Baltic Household Outlook

More signs of optimismBaltic Household

Outlook

Edmunds Rudzitis

SEB LatviaGeneral Trends

3

Economic growth continues

3

Estonia has a single digit unemployment

rate for the first time since late 2008

In 2013, wage growth in the Baltic countries

will be more broad-based

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

Unemployment (job-seekers) rate* (%)

* Persons aged 15-74 Source: National Statistics

Average gross wages and salaries (%, YoY)

-15%

-10%

-5%

0%

5%

10%

15%

4Q08

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Source: National Statistics


2013-04-11 4

Moderate improvement in purchasing power

4

In 2012, the real earnings of employed

persons increased in Estonia and Latvia. In

Lithuania wage growth was slower than

inflation

Despite the latest improvements the real

wages still are below the pre-crisis level in

all Baltic countries. Compared to the last

quarter of 2008, real earnings have

decreased by approximately 13 per cent in

Lithuania. In Latvia and Estonia, real wages

are lower by approximately 10 and 4 per

cent, respectively

Real wage growth rate is expected to

accelerate in 2013

Real wages (%, YoY)

-12%

-8%

-4%

0%

4%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

Source: National Statistics


2013-04-11 5

Are labour taxes in the Baltic countries low or high?

5

In Latvia, the tax wedge on labour is above the EU average - approximately 4 percentage

points higher compared to Lithuania and Estonia

Tax wedge on labour (%, 2011)

36 37 38 39 40 41 42 43 44 45

Latvia

Estonia

Lithuania

EU-27

Source: Eurostat

Tax wedge for single 67% of AW earner

Tax wedge for single average wage earner

2013-04-11 6

Tax burden issues

6

Latvia has the largest difference between gross and net salaries

Gross and net salaries (EUR)

805

746 763

560596 584

200

400

600

800

1000

Latvia Estonia Lithuania

Source: SEB calculations

Gross salary Net salary

total labour costs - 1000 EUR

2013-04-11 7

The tax wedge is decreasing again

7

Since 2008, the tax wedge for average and low income earners has only decreased in

Lithuania, while in Latvia and Estonia the tax wedge has increased

In 2013, the tax wedge is lower both in Latvia (PIT cut) and Estonia (cut in unemployment

insurance tax)

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

34

36

38

40

42

44

2008 2009 2010 2011 2012

Source: Eurostat, SEB estimates

Latvia Estonia Lithuania

Julita Varanauskiene

SEB Lithuania

Financial assets:

longer-term view

• Households are accumulating savings and deleveraging at the same time

• The growth of assets is conditioned by still insufficient reserves for extraordinary events and

by not making any decision yet on use of the funds

• Asset volume in Latvia might be positively influenced by a decision on entering the Eurozone

All the countries still in the asset accumulation mode

Financial assets (2008=100)

90

100

110

120

130

140

150

2008 2009 2010 2011 2012


Financial liabilities (2008=100)

60

70

80

90

100

110

2008 2009 2010 2011 2012


9

Bigger and smaller winners in asset accumulation race

10

Measures selected for asset accumulation or keeping depend: 1) on the level of income

2) on economic phase

3) on the legal and tax environment

4) on the confidence in the financial

institutions

5) on trends in the securities markets.

• Value of the financial assets in Estonia per capita is the largest

• In Latvia, the ratio of assets in Pillar II and Pillar III pension funds to deposits is the highest

• Lithuanians have the largest Pillar III savings

Source: Central banks, SEB estimations

Financial assets per capita (EUR)

0

1000

2000

3000

4000

5000

6000

2008 2012 2008 2012 2008 2012

Estonia Latvia Lithuania

Deposits II pillar pension III pillar pension

Lithuania is currently most sensitive to pension problem

Main purposes for savings

39%

37%

38%

59%

39%

37%

42%

22%

20%

Lithuania

Latvia

Estonia

Rainy day Sense of security Retirement age

Average (net) salary and pension (EUR)

