Baltic Household Outlook: So far - better than expected

7/31/2019 Baltic Household Outlook: So far - better than expected

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Baltic Household OutlookOctober 2012

So far - better than expected

THE BALTICS

Estonia posted the biggest increase in employment in the second quarter by3.6 per cent compared to the same period of 2011. In Latvia and Lithuaniaemployment grew by 2.2 per cent and 1.4 per cent respectively.

Growth of real wages has resumed in Estonia and Latvia, while in Lithuaniareal wages remains on downward trend.

Employment growth and rising wages supported the private consumption,moreover in Lithuania and Latvia the household consumption expendituresgrew faster than income.

In the first half of 2012 the growth rate of spending abroad outpaced rise indomestic spending.

Households in all three countries increased their net financial worth.

Due to low interest rates short term deposits were losing their attractiveness,besides holdings of cash were increasing.

The fall of loan volumes is slowing down in Estonia and Lithuania while inLatvia the deleveraging continues at the same speed.

Households benefit from historically low Euribor rates. Households experiencethe lowest mortgage interest rate in Estonia (in June 2012 for mortgage ineuro 2.9 per cent annually) followed by Lithuania (3.2 per cent) and Latvia (3.5per cent).

The household sectors investment rate is lower than the EU average. In orderto increase the useful floor area of dwellings, it should be increased.

Households liquidised extensively their real estate in 2002-2007 and half ofthe additional funds was consumed. Since 2008 households are injectingfunds to the real estate at the expense of their consumption.

Edmunds RudzitisSocioeconomics ExpertSEB LatviaTelephone: +371 [email protected]

Julita VaranauskieneHousehold Economist

SEB LithuaniaTelephone: +370 [email protected]

Triin MessimasHousehold ExpertSEB EstoniaTelephone: +372 [email protected]

Merike KukkResearch ScientistTallinn University of TechnologyTelephone: +372 [email protected]


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Baltic Household Outlook

Even with some slower growth in the first half of 2012,economic conditions in the Baltic countries remainpositive. In the first two quarters of this year Latvia wasthe fastest growing economy among the 27 EuropeanUnion countries, followed by Lithuania and Estonia.In contrast to 2010-2011, when economic recovery ofBaltic countries was mainly driven by strong export

Labour market situation continue to improve in line with

economic growth. Due to seasonal factors and slower

global growth unemployment increased slightly during the

first quarter of 2012. Unemployment started declining

again from April, by mid-2012 reaching the lowest level

since the last quarter of 2008 in Estonia. In Lithuania and

Latvia in the second quarter unemployment rate was at

the lowest level since the first quarter of 2009. Although

unemployment rate has decreased significantly since the

trough of the recession, share of long-term unemployed

persons (persons who had been looking for a job for one

year or more) remains high. In Latvia the share of long-

term unemployed among all unemployed persons was

54.1 per cent, in Estonia and Lithuania 52 and 48 per cent

respectively, reflecting also some structural problems in

labour market.

Estonia posted the biggest drop in unemployment during

the last 12 months in the second quarter unemployment

(job seekers) rate was 10.2 per cent, 3.1 percentage points

lower compared to the same period of 2011. In Lithuaniaunemployment rate declined by 2.3 percentage points to

13.3 per cent while in Latvia decrease in unemployment

level was the smallest among Baltic countries despite the

highest GDP growth rate only by one percentage point

from 17.1 per cent in the second quarter of 2011 to 16.1 per

cent in mid-2012.

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October 2012

Employment continues to grow

growth, in the first half of 2012 export growth rate slowedsubstantially and economy was supported by privateconsumption, the largest gross domestic product (GDP)component. Due to stronger than expected domesticdemand, the GDP growth rate of this year has beenrevised upwards in all three countries.

Unemployment rate* (%)

Latvia Lithuania Estonia

*Persons aged 15-74Source: National Statistics

Slight unemployment changes in Latvia can be explained by

a significant rise in the economic activity, e.g. decline in

number of discouraged workers (those persons who have

lost hope to find a job or do not know where and how to

find a job). In Latvia number of discouraged workers in the

second quarter was 25.4 thousand persons or 4.8 per cent

of the total number of inactive population. Number of

discouraged workers declined by 8.2 thousand compared to

the second quarter of 2011. In Estonia and Lithuania

number of discouraged persons is smaller than in Latvia,

forming approximately two per cent of the total number of

inactive population.

Growing economic activity and gradually declining

unemployment rate reflects positive development in the

labour market. According to Labour Force survey, in Estonia

employment grew by 3.6 per cent year-on-year in the

second quarter of 2012. Latvia and Lithuania posted 2.2 per

cent and 1.4 per cent growth of employment respectively.

Since its labor market bottomed in the first quarter of 2010,

Estonia has recovered 70 thousand of the 109 thousand lostjobs. In Lithuania number of employed persons during the

last nine quarters has increased by 76 thousand. Due to

adjustments in unemployment and employment figures

according to Population Census 2010, in Latvia it is much

harder to evaluate the number of recovered jobs. Compared

to the lowest point of 2010, employment has rebounded by

12.7 per cent in Estonia and 5.7 per cent in Lithuania.

Employment will rise further, albeit at a slower pace amid

moderate GDP growth.

Unemployment rate is expected to decrease in the near

future in all Baltic countries, due to both job creation and

emigration. According to forecasts, average unemploymentrate this year in Estonia will be 10.4 per cent while in

Lithuania and Latvia unemployment will make 13.5 and 15.6

per cent of the economically active population respectively.

Next year unemployment rate is expected to be 9.8 per cent

in Estonia, 12 per cent in Lithuania and 14.2 per cent in

Latvia.

0%

4%

8%

12%

16%

20%

24%

1Q07

2Q07

3Q07

4Q07

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11


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Wages in Estonia had the highest increase among the

Baltic countries in the last quarter wages grew by 6.3 per

cent compared to corresponding period of 2010. In Latvia

gross wages increased by 4.5 per cent and in Lithuania by

2.5 per cent. Wage growth in Estonia during the last two

years was faster than in Latvia and Lithuania, thus

difference between wages in Estonia and other Balticcountries increased. In Estonia average gross wages (EUR

865) is by 28 per cent larger than in Latvia (EUR 676) and

by 37 per cent higher than in Lithuania (EUR 630). Average

gross wages in Latvia is by 7 per cent higher than in

Lithuania; however due to larger tax wedge on the labour

net monthly salaries in Latvia is the lowest among the

Baltic countries. In the first half of2012the average net

monthly wage in Lithuania reached EUR 483 while in

Latvia it was EUR 481.

Gradual growth of real income has resumed in Estonia and

Latvia, while in Lithuania real wages remains on downward

trend. The real wages in Estonia increased for the fourth

quarter in a row, albeit, at a slower pace than in the

previous quarters. In the second quarter real wages

increased 1.1 per cent year-on-year. In Latvia the average

real wage in the second quarter rose by 1.5 per cent year-on-year thus improving purchasing power of labor force.

Average gross wages and salaries (%, YoY)

Source: National StatisticsLatvia Lithuania Estonia

Real wages (%, YoY)

Source: National Statistics


There is uneven wage growth across the different sectors

of economy. Besides, labor cost dynamics are influenced

by irregular bonuses and premiums. In the second quarter

of this year the irregular bonuses and premiums per

employee in Estonia grew by 19.9 per cent compared to

the 2nd quarter of 2011, influencing the growth of the

average monthly gross wages. Increase of average gross

wages (excluding irregular bonuses and premiums)

reached 4.6 per cent.

