuing economic development

determined by rather solid and stable export volume.

Nevertheless in the 4th quarter the local unemployment

level stood at 13 per cent, or was higher by 0.7 per cent

compared with the 3rd quarter. Seasonality factors, such

as reduced number of fixed-term contracts only for

summer and autumn, lower volume of operations in some

industry sectors (e.g. construction, retail trade) also made

relevant impact.


17/24

emigration volume remains threatening and the structured

unemployment problem becomes even more acute.

We forecast that the unemployment in the year 2013 will

decrease to nearly 11.5 per cent. Moderate economic growth

and continuing emigration of the population in the coming

years will ensure a gradual decline in the unemploymentlevel.

Irrespective of the fact that unemployment level makes

nearly 13 per cent, the number of sectors (IT, transport,

shipbuilding, etc.) complaining about difficulties in finding

necessary workers is rising. Such fact is not surprising as

emigration reduces the number of potential workers. In the

year 2012, 43 thousand of inhabitants emigrated. The above

number is lightly lower compared with the year 2011 when54 thousand of inhabitants left the country, however the

17/24

The retail trade turnover volumes were selected for

analysis of the household consumption expenditures.

After a positive start in the beginning of this year, the

retail trade turnover in the second half-year started to

stagnate and in December, as compared with the

equivalent month of the previous year, nearly stopped

(growth made up only 1.4 per cent). Negative impact onconsumer expectations was made by spreading news

that the heating season in 20122013 will be the most

expensive since the date of independence restoration.

Consumption volume stopped increasing

Retail trade (except motor vehicles) turnover(2010 = 100)sa


As compared with the data announced by the Statistics

Department, in the beginning of this heating season (in

October), the heating power supply costs were higher by

3.7 per cent on average as compared with the previous

year. However based on the data of the Lithuanian Heat

Suppliers Association, the bill for heating of 60 square

meter apartment (in the houses located in the entireterritory of Lithuania being monitored by the

Association) in January 2013 was higher by 14 per cent

on average than a year ago. The heating bills soared as

the average monthly temperature determining greater

demand for heating power was low.

Greater optimism about the internal market

consumption volume in the year 2013 may be partially

substantiated by a decision to increase MMW. The

measures for revenue increase mostly stimulate

consumption of low-income families, as the marginal

propensity to consume of such families is the largest.

Inhabitants accumulated financial assets and repaid debts

80

90

100

110

120

130

Jan

Feb

Mar

Apr

May

Jun

Jul

Aug

Sep

Oct

Nov

Dec

2011

2012

2013 Source: Statistics Lithuania

Irrespective of higher expenditures at the year-end, the

deposits of households with the financial institutions

2nd - 4th quarter grew by LTL 1.2 billion (EUR 348

million) or by 4.4 per cent and at the end of the year

amounted to LTL 28.7 billion (EUR 8.3 billion). Liabilities

to the financial institutions decreased by LTL 260

million (EUR 75 million) or by 1 per cent. Net financial

assets (financial assets minus liabilities) totalled LTL 12

billion (EUR 3.48 million), or nearly LTL 4 thousand

(EUR 1.2 thousand) per capita.

Household financial assets and liabilities in MFI (bnEUR)

6

7

8

9

10

11

12

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2008 2009 2010 2011 2012

Assets Liabilities

Source: Bank of Lithuania, Central Securities Depositor, SEB estimations


18/24

However the households willing to use the above

advantages should have more available funds at the end

of the year, should limit spending for consumption

needs, and should be prepared to suspend use of

insurance premiums for a long-term, i.e., until the

insurance agreement expires (exemptions related to the

insureds age may be applied), and in the near future

only to use the income tax refund (15 per cent of

insurance premiums).

Inflows in the investment funds are yet another

indicator showing the investment expectations.

Indicators of the last quarter of the previous year show

that the volume of inflows in the investment funds also

grew, and in the last quarter the value of inflows in the

above funds exceeded the value of outflows.

