Baltic Household Outlook

April 2011

Summary
• Export-led economic recovery through drop in unemployment Edmunds Rudzitis
and modest wage growth will be reflected in pockets of Baltic Socioeconomics Expert,
households. SEB Latvia
Telephone: +371 67215933
• Wage gap between Estonia and other Baltic countries are edmunds.rudzitis@seb.lv
increasing; although Lithuania has the lowest average gross
wages, average net monthly salaries in Lithuania are slightly larger Julita Varanauskiene
than those in Latvia. Household Economist,
SEB Lithuania
• Growing food and energy prices put another strain on the Telephone: +370 61537746
household budget; increasing share of food, housing and transport julita.varanauskiene@seb.lt
expenditures shows households’ deteriorating welfare.
Hardo Pajula
• Food remains cheaper in Lithuania than in Estonia or Latvia. The Economist,
largest increase in food prices was observed in Estonia; however, SEB Estonia
food is still the most expensive in Latvia. Telephone: +372 6655173
hardo.pajula@enskilda.ee
• Financial safety cushion of Baltic households has increased; net
asset value of Estonian and Latvian households still remains
negative.

• Time deposits lost their attractiveness due to low interest rates.

Households are looking for investment opportunities with higher
yields or choose to keep their funds in current accounts.

• The volume of newly granted loans is still lower than the total loan
repayments by private individuals; however, interest in housing
loans has improved.
Baltic Household Outlook April 2011

THE BALTICS
Almost out of the woods
Last year the Baltic economies started to recover numbers of jobless people. The bad consequence of
from the free-fall of 2009. The recovery is mainly the recession is the growing number of the long-
export driven though private consumption also term unemployed persons.
shows signs of improvement. External demand
made recovery process faster than expected at the Changes in employment (%, Y-o-Y)
beginning of the year thus making the outlook for 8,0%

2011 optimistic. With export-led recovery the

growth of unemployment slowed down and the 4,0%
trend was reversed. The largest drop in
unemployment registered in Estonia – the rate of
0,0%
jobseekers decreased by approximately six
percentage points from its peak in first quarter of
-4,0%
2010. Unemployment rate decreased also in Latvia
and Lithuania.
-8,0%

Unemployment (job-seekers) rate* in Baltics (%)

22 -12,0%

20

18 -16,0%
1Q 07

3Q 07

4Q 07

1Q 08

2Q 08

3Q 09

4Q 09

1Q 10

2Q 10

3Q 10
2Q 07

3Q 08

4Q 08

1Q 09

2Q 09

4Q 10
16

14 Latvia Li thuania E stoni a

12 Source: National Statistics

10
In Estonia the average unemployment rate may
8
drop to 12 per cent this year. In Latvia and
6 Lithuania the fall in unemployment rate will be
4 modest. In both countries the average
2
unemployment rate will shrink to approximately
1Q 07

4Q 07

1Q 08

2Q 08

3Q 08

2Q 09

3Q 09

4Q 09
2Q 07

3Q 07

4Q 08

1Q 09

1Q 10

2Q 10

3Q 10

4Q 10

16 per cent level. Although unemployment rate

will decline further from current level in all three
Latvia Lithuania Esto nia
Baltic countries, unemployment figures will
* Persons aged 15-74 remain high for several years to come.
Source: National Statistics

Average gross wages and salaries (%, YoY)

At the same time, total employment is slightly
30,0%
increasing. The number of new jobs is similar in all
25,0%
Baltic states – since the first quarter of 2010
20,0%
economies have added nearly 40 thousand jobs.
Compared to the lowest point of 2010, employment 15,0%

has rebounded by 7.1 per cent in Estonia, 3.8 per 10,0%

cent in Latvia and 2.9 per cent in Lithuania. 5,0%

However, the total employment is still gradually 0,0%
below the peak level of 2007. Compared with the
-5,0%
highest employment level there are still 198
-10,0%
thousand lost jobs (approximately 17 per cent) in
-15,0%
Latvia. Estonia and Lithuania has lost 69 thousand
08

08

08

08

09

09

09

09

10

10

10

10
1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

jobs (10 per cent) and 193 thousand jobs (12 per
cent) respectively. The labour market is not Latvia Lithuania Estonia

rebounding fast enough to absorb the large Source: National Statistics

2/18
Baltic Household Outlook April 2011

Drop in unemployment and increasing number of Average monthly wages (4th quarter of 2010)
employed persons will improve financial situation 900

of households. Wage and salary statistics also

showed some positive dynamics. In the last quarter 800
of 2010, average gross wages grew in all Baltic
-20%
states. The largest increase was in Estonia – average
700
wages rose by 3.9 percent compared to fourth
quarter of 2009, the sharpest upturn since the end
of 2008. In Latvia and Lithuania wage increase 600

year-on-year was 3.4 per cent and 0.2 per cent -29%
-22% 814

respectively. Besides, in Latvia and Lithuania the 500

wage increase was registered for the first time since 647
614
654

the first quarter of 2009. Compared to the last

400
quarter of 2008, Latvia and Lithuania witnessed the 460
478

highest rate of gross wage decrease (9 per cent),

followed by Estonia with three per cent wage drop. 300
Latvia Lithuania Estonia

Real wages (%, YoY) Average gross wage (EUR)