Baltic Household Outlook October 2012

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q1 0

2Q1 0

3Q1 0

4Q1 0

1Q1 1

2Q1 1

3Q1 1

4Q1 1

234

256261 264

235 235

216

236

305 305 306

291

150

200

250

300

350

4Q08 4Q09 4Q10 4Q11

Average old-age pensions (in euros)

Source: National StatisticsLatvia Lithuania Estonia

-12%

-8%

-4%

0%

4%

8%

12%

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

Since the first quarter of 2010 when wages in Estonia

started to grow, average gross wages have grown by 19

per cent. Taking into account consumer price movements,

real wages have increased by 6.7 per cent. In Estonia

households have experienced a quicker improvement in

the purchasing power than in Latvia and Lithuania. In real

terms (deflated by the consumer price index), average net

wages and salaries are approximately 7.5 per cent lower

compared to the second quarter of 2008. In Latvia since

the lowest point of recession average gross and real

wages have increased by 11 and 2.5 per cent respectively,

however purchasing power of workers is far below pre-

crises level. In the second quarter of 2012 average real net

wage was 10.3 per cent lower compared to the same

period of 2008. Among Baltic countries Lithuanianhouseholds have gone through the largest decline in their

income level -- real net wages fell by 14.3 per cent

between the second quarter of 2008 and the same

quarter of this year.

It is expected that labour income will rise gradually. In

Latvia approved Personal income tax cuts (from 25 to 24

per cent in 2013 etc.) are expected to support private

consumption next year. According to forecasts, in Latvia

increase of average gross wages next year will reach 4 to 5

per cent. In Lithuania wage growth is expected lower than

in Latvia and Estonia, reaching 2.5 per cent.


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To spend, or not to spend: that is the question

Since the second half of 2010 the rise in private

consumption has been observed in all three Baltic

countries. In the second quarter of this year the fastest

growth rate of the household spending for goods and

services was registered in Latvia 7.2 per cent up year-on-year. In Lithuania household consumption increased by 4.6

per cent, while Estonia demonstrated slight 1.9 per cent

gain in private consumption. Increase in household

spending fuelled by employment growth and gradually

rising wages. In Lithuania consumption was influenced also

by nominal growth of old-age pensions to the pre-crises

level.

The growth of nominal household expenditure (at current

prices) in Latvia was 10.7 per cent while in Lithuania and

Estonia nominal expenditure rose by 7.2 and 5.7 per cent

respectively. Moreover, in Latvia and Lithuania growth of

consumption expenditures was faster than disposableincome increase. It can be explained by quite large share of

shadow economy (envelope wages) and by improvements

in consumer confidence. Consumers are become less

concerned about the future, making more purchases.

Besides, in Latvia consumption expenditures show that

propensity to consume is starting to prevail over propensity

to save while in Estonia households are more cautious in

their consumption and saving behaviour.

At the same time, growth rates of household consumption

in all three countries remained low compared to those of

boom years as numbers of financially constrained

households with limited spending opportunities stay quite

high and households remain cautious as well. In the near

future, household spending will depend on the growth of

disposable income and inflation as well.


Household consumption expenditure (%, YoY)


-30,0%

-25,0%

-20,0%

-15,0%

-10,0%

-5,0%

0,0%

5,0%

10,0%

15,0%

1Q08

2Q08

3Q08

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12


Shopping abroad grew substantially

Consumers shop more outside country statistics continueto show a rapid increase in the number and value of

payment card transactions abroad, incl. in the online stores.

In the first half of 2012 the biggest rise in the number of card

transactions at POS terminals abroad was registered with

payment cards issued in Lithuania 44 per cent year-on-

year. Payment card spending by Lithuanians outside the

country grew by 25 per cent to EUR 248.3 million. Over the

year the number of transactions made in stores abroad with

payment cards issued in Latvia and Estonia went up 19.8 per

cent and 11 per cent respectively. In the first half of 2012 the

total turnover of purchases made abroad with payment

cards issued in Latvia reached EUR 375.6 million (28 percent growth y-o-y) while Estonians spent abroad EUR 261.3

million (20 per cent growth y-o-y).

Changes in numbers of transactions at POS terminals(1H2012 compared to 1H2011)

The growing trend of shopping overseas is due both to the

increase in travelling and more popular online shopping.

The Internet and payment cards have opened up the

opportunity of shopping abroad also for those people who

are not travelling.

The usage of payment cards in local markets has also

increased. Lithuanians have been most active in boosting

the number and value of their purchases by cards in the

first half of 2012 the number of transactions at POS

terminals grew by 18.2 per cent to 56.7 million while

money spent at POS terminals increased by 18.3 per cent

to EUR 849 million. In Estonia the amount and number ofcard transactions at POS terminal rose slower by 14.6

per cent and 9.4 per cent respectively. In Latvia growth

rate was similar to Estonia the number of purchases by

0%

10%

20%

30%

40%

50%

Localmarket

Abroad Localmarket

Abroad

LV LT EE

Source: Central Banks

Abroad Localmarket

Changes in amount of transactions at POS terminals(1H2012 compared to 1H2011)

0%

10%

20%

30%

40%

Localmarket

Abroadmarket

Abroadmarket

Abroad

LV LT EE


Local Local


5/295/29

cards increased by 9.9 per cent while value of purchases

rose by 13.5 per cent.

The usage of payment cards indicates that consumers find

payment cards more appropriate both for day-to-day

transactions and large purchases. In local markets the

average value of transaction does not differ -- average

sum for a purchase made with a card was approximately15 euros in all three countries. However, Latvias card

holders more frequently use cards for large purchases

abroad, outpacing Lithuanians and Estonians. In Latvia

the average value of purchases abroad is 69 per cent

larger than in Lithuania and approximately two times

bigger than in Estonia.

Although growing trend of payment card usage can be

observed across the Baltic States, the card penetration

and payment preferences of customers differs. Among

Baltic States Estonia has the highest usage level of

payment cards. Payment cards are most frequently used

in Estonia with 59 transactions per card at POS terminals

(including terminals abroad), followed by Latvia with 24transactions per card and Lithuania with 16 transactions

per card.


Average transaction at POS terminals in 1H2012(in euros)

0

20

40

60

80

100

LV LT EE

Local market Abroad

Source: Central Banks, SEB calculations

In all Baltic countries the total amount of money spent on

purchases (both abroad and in the local market) reached

record high levels. At the same time, in Latvia card

spending domestically are still below pre-crises level. Inthe first half of this year value of card transactions in

Latvia was 7.7% lower than in January-June of 2008.

The total value of card payments at domestic POSterminals (mEUR)

0

300

600

900

1200

1500

1H2008 1H2011 1H2012 1H2008 1H2011 1H2012 1H2008 1H2011 1H2012

LV LT EE


Number of transactions per card in 1H2012

0

15

30

45

60

LV LT EE

ATM POS


Estonia has also the highest turnover per payment card. In

Estonia the amount of purchases made with payment card

on average is two times larger than in Latvia and more

than three times bigger than in Lithuania. Statistics

indicates that consumers in Estonia more frequently use

cards for their purchases while Lithuanians and Latvians

still prefer cash for their daily purchases instead ofpayment cards.

Average turnover per card in 1H2012 (in euros)

0

150

300

450

600

750

900

1050

LV LT EE


Stabile expectations of the population show that no considerablechange is likely in the financial behaviour in the three Baltic countries

According to the most recent statistical data of Eurostat

consumer opinion poll in September, expectations of the

Lithuanian population regarding the future, though

pessimistic, are rather stable. In September, Lithuanias

Consumer Confidence Index (CCI), eliminating the impact

of seasonality, was -22. In Estonia this indicator in

September was -10, and in Latvia -13. At the same time it

should be noted that the level of pessimism in Lithuania,

which is the most pessimism-ridden among all the three

countries, is weaker than in Spain, which is experiencing

not its best times, and where this indicator has dropped

to as low as -37, or in Portugal (-59), not to mention


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Greece (-76). Also, in Lithuania there is less pessimism

than in neighbouring Poland (-32), which a few years ago

was almost undisturbed by a recession and is probably

more concerned about a potential decline in future.

Among all the three Baltic states Estonia stands out in

that the ratio indicating the consumers opinion about the

probability of at least some savings is better (-26) than

that indicating the consumers intention to make any

higher-price purchases (-43). In Latvia and Lithuania the

situation is reverse the ratio indicating the consumers

intention to make any higher-price purchases in near term

(-15 and -10, respectively) is better compared to the ratio

indicating the consumers opinion about the probability of

at least some savings (-39 and -41, respectively). It may be

assumed that these indicators have been determined by

the level of current income rather than by higher

propensity to spend. Starting from the year 2001, the ratio

of probability of at least some savings has always been

negative in Lithuania and in Latvia, however, the portfolio

of the populations savings with financial institutions has

been mainly increasing. Hence, the population in Latvia

and Lithuania have intentions to make higher-price

purchases without giving up accumulating their savings.