In last quarter of the year, the popularity of investment

funds slightly increased after positive developments in

the financial markets and disappointment in low interest

earned from other forms of savings. Based on

information available to us, it is obvious that inflows in

the investment funds are rather sensitive to price

fluctuations in the securities markets. Therefore it is too

early to consider that inflows in the investment funds

are long-term or stable investments. Further trends will

depend on the events in the securities markets.

18/24

In the last quarter of the year, the greatest increase in

deposits (term and non-term deposits) was observed.

Such behaviour of households may be explained by the

below reasons:

1) households did not accumulate sufficient reserves for

extraordinary events;

2) households are unwilling to invest in high-risk assets;

3) households do not make any decision yet on use of

their funds, i.e., the purpose of spending, or the purpose

of savings.


Demand for safety remains high, however does not hidewillingness to get higher profits

In addition to recently increasing demand for safety, which

determines savings behaviour of households, willingness

of households to get the best possible interest is

observed. The unit-linked insurance premiums and the

statistical data of inflows in investment funds prove the

above.

Thus in December of previous year, the value of insurance

premiums under unit-linked life insurance agreements

amounted to LTL 65.9 million (EUR 19 million). It was

higher than in the year 2011, when the above indicators

made up LTL 44 million (EUR 12.8 million). Taxable income

is reduced by the amount of premiums paid under the life

insurance agreements, and the income tax surplus is

refunded in the beginning of the following year. The 31st

of December is the last day to get a refund of income tax

paid in such year.

Unit linked life insurance premiums (mEUR)

0

5

10

15

20

25

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2011 2012

Source: Bank of Lithuania

Financial obligations of households continue to shrink,however borrowings are growing

The amount of new loans to households granted by

financial institutions is smaller, compared to the value of

repaid loans. The credit portfolio of households with the

financial institutions continued to shrink. However the

statistical data of the new loans for January provided by

the Association of Lithuanian Banks shows that the value

of such loans is growing. In the first month of the year, the

value of new consumer loans and the new mortgages

grew by nearly 40 per cent as compared with the first

month of the year 2012.


19/24

In addition to the improving financial position, revitalisationof the residential property development sector should bementioned. The number of issued dwelling constructionpermits was higher by 38 per cent than one year ago, and thenumber on finalised construction projects by 3 per cent.Till today, the improvements of the above-specifiedconstruction indicators do not result in value growth of thenew mortgages (agreements). Primarily, those who build orbuy the newly constructed dwellings not always apply forloans. Secondly, the household demand for loans in futurewill increase, when the dwelling is constructed or equippingprocess is started. Thus if the existing environment (localeconomy forecast, situation in the labour market),household income expectations and borrowingrequirements do not significantly deteriorate, the volume ofthe new loans should rise, and the credit portfolio shouldstop shrinking.

19/24

Financial behaviour of households is determined not only

by financial potential but also by prevailing sentiment:

when more difficult period is expected, the households

start cutting their costs and accumulate savings to ensure

financial safety, and repay loans. If households decide that

the most difficult period is over and the near future is

secure, their behaviour is less constrained. Households do

not change their current sa vings habits; however they

make proactive plans for future. In the beginning of the

year, the consumer sentiment index calculated by the

Statistics Department reached the level of spring 2008

(-10). Irrespective of the fact the number of pessimists is

higher that the number of optimists, increasing number of

households does not expect any improvement or

deterioration of the current situation.

Consumer sentiment index the highest since spring 2008


New housing loans(mEUR)

New consumer loans(mEUR)

27,224,7

Jan2011 Jan2012 Jan2013

6,7

7,7

Jan2011 Jan2012 Jan2013

34,010,7

Source: Lithuanian Bankers Association

Consumer sentiment index

-10

-56

-10

-60

-50

-40

-30

-20

-10

0

2008 2009 2010 2011 2012 2013

Source: Statistics Lithuania

Households financial assets, liabilities and net asset value (EUR million)

Financial assets

Deposits

Bonds (Lithuanian corporate bonds and Government bonds)

Units of investment funds offered by the banks

Savings under life insurance agreements

Pillar II pension funds

Liabilities

Mortgage loans

Consumer loans

Other loansNet value of financial assets

The review of the financial assets of households is based on information announced by SEB Bank, Bank of Lithuania, Lithuanian Banking Association, Statistics Lithuania and Lithuanian Central SecuritiesDepositor on the financial assets of residents with the financial institutions, i.e., funds in deposit accounts, investment in bonds, shares, investment funds, pension funds, funds accumulated under lifeinsurance agreements and liabilities to the financial institutions.