729

490 501

316271

236


Average (net) salary Average old age pension

2013-04-11 11

• Pension savings in Lithuania seem to be more important for the residents as compared

with Latvia and Estonia

• Average retirement pension in Lithuania is the lowest

Source: Mindshare, National statistics

Prospects are alarming in all three countries

Old age dependency ratio

26%28% 27%

40%43% 42%


2012 2040

Old age dependency ratio projections (2040)

0 10 20 30 40 50 60

GermanyItaly

GreeceNetherlands

AustriaPortugal

SpainSloveniaBulgaria

Sw itzerlandEU (27 countries)

FranceFinlandLatvia

DenmarkLithuaniaBelgium

RomaniaEstonia

Sw edenMalta

Czech RepublicPoland

HungaryUnited Kingdom

Norw aySlovakia

LuxembourgIcelandCyprusIreland

2013-04-11 12

Factors increasing dependency ratios:

• Late marriages

• Low birth rates

• Emigration

• Tax evasion

Source: Eurostat

Preparation for retirement : most favourable institutional conditions in Latvia, economic - in Estonia

Contributions to II pillar pension funds (%)

0

1

2

3

4

5

6

7

8

9

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

Estonia Alternative (EST) Latvia

Lithuania Alternative (LTU)

13

• In the long-term, PF II instalment (rate)

in all countries will be similar

• In Latvia, the total instalment is

transferred by the government

• In Estonia, instalment is the largest due

to the highest income

• The stability criterion is rather important

for the successful functioning of Pillar II

pension funds

• According to LIPFA survey, the largest

part of current II pillar participants will

choose the (dotted ) alternative

Source: National pension systems

Households see several alternatives to increase retirement income

Latvia

48%

32%

32%

23%

Working as long aspossible

Family children

Savings in the III pillarpension funds

Investments in real estate

Lithuania

45%

33%

27%

27%



Savings in the III pillarpension funds

By working abroad

Estonia

43%

40%

32%

22%



Family children

Guaranteed saving(deposits)

14

What are the most appropriate solutions to increase retirement pension?

Source TNS (SEB)

Triin Messimas

SEB Estonia

Household

Liabilities

2013-04-11 16

In household borrowing signs of recovery starting to emerge

The speed of deleveraging

has slowed down in Estonia

and Lithuania where the

housing loan volumes

decreased by -0.6 per cent

and -1 per cent, respectively,

in 2012. In Latvia, housing

loan volumes continued to

decline at such high level as -

11 per cent in 2012

2013-04-11 16

• The issuing of new housing loans has activated in Estonia, the first positive signs are also

seen in Lithuania

• Latvia has not reached the bottom of housing loan volumes yet

2013-04-11 17

Households are cautious about consumer loans

The stock of consumer and

other credits is continuing

to decrease at the rate of:

• -5% in Lithuania

• -10% in Estonia

• -18% in Latvia

2013-04-11 17

The effect of

Bank Snoras

disappeared

• The awareness of the costs of borrowing has increased

• Households are more reluctant to finance their consumption by borrowing

2013-04-11 18

Households benefited from low interest rates in 2012

In 2012, average interest

rate of housing loans

made the biggest

downward jump. Within a

year it decreased:

� In Estonia by 0.9%

� In Latvia by 0.7%

� In Lithuania by 1.2%

Lithuania had the lowest

average interest rate on

housing loans in January

2013

2013-04-11 18

2013-04-11 19

Foreign currency borrowing in the Baltic States

2013-04-11 19

• Foreign currency borrowing has been most popular in the Baltic states among Central and

Eastern European countries

� Households face high exchange rate risk in the countries with floating exchange rate

� Estonia has eliminated the exchange rate risk by adopting euro

2013-04-11 20

� Since 2000, household indebtedness has substantially increased in all Baltic countries but

also in other European countries

� Indebted households have higher level of compulsory expenses (i.e. debt servicing),

which they have to cover compared to households without liabilities

� Indebted households need either higher buffer stocks or insure themselves against

negative income shocks

2013-04-11 20

Households’ sector

debt-to-income ratio in 2011:

� In Euro area 99.4%

� In Estonia 88.1%

� In Latvia 66.1%

� In Lithuania 41.2%

Indebted households are more vulnerable to income shocks

Thank you

Baltic Household Outlook

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