Average net wage (EUR) Source: National Statistics

15,0%

10,0% According to the statistics, wages in Estonia is

substantially higher than in Latvia and Lithuania.
5,0%
In the last quarter of 2010 average monthly gross
wage in Estonia reached 814 euros, followed by
0,0%
Latvia with 647 euros and Lithuania with 614
euros. Even larger wage gap between Estonia and
-5,0%
other Baltic countries display numbers of net
wages and salaries. Net wages are derived from
gross wages and represent the part of pay that
-10,0%
employees can receive. In the fourth quarter of 2010
average monthly net wage in Estonia was 654
-15,0%
euros. Although Lithuania has the lowest average
08

08

08

09

09

09

09

10

10

10

10

gross wages, average net monthly salaries in

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

Latvia Lithuania Estonia Lithuania are slightly larger compared to those in

Source: National Statistics
Wages and salaries will continue to grow this year,
primarily in export oriented industries. Nominal
wage increases will reach nearly four per cent this
year. However, inflation is back and employees’
real earnings keep falling. Real wages, which take
into account changes of consumer price index,
continue their downward trend. In Estonia the
average real wage has contracted since the last
quarter of 2008 but the pace descent has slowed
from 4.6 per cent at the end of 2009 to 1.3 per cent a
year after. In the last quarter of 2010 the average
real wage dropped by 2.0 per cent in Latvia and 2.9
per cent in Lithuania, continuing their downward
trend for the eighth quarter in a row.
Due to increasing inflation, real earnings of Baltic
households will rise very slowly or will remain
unchanged in 2011.
Latvia. At the end of 2010 average net wage in
Lithuania reached 478 euros while in Latvia it was
only 460 euros. Due to larger personal income tax
rate and smaller tax exempt amount, employees in
Latvia receive fewer salaries than those with
identical gross wages in other Baltic countries.
Latvia has the largest difference between gross and
net salaries – approximately 29 per cent. Both in
Estonia and Lithuania this difference is close to 20
per cent.
Household consumption has recovered in all Baltic
states. Consumption has picked up in line with
lower unemployment and improved consumer
confidence. Households are more optimistic about
overall economic situation and their financial
situation than a year ago. In Latvia household
consumption expenditure grew most of all
showing increase by 5.1 per cent on annual basis in

3/18
Baltic Household Outlook April 2011

the last quarter of 2010. Taking into account high last year. Compared to 2009, expenditure for these
unemployment level, slow income rise and groups has increased. Share of food, housing and
growing compulsory expenses household transport expenses in the household budget has
consumption in the Baltics will remain weak in grown in all Baltic states, forming more than half of
2011. Despite negative factors influencing private the total consumption expenditures. Increasing
consumption, it is expected that household share of the essential goods and services in the
consumption will grow by nearly three per cent in household expenditure reflects the decrease in the
2011. quality of life and households’ deteriorating
welfare, a less money remains for other
Household consumption expenditure (%, YoY) expenditures.
15,0%

10,0%
Consumption expenditure structure of
households* (%)
5,0%
100%
0,0%
90%

-5,0% 80%
45,0 49,0 44,9
-10,0% 70%

-15,0% 60%

-20,0% 50% 13,3 13,22

11,5
40%
-25,0%
16,3 12,9 17,73
30%
-30,0%
20%
08

08

08

08

09

09

09

09

10

10

10

10
3Q
1Q

2Q

3Q

4Q

1Q

2Q

4Q

1Q

2Q

3Q

4Q

25,4 26,6 24,2

10%
Latvia Lithuania Estonia
0%
Latvia Lithuania Estonia
Source: National Statistics

Food and beverages Housing

According to national statistics, prices of the Transport Other

essential products and services (food, transport

*CPI weights
and housing) have grown considerably over the Source: National Statistics

Food prices inflict another strain on the household budget

One of the current forces pushing up inflation in Export and import of agricultural and food
Baltic states is the rising food prices. Besides, prices products (in million euros)
of major food commodities are rising up around 3000
2661
the world. Increasing demand for food in emerging 2600
economies and adverse climatic conditions has 2201
contributed to food product shortages. 2200

Consequently, food prices demonstrate upward 1800

trend. After the turmoil triggered by food prices in
1400 1277
2008 the recession in global economy and good 1161
1022
harvests forced the prices down until the year 2010 1000 836
show another sharp rise of food prices. In February
600 459
of 2011 Food Price Index of the UN Food and
Agriculture Organization rose for the eighth 200
consecutive month reaching the highest level (in
-200
both real and nominal terms) since January 1990. At -117
-186
Latvia Lithuania Estonia
present the overall food price index is 12 per cent
Export
(in real terms) and 5 per cent (in nominal terms) Import
higher than in 2008. Net balance Source: National Statistics