2008

8830

7152

493

121

420

644

8740

6055

1265

1420

90

2009

9614

7392

580

183

514

945

8362

6027

1026

1309

1252

2010

10096

7856

241

264

618

1117

7917

5983

932

1002

2179

2Q2011

10200

7893

263

259

626

1159

7850

5982

871

997

2350

4Q2011

10028

7720

322

207

599

1180

7560

5934

691

935

2468

2Q2012

10420

7974

345

197

623

1281

7492

5892

679

921

2928

4Q2012

10 900

8 322

332

201

653

1392

7417

5873

656

888

3483


20/24

Estonia

More certainty on the labour market

More certainty on the labour market, still theunemployment rate is twice as high as before therecession

The increase in electricity prices has affectedhouseholds sentiment, the beginning of 2013 showssome recovery

The unemployment among male has decreased at

significant speed during last years in Estonia. The gap of

unemployment rate between men and women has

diminished and resembles the pre-crises situation.

During the recession cyclical unemployment was

considerably higher among men than among women,

the gap reached 10.6 percentage points in the first

quarter of 2010. The gap decreased rapidly in 2010 and

it has been less than 3 percentage points in recent

years. In the third quarter of 2012 the unemployment

rate of men was slightly lower than that of the women. It

shows that the unemployment is distributed evenly

across genders as it was before the crises. However, the

level of unemployment is still two times higher than

during pre-crises period.

Unemployment rate (%)

Estonian households have experienced modest

improvements on the labour market. According to the

data of Statistics Estonia, the unemployment rate has

been decreasing to 9.3 per cent by the end of 2012 with

the number of unemployed being 63,700. There are

10,200 employed more than a year ago and since the end

of 2011 the unemployment rate has decreased by 1.1

percentage points. The situation is sounder than in many

EU countries; the average EU unemployment rate has

increased slowly since 2011. By the end of 2012 it had

reached 10.7 per cent, that is the highest level in the last

decade. Estonia is among the few countries where the

unemployment rate has decreased during the last half-

year and the labour market is gradually returning to

normal.

Households follow restrained borrowing decisions: theinterest for housing debt and leasing is increasing whilethe demand for consumer debt is continuously modest

Unfavourable era for deposits as the interest rates are athistorically low levels

20/24


0

5

10

15

20

25

30

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006 2007 2008 2009 2010 2011 2012

Total population (15-74)

MaleFemale Source: Statistics Estonia

There are still 63 thousand unemployed on the market;

36 per cent have been unemployed less than 6 months,

12 per cent between 6-11 months, 17 per cent between

12-23 months and 35 per cent of the unemployed have

been searching for a job for more than 24 months.

Long-term unemployment is still a big issue. The share

of those being unemployed between 12-23 months has

decreased since the beginning of 2012 but the share of

those being unemployed for more than 24 months is

showing an increasing trend. This segment of labour

force continues to exhibit minimum purchasing power.

Share of the unemployed by duration (%)

0%

5%

10%

15%

20%

25%

30%

35%

40%

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

Q1

Q2

Q3

Q4

2006 2007 2008 2009 2010 2011 2012

12-23 months

More than 24 months Source: Estonia Statistics

For those who are working, the gross wages are

increasing slightly faster than the inflation rate; henceon average the real purchasing power is increasing. The

average gross wages increased by 5.9 per cent at the

end of 2012 compared to a year ago, reaching the level

of EUR 916. The real wages that adjusted to the inflation

rate increased on yearly basis 2.1 per cent, that is the

same growth rate as at the end of 2011. While the

nominal wages turned into growth in the second quarter

of 2010, the real wages started to grow from the third

quarter of 2011. The real wages have shown modest

increase of 1-2 per cent year-on-year since then.

However, we ha

baltic household outlook: more signs of optimism

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