Expectations about household's financial situationand general economic situation in the future(September, 2012)


pessimists in Latvia is higher than that of optimists the

indicator is negative (-5). Usually, as regards personal

financial situation, the attitude of the population is more

optimistic than that regarding the countrys situation.

However, a large difference is already a signal of either

excessive optimism as regards personal situation, or

excessive pessimism (sometimes also externally formedattitude) regarding the situation of the whole state.

Consumer sentiment index

-30

-25

-20

-15

-10

-5

0August

September

October

November

December

January

February

March

April

May

June

July

August

September

2011 2012


Since the beginning of the year, the ranks of pessimists

thinned the most in Estonia (the indicator improved from -

15 to -10). In Lithuania it has remained nearly unchanged

(respectively -20 and -22). In Latvia, the index improved

from -18 to -13.

Estonian, Latvian and Lithuanian households have

regained their optimism in the first half of 2012 as in the

light of debt crises the fiscal position of the three

countries is better than in several other EU countries. Still,

the confidence slightly worsened at the end of summer in

Lithuania and Estonia. Not so good news from Eurozone

countries, fear of significant increase of energy prices to

households in Estonia, and of approaching expensive

heating season (in Lithuania) could be the reasons of that.

Latvians optimism still seems unabated. This may be

related to increasing purchasing power of the households

due to decreased or approved to decrease taxes (VAT and

personal income tax).

There are not only different trends, other differences can

also be found. One such difference that singles out Latvia

is the difference between expectations of the population

regarding financial future of their households and thecountrys economic situation in future. In Estonia the

indicator that reflects the expectations regarding their

personal financial standing is -5, and that regarding the

countrys economic situation is -6. The differences

between valuations in Lithuania and Latvia are very much

alike. In Lithuania the indicator that reflects the

expectations regarding their personal financial standing is

-12, and that regarding the countrys economic situation is

-19. Whereas in Latvia the indicator that reflects the

expectations of the population regarding family financial

standing is positive (3), which means that the number of

the population that expect improvement in their familyfinancial situation was higher than that of the population

with an opposite opinion. And as regards the development

of the countrys economic situation, the number of

Source: Eurostat

Source: Eurostat

-25

-20

-15

-10

-5

0

5Latvia Lithuania Estonia

Household financial situation General economic situation

Intentions to spend more and probability to save(September, 2012)

-50

-40

-30

-20

-10

0

Estonia Latvia Lithuania

Intentions to spend more on big ticket purchase Probability to save

Source: Eurostat


7/29

borrowing. In case the development of events would take a

worse turn than expected, excessive optimism may

significantly deteriorate a familys financial standing and its

standard of living.

In the current situation, higher savings and lower level of

debt allows households to be more relaxed about their

future. Therefore, we tend to believe that the populationwould be better prepared for a second wave of recession, if

any, than they were four years ago. Nevertheless, as the

behaviour of households during a few recent years has

shown, consumer expenditure mainly depends on current

income. When the latter decrease, people are inclined

rather to limit their consumption expenses than borrow or

eat up their savings. Perhaps hardly anyone would dare

consider such behaviour to be irrational.

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Over the first half-year of the current year, financial assets

of households increased in all countries. In Estonia and

Lithuania it was mainly due to growth in the major part of

financial assets, i.e. in the amount of deposits. In Latvia

deposits growth was lower than growth in II pillar pension

funds. Over time, the impact of changes in financial

markets on asset classes related to securities markets was

different: in the first quarter, the asset value grew as a

result of favourable changes, in the second quarter it

mainly declined again favouring the holders of such assets

only in the very last month of second quarter. Volatilesecurities markets and their performance that is more

often negative than positive had an impact not only on

the fluctuation of the asset value, but also on the

investors behaviour attraction of higher-risk yet, in case

Financial assets of households increased in all countries


of favourable environment, profitable financial

instruments was declining, and investments in these

assets classes were lower as against previous periods.

A rising trend in the amount of cash holdings is also worth

mentioning. The ratio of cash to deposits with financial

institutions in all the three countries is different, the

highest one being in Latvia and the lowest one in Estonia,

however, during recent months, a rising trend in this ratio

has been observed in all the three countries due to several

factors: a decrease in the number of financial service

points resulting in the emergence of households that findit more convenient to have cash; little stimulus to

transform cash into non-cash as interest on deposits has

dropped to record low levels without any perspective of a

rise; and, last but not least, shadow economy.

Expectations of the population regarding future to a fairly

large extent determine its financial behaviour. Mere

opinions, talk or considerations about future cannot make

any significant change in the financial situation (it does not

cause any increase or decrease in a family budget), however,

financial behaviour of the majority of the population may

strengthen or mitigate economy fluctuations. For instance,three years ago, at the very end of 2008, when it became

obvious for everyone that the economic decline is

unavoidable, consumer sentiment worsened dramatically,

the level of consumption dropped immediately, whereas

income was decreasing gradually. On the other hand,

rationally unsubstantiated optimism regarding ones own

financial standing, the economic situation of the country or

changes in the labour market should not be basis for a

decision to spend ones savings or for inadvertent

Over the initial six months of the current year, savings in

deposit accounts of households increased in all the three

Baltic countries. Similarly as over the previous period,

savings of Estonian households were characterised bythe most rapid growth (EUR 240 million or 5.5 per cent),

whereas in Lithuania they were almost half slower (EUR

254 million or 3.3 per cent). During January through June,

the amount of deposits of households with financial

institutions in Latvia increased by EUR 46 million or by 1

per cent.

Preconditions for savings growth in all the countries are

the same: higher income, somewhat lower-pace growth

in households consumption as a result of ended sale

period, moving of financial assets from instruments

related to excessively volatile or disappointing securities

markets investment funds, equity related bonds toregular accounts where the value of the assets

transferred or held is stable.

According to the amount of savings per capita the leader,

as before, is Estonia (EUR 3,410) followed by Lithuania

(EUR 2,652) and Latvia (EUR 2,026).

Deposits are losing their attractiveness

Deposits per capita (Eur)

1980

2586

3126

2026

2652

3410

0

1000

2000

3000

4000


June 2011 June 2012

Source: Central Banks, National Statistics


8/298/29

In January through August, trends in the saving patterns

of households remained similar in all the three Baltic

countries: the share of deposits with agreed maturity

grew as against that of deposits without maturity. The

slight shock in December of last year is related to the

bankruptcy of some banks. At that time, savings that had

previously been in closed banks agreed maturitydeposits accounts were transferred from Lithuanias and

Latvias deposit insurance funds to deposit without

maturity accounts. Since then, in terms of the share of

funds held in deposit without maturity accounts Latvia

surpassed Estonia and is still leading in terms of this

indicator. At the same time Lithuania retained its rank as

the most persistent saver. However, as compared to, say,

the beginning of the year 2011, even Lithuanians are

more often inclined to leave their money in deposit

with agreed maturity. Furthermore, interest rates of such a

level are too low to eliminate the detrimental effect of

inflation on savings, therefore, the actual value of savings

is decreasing.

Possibilities to have higher interest by selecting longer

maturity deposits with agreed maturity do not give ground

for much optimism. Within eight months, in Estonia andLithuania there was a slight increase in the share of

deposits with more than one-year maturity. At the

beginning of the year, the share of such long-term deposits

in Estonia and Lithuania was 18.2 per cent and 17.3 per

cent, respectively. At the end of August these indicators

were, respectively, 19.8 per cent and 20 per cent. Whereas

in Latvia within the eight months there was a drop in the

share of long-term deposits: from 27 per cent down to 24.4

per cent.

In the nearest future, now that the central banks in Europe

and the US are cutting interest rates with the aim to

overcome the economic stagnation, depositors in theBaltic States should no longer expect the level of interest

rates that were offered, for instance, in the period

20082009. The majority of households will most likely

put up with this, and their behaviour will change but

slightly. Some depositors will look for institutions offering

higher interest on deposits. When the interest rates are as

low as they are, interest higher by even one percentage

point may mean double as high income for a depositor.