4/18
Baltic Household Outlook April 2011

Although the food price increase negatively affects
the purchasing power of households, agriculture
and food production industries can benefit from
the upward trend of food prices. Agricultural and
food products play a significant role in economics
of three Baltic states, counting for more than 10 per
cent of total export volume. Among Baltic states,
Estonia has the lowest share of agricultural and
food products in total export – nearly 10 per cent. In
Lithuania and Latvia share of agricultural and food
products export in total formed 18 and 17 per cent
respectively. Export of Baltic agricultural and food
products has rapidly increased over the last years,
In Lithuania, prices of food products are the lowest
among the Baltic states. Despite of food getting
more expensive throughout the year 2010, it was
the slowest pace of growth compared with other
Baltic countries. Food in general and also
compared with different groups of products still
remains cheaper in Lithuania than in Estonia or
Latvia. The largest increase in food prices was
observed in Estonia. But food is still the most
expensive in Latvia.
Price levels for food (Lithuania 2009=100, in PPP)
140

partially due to rise of food prices. In 2010 Estonia 120

demonstrated a 27 per cent increase in export of
100
agricultural and food products, followed by Latvia
(23 per cent) and Lithuania (22 per cent). At the 80

same time, import of agricultural products

60
increased at a slower pace.
40
Lithuania is net exporter of food with 460 million
euros surplus. Export of food exceeded imports by 20
20 per cent in the last year. Despite strong export
0
growth, Estonia and Latvia still are net food
Bread and cereals

Meat

Fish and seafood

Milk, cheese and eggs

Oils and fats

Fruits and vegetables

Food
importers.

Expectations regarding price trends over

12 months Lithuania
80 Latvia
Estonia
Poland Source: European Commission
60

However, people in Lithuania are dissatisfied with

40
the prices of food. In another neighboring country,
i.e., Poland, prices of food are the lowest in the
20
European Union. So far, Lithuanians try to
minimize their food costs by going to Poland to buy
0
food for their own needs and also for sale.
2008 2009 2010 2011

-20
Consumer expenditure on different foods (2009)
140
-40
120

-60 100

Estonia
Latvia 80
Lithuania Source: National Statistics
60

40
Currently, households are the most anxious about
price increase. According to consumer surveys, 20

Lithuania’s expectations regarding price increase 0

Fish and
seafood

Sweets
Milk, cheese
and eggs

Sugar and
confectionery
Bread
and cereals

Meat

Fruits and
vegetables

are the highest. Sensitivity to food prices (products

of first necessity) is strong indeed. Such anxiety is
reasonable as prices of the most common products
Lithuania
such as bread and milk products have already
Latvia
increased. Estonia Source: National Statistics, Eurostat, SEB estimates

5/18
Baltic Household Outlook
According to SEB Bank’s estimates, based on the
data provided by the Statistics Lithuania, the
Lithuanian residents spent more than their
neighbours on bread and cereals, meat and fish
(although these products are cheaper), Latvians –
on fruits and vegetables, Estonians – on milk, eggs,
cheese and confectionary. Increase in prices during
the year 2010 (prices of fruits and vegetables
increased by 16 and 20 per cent in Latvia, prices of
Financial safety cushion has increased
The net financial assets have increased in all the
three Baltic countries due to increase in financial
assets increase and decrease in liabilities. However,
the growth pace was different. The fastest growth
was observed in Estonia (14 per cent). In Latvia and
Lithuania, financial assets grew at the same pace (7
per cent). At the end of 2010 the Latvian and
Estonian households’ net financial assets were
negative (minus EUR 2 billion and minus EUR 1.5
billion, respectively), although the negative margin
(liabilities exceeding assets) was steadily
decreasing. In Lithuania said assets were always
positive.
Financial assets structure and dynamics
(in million euros)
12000
10000
8000
6000
4000
2000
2009 2010 2009 2010
Estonia Latvia
Other financial assets
Pensions and life insurance savings
Deposits
Time deposits losing their attractiveness
Households’ deposits during the year 2010
increased in all three countries. However in all the
three growth was registered in demand deposits
rather than time deposits. The most significant
growth was observed in the last quarter. Larger
April 2011
milk cheese and eggs – by 16.6 per cent in Estonia)
may change diet preferences in the above
countries.
No one can avoid the food expenditure. People
look for ways to decrease their costs by going to
other (cheaper) countries to buy food or by cooking
and baking themselves and also by growing
vegetables in their own gardens.
Our estimations show that the growth of financial
assets was determined by the same factor –
deposits. In Estonia, the volume of deposits
increased by 17 per cent (EUR 614 million). In
Lithuania, the growth pace of deposits made up 6
per cent (EUR 464 million) and it was the largest
increase compared to all the asset types. In Latvia,
percentagewise the largest growth in 2010 was
registered in households’ financial instruments
portfolio (23.5 per cent), although in nominal
amounts, the most significant increase was seen in
Tier 2 pensions (EUR 176 million). In Latvia,
deposits grew by EUR 109 million or by 3 per cent.
So we may conclude that in Estonia and Lithuania,
households’ savings increased mostly due to new
inflows into deposits. The Latvian deposits’ growth
was moderate and investment management results
made a large impact on increase in the Latvian
household financial assets increase. Approxi-
mately 47 per cent of the most significant increase
in pension assets resulted from investment income.
2009 2010
Lithuania
Source: SEB estimates
inflows into residents’ accounts were typical of the
last month of the year. It signals about the year-end
bonuses back again, also money transfers by those
who work abroad and send money home for
Christmas.
6/18
Baltic Household Outlook April 2011

