Estonia

Inflation Worries Continue

Finance Minister Aivar Soerd reported that Estonian prices are expected to rise 4.5 percent this year, up from an earlier forecast of 3.7 percent.  While he still forecasts an annual increase of 3.9 percent by year's end, he warned that prices could climb another 4.2 percent in 2008. 

The current inflation rate across the EU declined unexpectedly to 2.4 percent in July.  Maastricht Treaty requires that accession members maintain an inflation rate below 1.5 percent above the EU average which puts Estonia just out of reach of joining the Euro. 

Estonia was scheduled to join the Euro beginning 2007, but pushed off entry to 2008 citing higher than forecasted inflation this year due to a rise in energy prices and strong consumer demand.  Now even the 2008 target is doubtful the government said. 

"The likelihood of accession to the euro-zone in 2008 has considerably declined in light of today's forecast but it would be premature to bury the aim for good," Prime Minister Andrus Ansip said in a statement.

Delays in joining the EURO could dampen investor enthusiasm.  Recent price appreciation in the property market no doubt contain expectations of introducing the common currency sooner rather than later.  Investor sentiment could weaken further by rising overnight bank rates which are expected to rise above 3 percent before the end of the year. 

Hansapank quoted me a rate of 4.1% on a 5 year ARM in the Spring; I anticipate rates will have risen by the time I finally secure a loan on my next trip to Tallinn in September. 

Security Concerns Could Dampen Boom

Given the recent foiled terrorist plot at London Heathrow, airports across the European Continent are tightening security.  Estonia, however, is tryinig not to. 

Much of the boom taking place in Eastern Europe these days has been fueled by the proliferation of cheap flights originating from western European capitals like London and Dublin.  Tourists and investors alike are streaming into these countries and yet the friction caused by terrorism fears could grind tourism to a screeching halt. 

According to an August 22nd article from the Baltic Times,  Estonia's Interior Minister Kalle Laanet says the "emphasis on stopping terrorist attacks should lie in intelligence gathering."  He explained futher that "security checks must be stepped up in accordance with risk evaluation.  There should not be permanent safeguards in place."

The UK's Home Secretary John Reid, ont the other hand, has said Europe faces a "persistent and very real" threat from terrorism and that stricter airport security measures should be introduced by all EU members.

If small countries like Estonia can remain off terrorist radar and thus avoid a mandatory ramp up in airport security, these countries may attract more tourists than they do currently not only because of easier travel, but also because of perceived safety. 

Estonia's Population Still Dropping

Despite the fact that Estonia recorded a higher number of births in July 2006, its population is still declining.  Not only do the July figures represent an anomaly, but they are also subject to change.  According to the Interior Ministry, a total of 1,341 births and 1,314 deaths were registered during the month. 

Some of the July figures, however, include births and deaths in June and the births figure includes still born children.  Other factors like Estonian residents living abroad still need to be tabulated and will be eliminated.  The gap between deaths and births thus far this year is 1,832. 

Estonia July CPI up 4.5 pct

According to FXStreet.com, "The price of goods and services in Estonia were up an average of 4.5 pct in July on a year earlier, BNS newswire reported citing the country's Statistical Office."

"The hike in administratively-regulated prices of goods and services was by 5.7 pct and in non-regulated prices by 4.1 pct. Compared with June, the consumer price index was 0.5 pct higher. Compared with the prior month, the index was affected the most by a rise in the price of motor fuel, housing, vegetables as well as discounts in clothing and footware." 

Unless the average inflation rate in the EU rises to at least 3% in 2007 it looks like Estonia may be shut out of the Euro again in 2008 due to Maastricht Treaty requirements, unless Estonia's economy cools during the same period. 

Bridge Deal Sign of Things to Come

The road to Narva may be paved with riches.  On Sunday July 22nd, Russian and Estonian transportation officials signed an agreement to build a new bridge spanning the Narva river which flows along Estonia's north eastern boarder with Russia.  Construction costs, estimated at 1 billion EEK, or 64 million euros will be financed by Russia, Estonia and the EU. 

When the present checkpoint between Narva and Russia’s Ivangorod was built, its projected capacity was 100 trucks a day; now approximately 400 trucks pass through the checkpoint daily, and trucks have to wait two days to cross the border.   In 2005 the number of cars crossing the border there increased 30 percent and the number of trucks 40 percent in comparison with 2004, with the number of trucks reaching 90,000. It is estimated that the total number of vehicles crossing the border will grow to 300,000 per year by 2010 according to the Baltic Times.

Transportation ministers from both countries say that the Tallinn - St. Petersburg road link is one of the busiest connections between Russia and the EU.  Additionally, the two ministries signed a bilateral railway treaty which could be a major step toward making Sillamäe (just west of Narva) a major port for the export of Chinese and Russian goods.  This will be an important story to keep tabs on.