Some depositors will opt for longer-term saving

agreements. For instance in Lithuania, where the state

borrows from the countrys population by issuing one or

two-year maturity saving bonds, in case of which interest ishigher compared to that offered by the largest banks for

relevant maturity deposits, the value of saving bonds

placed during the second quarter of the current year was

about four times as high as that over the previous period.

Increasingly higher alertness and cautiousness of

households will not provide conditions for other, higher-

risk related forms of saving, namely, investments in

securities and other and financial instruments.

The reason of such behaviour is interest rates. Currently

they are record low in each of the three countries. InAugust 2012, the weighted average of the most popular

maturities (in the range of 6 to 12 months) of new

deposits in Estonia and Lithuania was, respectively 1.38

per cent and 1.83 per cent (in case of Lithuania, interest

rate on deposits in the national currency is provided, as

most of the deposits are of national currency). Interest

rate of such a level is not attractive to depositors and does

not encourage them to execute agreements on deposits



Deposits without agreed maturity share

30%

35%

40%

45%

50%

55%

60%

2011 2012


Securities markets were more often disappointing than encouragingThe close of the first quarter of the current year, though

profitable, was marked by little optimism. During the

second quarter more optimism, if at all, could be felt only

at the very end of June. Recent trends in equity markets

indicate that the situation is improving markets are

gradually recovering, prices are increasing. Anyway, one

should bear in mind that prices are still highly volatile, and

risk remains high.

Negatively developing situation in the global markets also

had an adverse effect on the value of the private

individuals financial assets funds accumulated frominvestments under unit-linked life insurance agreements,

in pension funds, investment funds. A decline in the value

of financial assets as a result of unfavourable changes in

the markets is a serious challenge to many investors.

Judging by changes in the financial assets of households

in the three Baltic states, a decrease in the value of assets

related to securities markets was a result of not only a

decline in the market price, but also of a fact that

households simply increased divestments rather than new

investments.

Market indicators that showed no improvement

disappointed investors investing based on unit-linked life

insurance agreements and decreased their appetite for

this type of insurance as a means of saving and investing.In Lithuania during the first half-year of the current year,

the value of insurance premiums paid under unit-linked

life insurance agreements was by one fifth lower as


9/299/29

Cash holdings are increasing

against a relevant period a year ago. This year, the

population is more positive towards traditional

endowment insurance. The share of this type of insurance

within the total life insurance portfolio has been

increasing both in terms of the number of new

agreements and the amount of new premiums written.

The statistical data related to premiums written in Latvia

When analysing financial assets of the Baltic states

households, usually we refer to the households savings

and funds held with financial institutions: deposits with

agreed maturity and deposits without agreed maturity,

funds accumulated in pension fund accounts, under life

insurance agreements, investment in securities and other

financial instruments. In the present issue of Baltic

Household Outlookwe have decided to analyse also thereserve of cash held by households.

Based on central banks data, it can be seen that the three

Baltic countries differ in terms of the ratio between cash

held by households and savings in accounts with

monetary financial institutions.


show that during the first half-year of 2012 the share of

unit-linked life insurance was 22 per cent, whereas during

a relevant period a year ago it was higher and accounted

for 30 per cent. According to Estonian data, during the

first half year of 2011 the share of unit-linked life

insurance was 40 percent, while in the first half of current

year 36 percent.

Judging from the perspective of the households,

inclination to hold cash instead of depositing it to

accounts with financial institutions is determined by other

factors as well. One such factor is penetration of financial

services. Eurobarometerdata announced in the spring of

the current year show that the share of private individuals

with a bank account in Estonia, Lithuania and Latvia was

94, 83 and 84 per cent, respectively. Also, Estonians areleading in terms of both the number of ATMs and POS

terminals per 1000 of the population.

During recent years, there has been an increase in the

cash to deposits ratio in each of the three countries. In

Estonia, the lowest cash/deposits ratio (4 per cent) was

achieved at the beginning of 2011. This should be

attributed to the introduction of euro. For households to

exchange their savings in the national currency was more

convenient by bringing it to financial institutions,

therefore, euro adoption served as a factor decreasing the

volume of cash. Recently, however, the cash/deposits ratio

has increased and achieved the level before theintroduction of the euro. The available short Latvias data

history also shows an increase in the share of cash. In

Lithuania, too, cash is increasing as compared to cash in

deposit accounts.

Collapse of banks Snoras and Krajbanka that serviced a

large number of private individuals (households) in

Lithuania and Latvia could contribute to an increase in the

popularity of cash: the amount in cash in deposit accounts

shrank as a result of a loss of uninsured deposits and due

to some panic-stricken depositors who decided to hold

their savings in cash. True, the amount of households

deposits that has been recently increasing in these

countries allows to believe that trust in banks has

regained its previous positions (even though public

opinion surveys would evidence the opposite).

One more purely technical reason is that there were

(and still are) localities, where there is no bank at all after

closing down the units of the bankrupt banks. Besides,

optimisation of the activities of other banks, too, involved

a close-down of economically detrimental units. Electronic

money is not convenient for everyone and in every

situation. Therefore, when the number of customer service

points decreased, some households simply had no otherway out than to hold their money at home instead of an

account with a financial institution.

Cash and deposits ratio

0%

5%

10%

15%

20%

25%

30%

35%

2008 2009 2010 2011 2012


Source: Eurostat

The ones who tend to have the least savings in cash are

Estonians. In that country in 2012 cash to deposits withfinancial institutions ratio was 9.7 per cent. In Lithuania

and in Latvia this ratio was 22.4 per cent and 33 per cent,

respectively. To the extent we can judge by the data

available, this pattern of the countries ranking according

to their love for cash has been valid already for quite some

time.

Excessive amount of cash in the economy is used as an

indicator of the size of shadow economy. Research carried

out by scientists of Stockholm School of Economics in

Riga shows that in Latvia the share of shadow economy

(ratio to the GDP) is significantly higher than that in1

Estonia or Lithuania . Consequently, the strongest

inclination of Latvian households to hold funds in cash

echoes the calculated results.

1For futher reading http://www.sseriga.edu/en/research/centre-for-sustainable-business/shadow/.

However, this research does not use currency approach but another methodology.


10/2910/29

Households in all three countries continue to adjust their

stock of loans downward, following the trend in most EU

countries. In Estonia the current loan volumes are on thesame level as they were in December 2007 while in Latvia

on the same level as in March 2007 and in Lithuania as in

February 2009. Hence, the household credit market has

fallen back the most in Latvia and in Estonia while the

least in Lithuania. Comparison of deleveraging of different

EU countries indicates that the level of deleveraging

depends on the rates of credit expansion before the crisis.

Estonia and Latvia had one of the fastest expansions and

therefore the adjustment is more profound than in

Lithuania.

Household debt to GDP is the highest in Estonia, 44 per

cent at the end of 2011. In Latvia it is 37 per cent and inLithuania 25 per cent. The debt to GDP level in the Baltic

countries is comparable to other new EU Member states

(e.g. in Poland it is 35 per cent and in Hungary 30 per

cent), being however lower than in the Northern EU

countries: e.g. in Sweden it is 76 per cent and in Germany

56 per cent. In the EU the level of deleveraging is more

closely linked to the degree of credit expansion prior to

the crises than to the current amounts of household debt

to GDP and this applies also to the Baltic countries.

The reduction of housing loan stock is smaller in all

countries while the consumer credit has showed the

deepest slump. One of the reasons for differentdeleveraging speeds is the natural higher rigidity of

housing loans and their longer maturities. Significant

share of the consumer credit stock was issued in 2006-

2007 with maturity around 5 years and as there are more

contracts that are terminated currently, then the natural

deleveraging process is faster.

The speed of deleveraging has been the highest in

Lithuania where the consumer credit portfolio decreased

in June 2012 by 22 per cent compared to the June 2011.