Household deposits in Latvia Household deposits in Estonia

(in million euros) (in million euros)
3000 2600

2500 2300

2000 2000

1500 1700

1000 1400

Jun-2008

Dec-2008

Dec-2009

Dec-2010
Jun-2008

Dec-2008

Dec-2009

Dec-2010
Demand Demand
Term&savings Source: Bank of Latvia Term&savings Source: Bank of Estonia

Household deposits in Lithuania

(in million euros)
6000
Time deposits lost their attractiveness due to low
interest rates. The correlation between the time
5000 deposit interest rates and the deposited amounts is
high. As the interest rates kept going down, some
people choose to keep their funds in current
4000
accounts or look for other investment
opportunities with higher yields, or even spend
3000 their money on a major purchase.

2000
Jun-2008

Dec-2008

Dec-2009

Dec-2010

Demand
Term&savings Source: Bank of Lithuania

Still cautious regarding borrowing

Dynamics of financial obligations was also Household loan portfolio changes (y-o-y)
25,0%
different. Loan portfolios of Lithuanian and
Lithuania
Latvian households shrank by 5.3 percent each. 20,0% Latvia
Estonia
Estonia’s households decreased their liabilities by 15,0%
3.3 per cent. However, since the peak of the credit
10,0%
cycle (December 2008), the decrease was the largest
in Latvia (10 per cent), followed by Lithuania (9 per 5,0%

cent), and the lowest in Estonia (6 per cent). 0,0%

Consumer loans in particular have fallen parti-
-5,0%
cularly sharply. Housing loans account for more
than four fifths of the outstanding household loans, -10,0%
09
08

09

09

09

10

10

10

10

so their growth rates are very similar to the overall

20

20

20

20

20

20

20

20

20
1Q
4Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

portfolio. Source: Central Banks

7/18
Baltic Household Outlook
The volume of newly granted loans is still lower
than the total loan repayments by private
individuals and also loan write-offs by commercial
banks. Although interest in housing loans in the
second half of 2010 has improved. In Lithuania,
during the last quarter of 2010, housing loan
portfolio slightly increased (by 0.04 per cent).
However, the amounts granted are small
compared with those issued during the credit
boom. The main reasons for modest credit volumes
are the residents’ falling incomes and people’s
reluctance to assume new burden of debt.
April 2011
Anyway, all the above changes are the first signals
of rising confidence in the future and improving
financial situation. According to the data provided
by SEB bank (Lithuanian) almost all borrowers (95-
99 per cent) who obtained new loans in 2009-2010
timely pay loan installments, i.e., no payments are
overdue for at least one day.
Decreasing pessimism may be observed in
households’ financial behavior. However, changes
are rather slight and related only to such
households who keep deposits in financial
institutions.
8/18
Baltic Household Outlook April 2011

LATVIA
Incomes shrink, economic recovery largely unnoticed
In 2010 the total income continued to decline losing improve, also due to emigration, as the people of
approximately 10 per cent year on year. The labour Latvia will be able to choose new destinations (e.g.
market is not recovering fast enough to be able to Germany will open its labour market) in their quest
absorb the vast numbers of jobseekers; of work and income.
nevertheless since the 1st quarter of 2010, when
unemployment reached the peak, it has started to Income of households
decline as the number of employed persons has 400 2400

grown together with the total wages and salaries 350 2100

fund. The number of employed people had risen by 300 1800

37 thousand compared with 1st quarter. At the

250 1500
same time, the number of jobseekers had dropped
below 200 thousand – by the 4th quarter 193.2 200 1200

thousand people or 17.2 per cent of the 150 900

economically active population were jobless. 100 600

Unemployment statistics is partially improved due

50 300
to the decreasing number of economically active
people. Scarcity of jobs in Latvia drives people out 0 0

07

08

09

09

10

10
07

07

07

08

08

08

09

09

10

10
1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q

1Q

2Q

3Q

4Q
of the country or makes them loose hope to find
work at all. In Q4 of 2010 there were 55.8 thousand Average net wage (EUR) Source: CSP
Average pension (EUR)
people who had given up the hope of working Overall income of households in m EUR (RHS)

again or 11.6 thousand more, year on year. The

rising number of the long-term jobless and
hopeless people also reflects structural unemploy-
ment problem.
Registered unemployment after standing at the
level of 14.5 per cent for several months most
probably will start falling in spring yet the decrease
will not be fast. Improvement in the labour market
will be slow due to the rising taxes and tariffs,
government expenditure cuts, consolidation that
will lead to slashing more jobs in the public sector
as well as the price rise of various raw materials.
The unemployment statistics will gradually
As opposed to 2009 when wages and jobs dropped
significantly, now the situation is better. After the
decline lasting for six consecutive quarters in the
last quarter of 2010 average gross wage rose 3.4 per
cent compared with Q4 of 2009. Net wages due to
the rise of the personal income tax and the smaller
non-taxable minimum income was still negative in
2010, yet this year net wages may see some
percentage rise. Average pay rise this year may
reach 4-5 per cent. This year the residents’ incomes
will be bigger than in 2010 yet their expenses will
grow, too, due to the rising prices.

