Finance minister: Situation complicated but growth incoming

Erkki Erilaid
Keit Pentus-Rosimannus.
Keit Pentus-Rosimannus. Photo: Sander Ilvest

Minister of Finance Keit Pentus-Rosimannus said that the ministry’s spring economic forecast holds encouraging news on the backdrop of over a year of uncertainty.

“If we can maintain the pace of vaccination and avoid the organizational side of things becoming a hindrance, the economy should return to growth in the second half-year and put us back where we were before the crisis,” the minister said.

Restrictions on activity and movement will continue to hold back recovery in the first half of 2021. All sectors except construction are forecast to return to growth once measures are lifted. The ministry forecasts annual economic growth at 2.5 percent.

While the economy was forecast to grow by 4.5 percent in fall, that estimate was based on a 5.5 percent recession forecast for 2020. But the economy only shrank by 2.9 percent last year.

Fiscal deficit to last years

“Because last year’s recession was not as bad as feared, recovery figures are more modest than initially forecast. We expect services and especially tourism to bounce back later and for recovery to stretch into 2022 in some areas,” said Raoul Lättemäe, head of the ministry’s fiscal policy department.

Recovery will initially be uneven and rely on the exporting industry and computer services. Recovery of foreign tourism is of critical socioeconomic significance and expected in 2022 when the economy is forecast to grow by 4.8 percent.

The finance minister said that while fiscal deficit will not be as bad as initially feared, it will take years of effort to overcome it.

Fiscal deficit will hit 6 percent of GDP this year. Improved business environment and changes to the second pillar pension system are forecast to bolster tax revenue, while short-term crisis alleviation measures will add to expenses. The deficit coupled with growing foreign support constitutes major stimulus that will help counterbalance the negative effects of the crisis.

While deficit will be decisively rolled back starting next year, the state budget will remain in the red for at least five years.

“While fiscal deficit will limit the use of tax proceeds, Estonia can invest record European support in new growth and important changes in the coming years,” Pentus-Rosimannus said.

National debt will grow to 21.4 percent in 2021 and hit 29 percent of GDP by 2025. The state treasury’s negative cash flow is forecast at €2.4 billion. This covers both deficit and refinancing of bonds issued. A third of negative cash flow will be covered using reserves and two-thirds using issue of new instruments and loans.

Tourism, transport and entertainment still in trouble

The ministry forecasts that people will withdraw €1.2 billion from pension funds this year around €300 million of which is expected to be spent in the short term with another estimated €300 million going into real estate.

Tax yield from pension fund asset withdrawals is estimated at €300 million in both income tax and VAT from new consumption.

Analyst for LHV Kristo Aab pointed out as a positive aspect the fact that GDP estimates for 2021 and 2022 have grown since the fall forecast. Assets to be withdrawn from the second pension pillar will deliver a growth spurt already in the final quarter of 2021, while its main effect will be felt in the rapid growth of 2022.

“Not much has changed for companies in recent quarters. Sectors hurting the most remain the same – tourism, transport and entertainment. Traders can rely on e-commerce to a much greater degree than last year, while industrial companies take heart in knowing that industrial activity is up everywhere in Europe,” Aab said. “Recent polls suggest entrepreneurs have experienced a notable growth in domestic and foreign orders and both production volumes and employment are forecast to grow.”

SEB analyst Mihkel Nestor said that the Estonian economy has rather done well in the crisis. “It is good that we managed to keep the virus in check for a long time, meaning that the economy will have to spend a far shorter time operating in the conditions of restrictions,” Nestor said.

Analyst for Swedbank Tõnu Mertsina added that savings of both individuals and companies have grown in the last year and hold potential that should be released once certainty improves. “This would have an additional positive effect on the economy,” he said. “The improving economic situation will translate into labor demand, reduction of unemployment and growth of salaries.”