However, most of the decrease has been induced by the

exclusion of Snoras Bank loan portfolio from the statistics

in November-December 2011 due to its bankruptcy. InLatvia the respective decreasing rate was 10 per cent year-

on-year and in Estonia 7.5 per cent year-on-year. The

changes in the growth rates are more informative than

absolute changes. In Estonia the decreasing rate is

slowing down: for comparison, in June 2011 the rate was

11.2 per cent year-on-year. During 2012 also Lithuania is

showing a slower speed of deleveraging while in Latvia the

speed remains the same. Surprisingly, although Estonia

experienced the most vigorous consumer credit volume

increases in 2005, the downturn after the recession is not

deeper than in other Baltic countries.

The demand for new loans is still modest as the current

economic situation does not promise any significant wage

increases in any of the Baltic countries and therefore

households have less arguments to consume the future

income now, i.e. to borrow. As long as the households do

not have good reasons to shift consumption from the

future to the current period, the consumer credit volumes

continue to decline.

Still, a fraction of households would like to borrowregardless of their future income prospects, but the

commercial banks pay more attention to the income risks

of households when evaluating the creditworthiness of

customers. Therefore some households use a very

expensive credit from unregulated credit providers instead

of regulated providers. There is no official data about the

loan volumes issued by unregulated credit providers in

Estonia and Latvia (also called SMS loans). In Lithuania

LVLKA (Association of consumer leasing and credit

companies) provides regular information for main fast

loan providers that cover over 80 per cent of the market.

According to their statistics the fast consumer loanvolumes at the end of the first quarter of 2012 reached

EUR 67.7 million, being 9.9 per cent of the consumer credit

volume of regulated providers. Quarterly new fast loans

are issued in the amount of EUR 20 million and the loan

stock is continuing to increase while the consumer credit

volumes of regulated providers are decreasing. The total

amount of consumer loans of regulated and unregulated

providers is decreasing in Lithuania, although some revival

of issuing consumer credit has been noted (more in the

country overview).

Continuing deleveraging indicates altered long-termbehaviour of households


Changes in consumer credit portfolio, Y-o-Y

-40%

-20%

0%

20%

40%

60%

80%

100%

120%

140%

160%

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12




11/2911/29

Regarding housing loans, Latvia has experienced the

highest growth rates in 2007 while currently it is

experiencing the biggest reduction in the growth rates.

The housing loan portfolio in Latvia decreased in June

2012 by 11.2 per cent year-on-year compared to 1.5 per

cent in Estonia and 1.6 per cent in Lithuania. The fall of

loan volumes in Latvia is partly explained by the extractionof loan portfolio of Parex Bank but still the data shows

significant deleveraging of households. The evolving of

housing loan volumes depends mainly on the current

needs and possibilities for improvement of

accommodation. The possibilities rely on the income

prospects and the costs of different tenure status that are

affected by real estate prices. The housing choices and

their impact on household financial behaviour is analysed

in the following section.

The structure of loan portfolio resemblesthe one of the Northern countries

In all three countries the housing loans provide the

biggest share of the households loan portfolio and the

share has been increasing: in June 2012 the share was

highest in Estonia, 84 per cent of total loan portfolio, while

in Latvia it was 81 per cent and in Lithuania 79 per cent.

The biggest shift in the share of housing loans has

occurred in Lithuania where the share has increased from

69 per cent at the end of 2008 to 79 per cent in June 2012.

The change in Lithuania is once again affected by thebankruptcy of Snoras bankas, but the changing loan

structure indicates that developments on the housing and

interest rate market affect households to large extent. The

structure of loan portfolio in the Baltic states resembles

most the one of the Northern EU countries where housing

loans make up of the total loan portfolio. In Southern

EU countries the share of housing loans is approximately

70 per cent while in the New Member States it is around

60 per cent.


The process of restoring household balance sheets has

led to major shrinkage in leasing volumes. At the end of

2008 the share of leasing volumes out of all household

liabilities was around 5 per cent in all Baltic countries,

namely 6.5 per cent in Estonia and 5.2 per cent in Latvia.

In Lithuania the statistics is from second quarter 2009 and

shows the leasing share of 4.6 per cent. In the second

quarter of 2012 the share has plummeted to 1.5 per cent

in Lithuania and to 2.2 per cent in Latvia. In Estonia theshare has decreased to 4.6 per cent. Leasing volumes have

decreased more rapidly than consumer credit volumes.

Changes in housing loan portfolio, Y-o-Y

-20%

0%

20%

40%

60%

80%

100%

Mar-06

Jun-06

Sep-06

Dec-06

Mar-07

Jun-07

Sep-07

Dec-07

Mar-08

Jun-08

Sep-08

Dec-08

Mar-09

Jun-09

Sep-09

Dec-09

Mar-10

Jun-10

Sep-10

Dec-10

Mar-11

Jun-11

Sep-11

Dec-11

Mar-12

Jun-12



Structure of household loan portfolio

81% 84% 79% 81% 69% 79%

11% 9% 12% 12%14%

8% 8% 8% 8% 16% 12%

9%

0%

20%

40%

60%

80%

100%

120%

2008 IIQ 2012 2008 IIQ 2012 2008 IIQ 2012


Housing loans Consumer loans Other loansSource: Central Banks

Share of leasing in portfolio of household liabilities

6,5%

4,6%5,2%

2,2%

4,6%

1,5%

0,0%

1,0%

2,0%

3,0%

4,0%

5,0%

6,0%

7,0%

2008 IIQ

2012

2008 IIQ

2012

IIQ

2009

IIQ

2012




12/2912/29

Households have benefited from the historically low level

of 6 month Euribor that determines the housing interest

rates. In all countries the majority of housing loans

contracts are based on flexible interest rates and

households experience Euribor movements directly via thechanges of their interest rates. In October 2008 the 6-

month Euribor rate was at its highest: 5.18 per cent

annually. It decreased sharply at the beginning of 2009 and

Households experience most favourable mortgage interest rates


6-month Euribor interest rate (%)

0

1

2

3

4

5

6

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Jan-12

Apr-12

Jul-12

Source: European Banking Federation

reached extraordinary low levels at the beginning of 2010

when 6 month Euribor was below 1 per cent annually. The

rate encountered some increase until July 2011 when it

reached 1.8 per cent annually. A year later, in June 2012 the

6 month Euribor was 0.9 per cent and it has decreasedsubsequently reaching 0.48 per cent in September 2012.

Accordingly, in half a year the interest rate of housing loans

has decreased in all countries more than 0.5 percentage

points in June 2012. SEB Estonia has calculated that their

mortgage customers save on an average around 435 EUR

per year due to lowering interest rates (more in the section

about Estonia). Comparing the housing loans in euros in all

three countries, then in June 2012 the lowest average

interest rate was in Estonia: 2.9 per cent annually. In

Lithuania the average interest rate of euro housing loans

was 3.22 per cent and in Latvia 3.5 per cent annually. Thelow mortgage interest rates support the revival of housing

credit market, although the demand for loans will remain

more modest than during the economic upswing.

Households are more concerned about their future debt

burden as their income risk has increased.

High home-ownership in all Baltic countries

All Baltic countries are characterised by high private

ownership of housing stock. In Estonia and Latvia 97 per

cent and in Lithuania 89 per cent of the housing stock isowned by private sector, i.e. mostly by households. The high

ownership is the result of restitution process that ensured a

tenure structure with a high proportion of owner occupation

which is higher than in many West European countries. The

latest available data is from 2010 and it shows that 85.5 per

cent of the Estonian population and 84.1 per cent of Latvian

population live in owner-occupied accommodation while

the share in Lithuania is even higher at 93.1 per cent. In EU

on average the owner occupation is at 70.7 per cent.

Latvia has the highest share of population occupying flats at65.4 per cent while Lithuania has the lowest share at 57 per

cent. Still it is far from the EU average of 41.8 per cent. InBaltic countries the importance of flats is graduallydecreasing; most significant change has occurred in Latvia,where in five years the share of population occupying flatshas decreased by three percentage points. The averagetrend in EU is the opposite the share of population residingin flats has been increasing.