Rising costs influence consumption

Consumer prices have returned to the peak
reached in March 2009. Historically highest prices
are now seen in several groups of goods and
services, including food products (e.g. dairy
products, fish, cereals, fruit, soft beverages),
alcohol and tobacco, transport (fuel prices), as well
as education.
The prices of the first necessity products and
services over the year have grown considerably.
Food prices have gained on average 8 per cent,
housing expenses – 6 per cent, transport – 7 per
cent, thus the share of these costs in the total
household budget has grown. The households
spend up to 23.6 per cent of their income for food,
16.3 per cent for housing and 13.3 per cent for
transport, these three largest expense items
amounting in total to 53.2 per cent. The survey of
the households’ welfare conducted by the Central
Statistical Bureau shows that the rising food prices
is one of the main reasons of the households’
deteriorating welfare. If at the beginning of 2010 it
was the shrinking wages and salaries that made life
harder, in the second half of the year, as the prices
for the essential goods soared, the households were
forced to economize on food, buying less, and
cheaper or discounted food products.

9/18
 Baltic Household Outlook April 2011

Consumer price changes (per cent) (electricity tariffs will go up by approximately 30

40,0%
per cent for small and medium enterprises who by
electricity in the regulated market) will push the
30,0%
producers’ costs up and after some time will be
20,0% reflected in consumer prices. The changes in tariffs
and taxes will hit hardest those households who
10,0%
live in privately owned houses heated by natural
0,0%
gas or electricity and drive cars with petrol engines.
-10,0%
Although this tariff and tax rise was targeted at
affluent residents who can afford to live more
-20,0%
comfortably, e.g. in a private house, in reality the
Food

Alcohol, tobacco

Clothing and footwear

Housing

Household equipment

Health care

Transport

Communication

Recreation, culture

Education

Hotels, restaurants

Other
less well-to-do families with children in whose
budget the transport and housing expenses make a
big portion will face bigger expenses.

2011 II compared to 2008 II

2011 II compared 2009 II Source: CSP
Share of the first necessity
goods and services in household expenses
In 2011 the rising food and housing prices will be 30,0%

one of the burning issues. Various food product

prices will increase differently, therefore the 25,0%

consumers will focus on cheaper products. The

20,0%
households’ budgets will perceive the rising
expenses for electricity, natural gas and in autumn 15,0%

– also thermal energy. At least half of all households

will feel the direct influence of the new electricity 10,0%

tariffs. The electricity tariffs together with the hike

5,0%
of excise tax on fuel and natural gas in June-July
will deal a double blow to the households: directly 0,0%
2005

2006

2007

2008

2009

2010

2011
- with the rising rates and bills - and indirectly –
through the increasing prices of goods and Food Housing Transport
services. The more expensive electric energy Source : CSP

Financial safety cushion has increased

The financial assets (bank deposits, financial reached its highest value so far, whereas, excluding
instruments, private pensions and insurance Tier 2 pension capital, the total amount of the
products as well as Tier 2 pension plans) increased households’ financial assets at the end of 2010 was
by 418 million to 6.095 billion euros. The largest only slightly smaller than in Q3 of 2008 when the
increase of assets was seen in Tier 2 pensions – 176 record volume was registered.
million euros. Besides, approximately 47 per cent
of pension amount increase was earned by the Breakdown of financial assets
pension managing companies. The next biggest 100%

group were household deposits (EUR 108 million 80%

up) and financial instruments (EUR 88 million up).
60%
Long-term savings (private pensions and life
insurance savings) also were positive – over the 40%

year the portfolio grew by 46 million euros. 20%

Percentagewise, the largest growth in 2010 was
0%
registered in households’ financial instruments IVQ 2008 IVQ 2009 IVQ 2010
portfolio – 23.5 per cent up. Tier 2 pension capital Pillar II pension funds
Life insurance and private pension savings
has risen by 17.5 per cent. The total amount of
Financial instruments
financial assets (including Tier 2 pensions) has Deposits Source: SEB estimates

10/18
Baltic Household Outlook April 2011

Over the year SEB Pension Fund had signed 2886
new private pension agreements whereas SEB Life
Insurance signed 9307 new insurance policies,
which was only slightly less than in 2009. Due to the
shrinking employers’ contributions to Tier 3
pensions of their employees the total amount of
contributions in 2010 were less than in 2009. The
number of active participants of pension plans
(those who made contributions themselves or their
employers did it) decreased whereas the number of
passive participants (those who had made no
contributions lately and had not reached the
retirement age yet) grew. Regarding the life
insurance savings, in 2010 the amount of signed
policies rose compared with 2009. A bigger number
of people last year chose the unit-linked life
insurance savings – these policies accounted for
more than 20 per cent of the underwritten life
insurance premiums. Although people’s risk
appetite over the last years has increased, generally
households have low risk tolerance and tend to
choose safer investment projects.

