On 18 March a
mission from the International Monetary Fund concluded a visit to Estonia Tallinn
[...]
3.
Risks to the outlook for 2013 will largely be on the downside. The risks stem primarily from a
prolonged period of slow growth in the euro area. With two-thirds of Estonia’s
exports going to the EU, delays in the euro area recovery could slow exports,
weaken the labor market, reduce household’s ability to service their loans, and
potentially hurt the quality of bank assets. The unwinding of past real and
financial sector imbalances would be more protracted and weigh on domestic
demand. Financial spillovers could emerge in the event of a sharp resurgence of
global financial market volatility. Alternatively, faster-than-expected euro
area recovery or unexpected export resilience would boost growth. In this case,
continued labor market strength could fuel wage and price pressures.
[...]
Advancing Financial Sector Robustness
9. Estonia’s financial sector has continued to strengthen and, while
risks remain, these are mitigated by improving balance sheets and prudential
positions. Banks
have remained profitable, liquid, and well capitalized despite extensive
write-offs that have cut in half non-performing loans. In addition, rapidly
growing domestic deposits have resulted in a record low loan-to-deposit ratio.
Risks on the domestic side stem mostly from variable-interest mortgage loans
tied to the six-month Euribor. Externally, a significant share of Estonian
banks’ funding consists of foreign financing, which could be potentially
volatile. Risks nonetheless appear manageable. At present, markets expect
interest rates to remain low, while improved corporate and household
debt-equity ratios and a strong labor market have raised the private sector’s
capacity to service its debt. Finally, parent-banks’ funding of Estonian
subsidiaries reflects a strategic commitment to highly profitable investments.
10. Macro-prudential policies can help further reduce risks. In tandem with parent supervisors
and following relevant EU-level regulations, the timely adoption of the capital
and liquidity provisions of the Capital Requirement Directive IV would enhance
Estonia’s financial sector resilience. This would not unduly constrain banks’
margins or credit to the economy since Estonian banks already meet or exceed
the likely requirements. In view of the prevalence of short-term variable
interest rate-linked mortgages, the authorities should also consider
introducing ceilings on loan-to-value and loan-to-income ratios to reduce
exposure to housing market developments and downside risks. Regarding the
institutional structure, the central bank’s macro-prudential authority and
existing tri-party (Eesti Pank, MoF, and FSA) forums can be further clarified
and strengthened—in line with the European Systemic Risk Board’s
recommendations—to advance the monitoring of systemic risks and limit potential
fallout.
11. Deeper cross-border prudential arrangements can also enhance
financial stability in Estonia. Over the years, Estonia and other Baltic nations have,
together with their Nordic counterparts, developed an effective regional
supervision framework underpinned by cooperation agreements and the
establishment of the Nordic-Baltic Stability Group and Macroprudential Forum.
Ongoing work has appropriately focused on establishing a burden-sharing
mechanism and a common database for financial groups, as well as on preparing
for cross-border crises simulations. In conjunction with EU-level initiatives,
these efforts should move ahead by implementing key elements of the framework,
notably by defining criteria for burden sharing.
12. The EU banking union would further Estonia’s financial stability
in coordination with long-standing close Nordic-Baltic cooperation arrangements. The banking union can bolster
financial soundness throughout the EU. In this regard, progress has been made
in establishing a single supervisory mechanism (SSM), which will place
Estonia’s two largest banks under the direct supervision of the ECB. Additional
efforts are however needed to clarify the role and powers of the Estonian
authorities in this context, including in supervisory colleges and with regards
to the exchange of confidential information. As the SSM and other elements of
the banking union go forward, particular attention will be needed to avoid
disrupting existing Nordic-Baltic supervisory arrangements.
[...]
Video of press conference
Sources:
Original text in English from IMF website: Estonia – 2013
Article IV Consultation: Concluding Statement of the IMF Mission
(2013-03-18)
Estonian version of text from website of the Bank of
Estonia (Eesti Pank): Rahvusvahelise
Valuutafondi 2013. aasta artikkel IV konsultatsioon. Esialgsed järeldused
(2013-03-18)
Video of press conference: IMFi visiidi pressikohtumine
- 18.03.2013 (length: 45:33)
Mark Pleas
[contact]