Share of population in owner-occupied accomodation

85,5 84,1

93,1

70,7

0

20

40

60

80

100

Estonia Latvia Lithuania EU 27

countries

2010 Source: Eurostat

In the Baltic countries there are more households that residein flats (vs. houses) than there are in the EU countries inaverage and this is induced by existing large flat stock.

Share of population occupying flats (vs. houses)

6668

58

41

65 65

57

42

0

10

20

30

40

50

60

70

80

Estonia Latvia Lithuania EU 27 countries

2005 2010 Source: Eurostat

The living conditions have been more modest in Eastern

European Countries compared to Western Europe. The

average useful floor area of dwellings per capita has been


13/29

increasing and in 2011 reached in Estonia 30.1 m2 and in

Lithuania 25.5 m2. The most recent data for Latvia stems

from 2009 and gives 27.2 m2 as useful floor area per

capita. In Western European countries the useful floor

area is around 40 m2. Hence, when comparing the living

conditions, there is further space for improvement in all

Baltic countries.


High ownership of housing indicates that the

developments on the real estate market have strong

impact on the housing wealth of households. Rapid

increase in real estate prices until 2007 increased the total

housing wealth of households; consequently the real

estate owners could feel themselves wealthier.

But the wealth added by real estate price increases is

ambiguous. Theoretically a dwelling is not just an asset

but represents compulsory expenses, as households need

accommodation and hence to consume housing services.As tenants households cover the costs of housing services

while the owner of a dwelling covers the costs of all the

future housing services at the time of purchase. In

perfectly functioning markets dwelling prices equal the

present value of total user cost of the housing service. It

means that increases or decreases in real estate prices

should not affect the lifetime wealth of households:

increasing real estate prices lead to proportionally higher

housing costs in the future that a household should

alternatively cover. Hence, increasing house prices could

create the perception of being wealthier but there is no

real win for households. Households benefit from housingprices only if they trade to smaller dwelling, i.e. lower

consumption of housing services which also means that

they accept lower welfare. In principle, households cannot

Useful floor area of dwellings per capita, in sq m

27

2322

30

27

25

30

27

0

5

10

15

20

25

30

35


1999 2009 2011

Source: National statistics

investment in dwellings. The investment rate in Latvia

and Lithuania has been significantly below the EU

average: in 2010 at 3.8 per cent and 3.5 per cent

respectively, while the EU average is at 8.3 per cent. In

Estonia the investment rate exceeded the EU average

during the expansion period, peaking 17.6 per cent in

2006 but fell slightly below the EU average levelconcurrently with the downturn of economy. In 2010 the

investment rate of households in Estonia was at 7.6 per

cent. The peak in Latvia occurred in 2007 when

households invested 8.2 per cent of their disposable

income and in Lithuania in 2008 at 6.2 per cent. In order

to increase the living conditions, the households should

increase the investment rate in all Baltic countries.

Gross investment rate of households

0

4

8

12

16

20

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: Eurostat

European Union (27 countries) Estonia

Latvia

%

Lithuania

Households have invested a remarkable share of their

income into dwellings. The gross investment rate of

households to disposable income contains mostly

Do house price increases make households wealthier?feel themselves wealthier from real estate price increases

or poorer from real estate price decreases.

Looking at the average apartment prices in Tallinn, Riga

and Vilnius estimated by Ober-Haus by using a common

methodology, the increases in the prices until 2007 were

one of the highest in the EU. Riga has experienced the

sharpest growth when the price in 2007 was threefold of

the price in 2004. However, in the mid of 2009 the flat

prices in Riga were back on the level of mid-2004 and so

was the housing wealth of the owners. The apartmentprices in Tallinn present a similar pattern while in

Lithuania the slump has been less profound.

Average flat prices in the capital regions

0

500

1 000

1 500

2 000

2 500

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Tallinn Riga

Source: Ober-Haus

Vilnius

EUR per sq m

13/29


14/29

Furthermore, high volatility of house prices suggests that

there is a bulk of households who buy the dwelling at a

very high price that is more expensive that would be the

rental costs after the decline of the housing price. Hence,


the high volatility of housing prices does not induce

additional gain to households but adds risks for predicting

housing costs and making optimal choices about housing

ownership.

Housing stock as a cash machineHigh private ownership of housing stock has enabled

households to use housing as a cash machine in good

times. After the restitution process a bulk of households

owned excess dwellings and land that they could use for

generating additional incomes. During the period of

increase in real estate prices in 2004-2007, the sale of real

estate property turned to be very favourable. A measure

that estimates the liquidisation of households housing

assets is called Housing Equity Withdrawal (HEW). HEW is

an aggregate measure of flow of funds for the whole

household sector, taking also into account the additional

funds of credit. As households invest into dwellings, their

funds are negative. But if the issued mortgage loans

exceed the amount that the household sector invests in

housing assets, HEW turns to be positive, i.e. some funds

are withdrawn from housing. On individual level this can

occur when a household purchases real estate from

another household and finances the purchase by

mortgage. On the other hand, the household who is

selling the real estate does not invest the amount into

housing assets but uses it for other purposes. Summing

the transaction, the household sector has been able to

liquidise the housing asset by the borrowed amount.

Another evidence of withdrawing equity from housing

occurs when household sells real estate to another sector

(f.in. land to the enterprise sector, a construction

company).

The flows of Housing Equity Withdrawal have been

calculated for Estonia by Madis Aben, Merike Kukk and2

Karsten Staehr . The calculations show that there has

been considerable liquidisation of housing assets in 2002-

2007 with peak in 2006 when HEW amounted to app 20%

of household sectors disposable income, i.e. households

had significantly more money at their disposal than theirearnings reveal. Furthermore, the estimations in the study

disclose that in 2002-2007 approximately half of the

liquidised funds were used for consumption, i.e. the rest

was saved or invested. There has been a remarkable

redistribution of real estate ownership, mainly thanks to

The situation has changed since 2009 when the Housing

Equity Withdrawal turned negative, i.e. households were

investing money into real estate. They have invested

approximately 5% of their annual disposable income into

real estate. According to the estimations of Aben et al.

there is almost one-to-one negative relationship between

HEW flows and consumption in 2009-2011, the money,

which the households were investing into real estate, was

mainly withdrawn from consumption. The results

underline that at the current moment households are

increasing the share of real estate assets in their balance

sheets that is also impeding the growth of householdconsumption. As Latvia and Lithuania have experienced a

similar restitution process and stimulation of real estate

market from the beginning of 2000-s, one can assume

similar relationship between Housing Equity Withdrawal,

consumption and saving dynamics as in Estonia.

Changes in consumer credit portfolio, Y-o-Y

-10

-5

0

5

10

15

20

25

2004 2005 2006 2007 2008 2009 2010 2011

HEW / Disp Income HH saving rate

Source: estimations of

Aben, Kukk and Staehr

2Aben, Madis, Kukk, Merike, and Karsten Staehr (2012). Housing Equity Withdrawal and Consumption Dynamics in Estonia 20012011.

Research in Economics and Business: Central and Eastern Europe, Vol. 4, No. 1, pp. 1940.

the restitution process where households obtained

excess real estate that has been liquidised in favourable

conditions.

14/29


15/29

Latvia

Since the lowest point of employment, the number of

employed persons has increased by almost 74 thousand

In the first half of 2012 household income grew by

6.6 per cent compared to the first six months of 2011

Workers' purchasing power continues to improve; theaverage real wage showed an increase of 1.5 per cent

year-on-year

15/29

The Latvian economy increased by 5.9 per cent during the

first half of this year. Economic growth is also reflected in

the labour market -- the number of unemployed persons

shrinks and new jobs are created. The Labour Force Survey

carried out by the Central Statistical Bureau (CSB) showed

a rise in the number of employed people by 19 thousandor 2.2 per cent compared to the second quarter of 2011.

However CSB data dont reflect the changes in the number

of temporary workers who have been engaged in state

work programs. Thus the employment growth rate year-

on-year, excluding the impact of the state temporary work

programs, was higher than 2.2 per cent.

Changes in the legally employed people can better be

described by the State Revenue Service (SRS) data on the

state social insurance mandatory contributions (SSIMC).