Deposits less attractive due to low rates

Households’ deposits during this year have grown
by 2.7 per cent. At the end of 2010 the total amount
of deposits reached the highest level since
November 2008 staying behind the pre-crisis level
by approximately 9 per cent. The increase is mostly
in the demand deposits rather than in term
deposits. Over the year the volume of demand
deposits has increased by 21.9 per cent, whereas
term deposits have shrunk by 10.1 per cent.
The correlation between the term deposit rates and
the deposited amounts is very close indeed. As the
lower than the rates for euro deposits, whereas a
year ago they were considerably higher. Further
fall of deposit interest rates is unlikely and in the
second half of 2011 they may even slightly go up.
Dynamics of household deposits
(EUR million)
1800,00
1500,00
1200,00

rates of term deposits in lats plummeted and

foreign term deposit interest rates kept going 900,00

down, some people chose to keep their funds in

600,00
current accounts or look for other investment
opportunities with higher yields than the term 300,00

deposits, or even spend this money on a major

purchase. The short-term deposit rates have 0,00
Jan. 09

Apr. 09

Jūl. 09

Jan. 10

Apr. 10

Jūl. 10

Okt. 10

Jan. 11
dropped to their historically lowest levels whereas
the long-term deposit rates in lats and foreign
Demand deposits
currencies – the lowest levels since 2005. It is Term deposits
notable also that the term deposit rates in lats are Savings accounts Source: LB

Residents reduce their liabilities; reluctant to assume new ones

Dynamics of household loans (per cent)
The households’ financial liabilities since Q4 2008
8,0%
have continued to shrink; over the year fell by 459
6,0%
million to 8.156 billion euros. The volume of newly
granted loans to households is still smaller than the 4,0%

total amounts repaid by private individuals on 2,0%

their outstanding loans and also loan write-offs of 0,0%

commercial banks. Consequently, the total amount
-2,0%
of loans issued to households in 2010 decreased by
-4,0%
5.3 per cent (approximately 5 per cent drop was
-6,0%
registered in 2009). Consumer loans are falling
1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010
AQ2008

faster percentagewise than the volume of housing

loans – in 2010 consumer loans dropped by 9 per changes over previous quarter
cent while housing loans were 4.5 per cent down. changes YoY Source:FCMC

11/18
Baltic Household Outlook April 2011

Although the interest in housing loans in the
second half of 2010 was revived, the amounts
granted are small compared with those issued
during the credit boom. The main reasons of
modest credit volumes are the residents’ falling
incomes, a big share of wages paid „in envelopes”
(the banks demand to disclose the borrower’s
official income) and the people’s reluctance to
assume new burden of debt.
Recession has changed the people’s priorities and
attitude to financial obligations therefore the
borrower’s profile has changed too. According to
SEB banka data over the last five years average
housing loan amounts have decreased by more
than half (from approximately 70 thousand euros
in 2006 to 31 thousand euros in 2010). The maturity
of the loan has decreased too – in 2010 housing
loans were granted for 14.4 years compared with
the average maturity of 17.7 years in 2006. The
borrowers often take loans for renovation of the
existing dwelling rather than for buying another
(bigger or newer) place of residence.
The first two months of 2011 show further decrease
in the private individuals’ credit portfolio by 6.2
per cent compared with the same period in 2010. In
view of a number of factors that curb lending
(including the possible rise of interest rates), it is
most likely that the declining trend of the total
loans issued to households will continue in 2011,
yet toward the end of the year decline rate will
somewhat slow down.

Financial vulnerability decreases

As the liabilities shrink and the savings grows the
households’ net financial assets has risen by 876
million euros. However, the households’ net
financial assets are still negative with liabilities
prevailing over assets. This negative margin at the
beginning of 2011 amounted to approximately 2.06
billion euros, although since the end of 2008 it has
been steadily decreasing (over two years the
financial balance of households has improved by
approx. 1.58 billion euros). As opposed to the
previous years, when the households’ debt burden
grew due to the fact that outstanding loans
decreased slower than incomes, this year the debt
burden (debt-to-income) is likely to decrease. The
debt burden may decrease both thanks to the rising
incomes and due to further decrease in the total
loan portfolio of private individuals.
The important factor influencing the borrowers’
financial stability is the interest rates. The rise of
euro interest rates may make a negative impact on
the financial strength of the borrowers as the rise of
euro interest rate by a mere percentage point
means several tens of millions of lats in additional
expenses per year. The rise of the credit interest
rates in addition to the rise of food, housing and
transport prices will reduce the households’
opportunities to put aside some money for savings
therefore this year a fast rise in financial assets of
households and positive financial balance can
hardly be expected.

