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7/28/2019 Baltic Household Outlook: More signs of optimism
1/24
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
Triin MessimasHousehold ExpertSEB EstoniaTelephone: +372 [email protected]
Merike Kukk
Research ScientistTallinn University of TechnologyTelephone: +372 6204069
7/28/2019 Baltic Household Outlook: More signs of optimism
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)
Source: National Statistics
-15%
-10%
-5%
0%
5%
10%
15%
4Q08
1Q09
2Q09
3Q09
4Q09
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Latvia Lithuania Estonia
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Source: National Statistics
-12%
-8%
-4%
0%
4%
1Q10
2Q10
3Q10
4Q10
1Q11
2Q11
3Q11
4Q11
1Q12
2Q12
3Q12
4Q12
Latvia Lithuania Estonia
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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)
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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)
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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.
Baltic Household Outlook April 2013
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
Investmentsin real estate
Working as longas possible
Lithuania
45%
33%
27%
By working abroad 27%
Working as longas possible
Investmentsin real estate
Savings in IIIpillar PF
Source: SEB
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Baltic Household Outlook April 2013
2008 2012
Estonia Latvia Lithuania
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
Estonia Latvia Lithuania
134
220
115
209
125
233
0
50
100
150
200
250+65%
+86%+83%
Source: SEB estimates
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Baltic Household Outlook April 2013
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
Estonia Latvia Lithuania
Source: National Central Banks
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
Estonia Latvia Lithuania
2012 January 2013 January
Average Interest Rate of Housing Loans
Source: National Central Banks
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Source: National Central Banks
Baltic Household Outlook April 2013
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
Estonia Latvia Lithuania
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
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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
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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.
Baltic Household Outlook April 2013
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)
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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
Baltic Household Outlook April 2013
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
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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.
Baltic Household Outlook April 2013
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
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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.
Baltic Household Outlook April 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
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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
Baltic Household Outlook April 2013
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.
7/28/2019 Baltic Household Outlook: More signs of optimism
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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
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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.
Baltic Household Outlook April 2013
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.
7/28/2019 Baltic Household Outlook: More signs of optimism
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
Baltic Household Outlook April 2013
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
7/28/2019 Baltic Household Outlook: More signs of optimism
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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
Baltic Household Outlook April 2013
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