The number of SSIMC payers in the second quarter grew

by approximately 25 thousand people year-on-year. In July

the number of SSIMC payers reached 784 thousand,increasing by 3 per cent or 23 thousand persons

compared to the same period of 2011. Since March 2010

(the lowest point of employment) the number of labour

tax payers has increased by almost 74 thousand.

previously did not believe they could find a job are now

trying to re-enter the labour market, increasing the total

labour supply. The share of economically active population

increased to 66.5 per cent (a year ago it was 64.9 per cent),

while the number of discouraged workers declined to 25.4

thousand versus 33.7 thousand a year ago.The job seekers rate is also higher due to statistical data

adjustments according to the Population Census. Due to

the gap between the census data and that previously used

(the lower number of economically active population and

changes in the age structure of the population), the job

seekers rate turned out to be higher. In the first quarter of

2011 the job seekers rate was one percentage point higher

compared to that previously published. This means that in

the first quarter of 2010 (the peak of unemployment level),

the unemployment rate was above 21 per cent. The

registered unemployment figures showed even greater

adjustments the data review led to an increase of 1.3percentage points. Consequently, the registered

unemployment rate at the end of June was 11.9 per cent,

that is only 0.7 of a percentage point lower year-on-year.

During the first quarter of 2012 an increase in the

registered unemployment rate was seen, mainly due to

seasonal factors. In the second quarter the unemployment

rate resumed its downward trend. Since the beginning of

the year the number of unemployed people fell by more

than 19 thousand. The registered unemployment rate in

early October fell to 10.9 per cent of the economically

active population. In the first eight months of this year

unemployed status was granted to 72 thousand people, 12thousand or 14 per cent less than in the same period of

2011. The number of unemployed people who lost their

status during the first eight months was also less than in

the corresponding period of 2011 92 thousand versus 114

thousand. 45 per cent of all unemployed people who had

lost their status found a job.

The labour market improvements are also confirmed by an

increasing number of vacancies. According to State

Employment Agency (SEA) data, in August, the job

vacancies totalled 5192, the highest level since November

of 2008. The actual number of vacancies in the economy is

higher than SEA reported as employers are not willing toseek managers and high qualified professionals among the

unemployed persons.


Growth means more jobs

784

711

500

600

700

800

900

1 000

1 100

Jan-04

Jul-04

Jan-05

Jul-05

Jan-06

Jul-06

Jan-07

Jul-07

Jan-08

Jul-08

Jan-09

Jul-09

Jan-10

Jul-10

Jan-11

Jul-11

Jan-12

Jul-12

Source: SRS

The number of SSIMC payers (in thousands)

The average inflation rate remains low, albeit an increase

in housing costs puts a strain on household budgets

Due to a better mood, consumers spending growth

surpasses income growth

Household financial balance continues to improve, albeitthe total debt of households is larger than the volume of

savings

Despite the relative good employment growth, the

unemployment (job seekers) rate in the second quarter was

16.1 per cent, only one percentage point less than in the

second quarter of 2011. The steady unemployment rate in

an environment of strong economic growth can beexplained by the rise in economic activity and employment

participation rate. Some of discouraged workers who


16/2916/29

Improvement in purchasing power

Employment and wage growth contributed to the increase inhousehold income. In the first half of 2012, the regular income(wages, pensions and benefits) of households showed a 6.6per cent increase compared to the first half of 2011. Incomegrowth of the working population in the first half of 2012reached 8.5 per cent year-on-year. The total expenditure forbenefits and pensions declined slightly compared to thecorresponding period of 2011. Thus the purchasing power ofthese socio-economic groups has not improved.Workers' average real wages (taking into account the impact

of changes in consumer prices) in the second quarterincreased by 1.5 per cent. In the second half of this yearaverage real wages continue to grow both in the private andpublic sector. Besides, household real income was positivelyinfluenced by a VAT reduction as of July 1, from 22 to 21 percent. Inflation remains relatively low; therefore purchasingpower will continue to improve. It is expected that personalincome tax (PIT), cut by one percentage point from January of2013, will improve the purchasing power of employed people.


unemployed persons were 44.9 per cent of all of the

registered unemployed people, 0.9 percentage point

higher than in August of the last year when 44 per cent of

unemployed persons had their unemployed status for

more than one year. At the same time, there is a lack of a

qualified workforce in some industries and economic

sectors.Labour markets indicators will continue to improve.

Besides, the growing opportunities of finding a job

stimulate more and more discouraged workers to re-enter

the labour market, increasing the number of economically

active people and employment participation rate as well. It

is expected that in the second half of the year the

unemployment (job seekers) rate will decline to 14.6 per

cent. Considering the higher unemployment rate in the

first half of this year, the average rate of job seekers in

2012 would be 15.6 per cent.

Unemployment and vacancies

0

3

6

9

12

15

18

Feb-06

Aug-06

Feb-07

Aug-07

Feb-08

Aug-08

Feb-09

Aug-09

Feb-10

Aug-10

Feb-11

Aug-11

Feb-12

Aug-12

Source: State Employment Agency

0

5 000

10 000

15 000

20 000

25 000

30 000

Unemployment rate (%; lhs) Number of vacancies (rhs)

Household consumption and income(labour costs, social benefits); million EUR

1000

1500

2000

2500

3000

3500

4000

2Q05

4Q05

2Q06

4Q06

2Q07

4Q07

2Q08

4Q08

2Q09

4Q09

2Q10

4Q10

2Q11

4Q11

2Q12

Source: CSB, SSIA, SEB estimates

Consumption Income

Despite the increase in vacancies, the share of long-term

employment is very high. At the end of august, long-term

Although the average inflation rate is lower compared to

the previous year, expenditure on first necessities show

significant changes. In 2011 the growing food prices

served as a major driving force of inflation, whereas this

year the largest price increase related to housing. Housing

expenses will be one of the major financial issues for

households this winter. Depending on the severity of

winter, utility bills could increase to a record level.

Heat prices in Riga in the last quarter of this year will be

20.4 per cent higher than in October-December of the last

year, while in the first quarter of 2013 the growth rate of

heating tariffs could reach 6-7 per cent year-on-year.

Consequently, in this heating season, housing

expenditures are expected to be higher than previously.

The housing expenses could rise at an even quicker pace

than heat prices. In the case of a severe winter, heat bills

could increase by 40-50 per cent in December compared

to the last month of the previous year.

Taking into account the structure of household

consumption expenditures, the price hike of housing costs

will be felt more by low-income households and retired

people.

The challenge housing bills


17/2917/29


Higher purchasing power is one of the factors that have a

positive impact on retail sales. Households have increased

their consumption more rapidly last year than was

forecasted. Household final consumption expenditure at

constant prices in the first half of 2012 increased by 6.3per cent compared to the first six months of 2011. The

total spending at current prices demonstrated a 10.2 per

cent increase year-on-year. These data indicates that

consumer spending growth outpaced the income growth

rate.

Household spending was not only supported by the

growth of workers income, but also the remittances from

abroad and the shadow economy as envelope wages

shows up in the household consumption. Spending is also

supported by improvements to consumer confidence.

Since the end of 2009, a gradual improvement in the

consumer sentiment index has been observed. In

September, consumer confidence hit its highest level

since December of 2007. In addition, consumers'

assessment of their financial situation over the next 12

months in September remained positive for a fourth

consecutive month.

Consumers increase spending as income grows and the mood brightens

Financial situation over last 12 months

-60,0

-50,0

-40,0

-30,0

-20,0

-10,0

0,0aug.0

8

okt.08

dec.08

feb.0

9

apr.09

jn.0

9

aug.0

9

okt.09

dec.09

feb.1

0

apr.10

jn.1

0

aug.1

0

Source: Eurostat

Over the last 12 months household financial assets (bank

deposits, securities and other financial instruments,

private pension and insurance savings, 2nd pillar pension

savings) increased by 163.5 million euros (114.9 million

lats) up to 6.277 billion euros (4.411 billion lats) at end-

June.