Financial assets and liabilities of households (EUR million)

IVQ 2008 IIQ 2009 IVQ 2009 IIQ 2010 IVQ 2010
Financial assets 5 421 5 576 5 677 5 895 6 095
Deposits 4 109 4 026 3 999 4 099 4 108
Securities and financial instruments 394 392 375 404 463
Savings under life insurance agreements
and private pension funds* 259 277 301 310 347
Pillar II pension funds 660 881 1 002 1 083 1 178
Liabilities 9 064 8 860 8 615 8 457 8 156
Mortgage loans 7 188 7 045 6 866 6 757 6 554
Consumer loans 1 121 1 080 1 012 942 920
Other loans 755 735 736 758 682
Net value of financial assets -3 643 -3 284 -2 938 -2 561 -2 062
* SEB banka estimates
Sources: Bank of Latvia, FCMC, LIA, SEB dzīvības apdrošināšana

12/18
Baltic Household Outlook April 2011

LITHUANIA – back on track

• Increasing consumer confidence is followed by More positive news came in the middle of the year –
changing household financial behaviour the unemployment rate stopped growing, the
• Net financial value is still increasing due to average salary started to increase and consumption
further increasing assets and decreasing also started to grow.
liabilities
• However, borrowing for housing loans is more Mid-year End of Change,
active and these loans’ quality is very good 2010 2010 %
• Composition of household financial assets is Number of
still very conservative although forms of long- unemployed, 324.2 311.3 -4
thousands
term saving products became more trendy due
to low interest rates and stronger confidence in Average salary, 463.9 477.8 +3
future income euros

Source: Department of Statistics

Back-on-track is mainly illustrated by re-gained
consumer confidence Consumer surveys show that
The changes are rather slight, and the pessimists
after a sharp drop in 2008, the confidence level is
would say that the changes are insignificant. In
gradually rising since the very beginning of 2010.
general, the situation is still not satisfactory: the
Consumer confidence level unemployment rate still remains too high, the price
2008 2009 2010 2011 levels increase faster than income, lack of jobs and
0
low income push people to leave their country.
-10
Although decreasing pessimism may be also
-20
observed in households’ financial behaviour. Of
-30
course, it is related only to such households who
have assets and keep thereof in financial
-40 institutions.
-50

-60

Source: Department of Statistics

Financial assets break-even point still ahead

Following the dynamics of changes in net financial Financial assets and liabilities
assets of households, we may notice the of households (EUR billion)
breakpoint in the last quarter of 2008, when a more 11

difficult period began. Value of financial assets

stopped collapsing and financial liabilities stopped 10

shrinking. Then the first priority was given to

safety. People tried to save as much as they can and 9

preferred to lower their debts to financial

institutions, as their prospects for future income, 8

due to galloping unemployment, were very

7
unclear.

6
Another break-even point, marking the end of the Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4
forced savings is still ahead. The nearest change to 2008 2008 2009 2009 2009 2009 2010 2010 2010 2010

be observed assets will be related to increased

Financial liabilities
liabilities but nor to decreased assets. Financial assets Source: SEB bankas

13/18
Baltic Household Outlook April 2011

Composition of financial assets still very conservative...

The largest growth of deposits in banks is
observed. During the second half of the year,
households’ accounts were replenished by 0.3 bn
EUR. Life insurance and pensions were the second
the most popular form of savings. Investment
funds showed positive performance results. Only
savings bonds, which were very popular 3 years
ago however became less popular due to lower
The most significant increase in deposits was
noticed in December. Such seasonality may be
noticed every year, although in the years 2008 and
2009 it was lower.
Change of deposits in December compared to
November (EUR million)
450

than expected results, showed negative results (i.e., 400 382

401 401

inflows were lower by 0.12 bn EUR compared to

350
outflows).
305
300 288

Households new savings (EUR million, 2H2010) 250

295
300 202
200
176
250
150

200
100

150
50

100
0
51 48

2007
2005

2009
2006

2010
2004

2008
50
12
0 Source: Bank of Lithuania

-50
The level of deposits growth in December of the
-100 year 2010 is still lower than pre-crisis levels of the
-118
-150 years 2005, 2006 or 2007. However it signals about
Deposits Investment Life insurance II pillar Bonds
funds and private pension
the year–end bonuses back again, also money
pensions funds transfers by those who work abroad and send
Sources: Bank of Lithuania, LBA, ISC, CSD money home for Christmas.

...although forms of long-term savings products became trendy

Nevertheless, term deposit portfolio is still Term deposits by maturity (EUR million)
shrinking. The main reason is too low interest rates. 6000
Interest rates on the most popular (up to 6 months)
5000
term deposits make an average of 1 per cent, that is
4000
lower than inflation forecast (according to SEB’s
forecast – 3.5 per cent next year). Only the volume 3000

of deposits with the longer maturity (over 1 year) is 2000

increasing. The above trend started in the
1000
beginning of 2010 and got even faster at the
0
beginning of the year 2011. Although ECB rate hike
2008

2009

2010

2011

forecasts may stop said trend.

up to 1 year

Long-term savings signal better perspective on the over 1 year Source: Bank of Lithuania

financial situation and income in the future. As

investors who choose long-term investments (life periods – to get tax allowances and/or to wait for
insurance, pension funds and mutual funds too) more favourable time to sell the securities at a
must be prepared to freeze the money for longer profit.