Excluding the increase in pillar II pension assets of

approximately 123.8 million euros (87 million lats) from

the household financial balance, households' financial

assets over the last 12 months only increased by 39.7

million euros (27.9 million lats). Deposits increased by

27.9 million euros (19.6 million lats). Long-term savings

(life insurance and private pension savings) grew a bit

more than deposits by 34.7 million euros (24.4 million

lats). At the same time, the total value of securities and

investment funds declined compared to the first half of

2011.

More money in current accounts and under the mattress

0%

20%

40%

60%

80%

100%

IIQ 2009 IIQ 2010 IIQ 2011 IIQ 2012

Pillar II pension funds

Life insurance and private pension funds

Securities and financial instruments

Deposits

Breakdown of financial assets

Source: SEB estimates

Household deposits (EUR million)

0

300

600

900

1200

1500

1800

2100

2400

Jun-08

Sep-08

Dec-0

8

Mar-0

9

Jun-09

Sep-09

Dec-0

9

Mar-10

Jun-10

Sep-10

Dec-1

0

Mar-11

Jun-11

Sep-11

Dec-1

1

Demand deposits Term deposits Savings accounts

Source: Bank of Latvia

The financial behaviour of households is influenced by

record-low interest rates. Due to the low deposit rates

people are not willing to put money into a deposit. Over

the last year the total amount of money of households

located in commercial banks increased slightly, moreover

demand deposits became more popular than termdeposits. At the end of August, the total amount of

demand deposits was 2.18 billion euros (1.53 billion lats),

while term deposits was only 1.76 billion euros (1.24 billion

lats). The difference between demand and term deposits

reached 407 million euros (286 million lats). The situation

was the opposite year ago. At the end of August 2011 the

amount of term deposits exceeded demand deposits by

90.2 million euros (63.4 million lats). During the last 12

months, term deposits decreased by 11 per cent or 215.4

million euros (151.4 million lats), while demand deposits

increased by 15 per cent or 281.7 million euros (198 million

lats). The share of current accounts in the total volume of


18/29

Debt burden continues to decline

18/29

The downward trend of the total portfolio of loans andleasing issued to households continues. Over the last 12months, the amount of loans and leasing decreased by 1032million euros (725 million lats) to 7.023 billion euros (4.936billion lats) at end of June. Since the last quarter of 2008 thehousehold debt portfolio has decreased by 27%. The rapid

The financial balance of households continues to improve. Aslight increase in financial assets along with the decline infinancial liabilities has reduced the negative differencebetween the financial assets and the financial liabilities ofhouseholds. At the end of June 2012 the negative differencebetween financial assets and liabilities amounted to 746million euros (525 million lats), approximately 869.4 millioneuros (611 million lats) less than at the end of 2011. The mostsignificant impact on households' financial balance relatedto the household debt reduction of approximately 711.4million euros (500 million lats).


64 million lats) in cash at the end of the first quarter. The

amount of cash is increasing, occupying a larger share in

the financial assets portfolio of households. In the last

quarter of 2010 the total amount of cash was 1.028 billion

euros (722 million lats), while in the second quarter of

2011 cash holdings of households was 1.106 billion euros

(777 million lats).Over the last 12 months the amount of cash increased by

approximately 284.6 million euros (200 million lats).

Taking into account household cash holdings, the

household total financial assets are approximately 7.68

billion euros (5.4 billion lats). The proportion of cash in the

Financial assets and liabilities of households(EUR billion)

3 000

3 800

4 600

5 400

6 200

7 000

2010IVQ

2010IQ

2011IIQ

2011IIIQ

2011IVQ2011

IQ2012

IIQ2012

Financial assets

Financial liabilities

IVQ 08 VQ 09 IQ 10 IIQ 10 IIIQ

Source: SEB estimates

total portfolio of financial assets is approximately 18 per

cent, significantly more than in other European countries.

Reasons for the popularity of cash we can find in the past

and today as well. A willingness to keep money at home is

influenced by Parexbank problems and the Krajbanka

collapse. According to different studies (Mudd and Valev,

2009; Osili and Paulson, 2008) turmoil in the bankingsector has a lasting impact on the financial decisions of

households. Another contribution to the popularity of

cash is the very low deposit rates as well as the relatively

large proportion of shadow economy.

decline was also influenced by cancelation of the licenses oftwo commercial banks (Parex Bank (now Reverta) in Marchand Krajbanka in May). The figures of these two banks wereexcluded from the total banking sector data, for that reasonthe outstanding volume of domestic credit in the Latvianbanking system has reduced. At the same time, these twoinstitutions had household loans of several hundreds ofmillions of lats, therefore the total aggregate credit portfolioof commercial banks and leasing companies does notreflect the total household debt levels.Newly issued loans can not compensate the amortisationprocess of the credit portfolio and the loan write-offs. Theamounts of newly granted loans to households aresignificantly lower than five years ago. In the first half of2012 the commercial banks granted 125.2 million euros (88

million lats) to households as newly issued loans. This yearhousehold lending activity grew by 35.4 per cent comparedto the same period of 2011, when 92.5 million euros (65million lats) was issued as household loans. Both thehousing and consumer credit growth rate was similar.Housing purchase and repair loans increased by 37.2 percent year-on-year, while consumer loans grew by 33.1 percent.The total amount of loans to households continues toshrink. The decreasing trend of housing and other loans willcontinue in the near future, however, the rate of decrease isgetting smaller. Household debts are also located as off-

balance items which do not appear on the balance sheets ofcommercial banks. Dark horse is a payday loan marketwhich has been gaining in recent years in contrast to adecline in the commercial banks' loan portfolios. Thus, thehousehold debt deleveraging process is slower and thehousehold's financial balance is worse than the statistics ofthe banking system shows.


19/29


Financial assets and liabilities of households (EUR million)

Financial assets

Deposits

Securities and financial instruments

Life insurance and private pension funds

Pillar II pension funds

Liabilities

Mortgage loans

Consumer loans

Other loans

Leasing

Net value of financial assets

* SEB banka estimates

Sources: Bank of Latvia, FCMC, LIA, SEB dzvbas apdroinana

IVQ 2008

5 421

4 109

394

259

660

9 559

7 188

1 121

755

494

-4 138

IVQ 2009

5 677

3 999

375

301

1 002

8 944

6 866

1 012

736

329

-3 267

IVQ 2010

6 117

4 108

485

347

1 178

8 400

6 554

920

682

244

-2 284

IIQ 2011

6 148

4 108

461

361

1 219

8 055

6 247

891

692

225

-1 907

IVQ 2011

6 125

4 090

411

377

1 247

7 735

5 985

864

679

207

-1 610

IIQ 2012

6 277

4 136

403

395

1 342

7 023

5 547

800

522

154

-746

19/29


20/29

Over the past several months, an unfading discussion is

taking place in Lithuania, i.e., whether Lithuania is already

hit by the second wave of crisis, or it may be expected in

the near future, or the crisis did not start or it may not start

at all. The dispute whether we are in the crisis or not now

shows that the countrys economic situation is not so

dramatic so far.

Lithuania

Differences of opinion on the discussion subject might

occur. Probability exists that the optimists in the business

community believe that the current situation is new

normal, while pessimists speaking about the crisis see

potential threats to their future. Positive mood among

businessmen and employers is not always supported by the

recruited persons and employees who never see real

increase in income, or by those who are unable to find work.

So far so good

Labour market within two quarters of the current year was

going in different directions. In the first quarter of the

current year, the average salary as compared with the end

of the year 2011 was shrinking. Such phenomenon, when

salary in the first quarter of the year is lower than at the

year end, is continuously observed. Mostly it is related to

bonuses and various wage premiums. In the second

quarter the average net salary increased again and

amounted to EUR 484.5 (LTL 1,673). However, as

compared with the end of the year, it was still lower by

EUR 4.5 (LTL 15.6), or by 0.9 per cent. In terms of realsalary, in the first half-year, the purchasing power of the

average salary (or real salary) decreased by 3 per cent.


Wage: rise does not meet expectations

Average net salary and real salary dynamics (Eur)

300

350

400

450

500

550

2008 2009 2010 2011 2012

Net Salary Net real salary


Starting from 1 August, the Government has decided to

increase minimum monthly wage from EUR 231.7 (LTL

800) up to E

Documents

Baltic Household Outlook: So far - better than expected