14/18
Baltic Household Outlook April 2011

The best illustration of the preparedness to freeze a Net inflows into investment funds (EUR million)
portion of income or savings is behaviour of those 26,0

who invest through insurance companies. At the 24,0

2010

end of the year, payments into the insurance funds 2007

22,0
increased threefold compared with the average
20,0
monthly payments. The level of new payments was
the same as in 2007. 18,0
2009
16,0

This form is subsidized by income tax deductions 14,0

2008
on condition that investment maturity makes at
12,0
least 10 years. So willingness to earn at least 15 per
10,0
cent (equivalent of tax deduction) was much

January

February

March

April

May

June

July

August

September

October

November

December
stronger than fear and willingness to keep cash on a
hand.
Source: Insurance Supervisory Commission

Changes in borrowing behaviour

Credit portfolio started to decrease at the end of Share of customers making payments on time
2008 and such trend is still observed. However, by the year the loan was issued
100%
analysis of different types of loans shows that 98,5%
98%
decrease in the housing loan portfolio was the
96% 94,9% 94,6%
slowest. During the last quarter of 2010, it slightly 93,8% 93,5% 93,4%
94%
increased (by 0.04 per cent). 92%
92,0%

90% 89,1%
Quarterly changes of loan portfolio 88%
87,8%
87,1%

10,0% 86%

84%
8,0% 82%

80%
6,0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Source: SEB bankas

4,0%

2,0%
Anyway, all the above changes are the first signals
0,0% of increasing confidence in the future, however the
3Q2008

4Q2008

1Q2009

2Q2009

3Q2009

4Q2009

1Q2010

2Q2010

3Q2010

4Q2010

improvement is not clearly observed yet. Also we

-2,0%
may notice that a certain stagnation of household
-4,0%
consumption observed during the year 2009 has
ended.
-6,0%

-8,0%
Yearly household consumption changes (%)
Consumer credits 15%
Housing loans
Other Source: Bank of Lithuania 10%

5%

0%
It would be too pessimistic to forecast a new 1Q2008 3Q2008 1Q2009 3Q2009 1Q2010 3Q2010
bubble, as repayment of the newly granted loans -5%

(2009-2010) are very disciplined. According to SEB -10%

Bank’s data almost all borrowers (95-99 per cent) -15%

timely pay loan instalments, i.e., no payments -20%

overdue for at least one day. So actually, loans are -25%
granted only to those who ensure timely
repayments. Source: Department of Statistics

15/18
Baltic Household Outlook April 2011

People got back to normal life, although the new
normality demonstrates that lower incomes still
persist. However the new features of behaviour can
be identified: during 2009 and 2010, the volumes of
purchase via post or via the Internet were
gradually rising, people have learned to find goods
and to buy such goods from other locations, i.e.,
from abroad. Footprints of the Lithuanians to
Poland aiming to buy food, clothes, domestic
appliances are still clearly visible. People have
learned how to find ways to cut their expenditures
and increase income by extending maturity of
deposits, profiting from tax allowance as they are
not so concerned about immediate availability of
cash . The above changes may also be deemed to be
positive changes although not of such scale that we
wish to see.

Financial assets, liabilities and net asset value of households mEUR

2008 2009 1H 2010 2H 2010

Financial assets 9136 9994 10096 10680
Deposits 7151 7392 7560 7856
Bonds (Lithuanian corporate bonds
and Government bonds) 492 580 366 241
Equities (Lithuanian equities) 522 633 668 879
Units of investment funds offered
by the banks 121 183 208 264
Savings under life insurance agreements* 206 261 278 323
Pillar II pension funds 644 945 1016 1117
Liabilities 8740 8362 8144 7917
Mortgage loans 6.055 6.027 6007 5985
Consumer loans 1265 1026 929 842
Other loans 1420 1309 1208 1090
Net value of financial assets 396 1632 1952 2763
* Source: SEB bankas

16/18
Baltic Household Outlook
ESTONIA
Estonian households have benefitted from the
latest favourable labour market developments.
The headline unemployment rate has fallen by
more than six percentage points from its peak in the
first quarter of the last year with the second half of
2010 showing particularly strong recovery. The
number of the jobless has thus come down from 137
thousand to 93 thousand – more than 30 per cent.
Year-on-year employment growth turned positive
in the last quarter of 2010. Compared with the peak
in the third quarter of 2008 there are still 67
thousand jobs lost (more than 10 per cent).
However, the total employment has rebounded by
approximately 7 per cent which has brought the
number of employed back to where it was in the
third quarter of 2009. By and large it seems that the
export-led recovery has reached the labour market
with somewhat greater vigour than we initially
expected. This means among other things that
employment gains are so far heavily skewed
towards manufacturing sector. This sector
contributed 2.5 percentage points to the growth
rate of total employment in the fourth quarter. To
the extent that total employment grew by 2.1 per
cent, it means that the other major activities are on
the aggregate still shedding labour.
Employment and unemployment
20%
10%
0%
03.98 09.00 03.03 09.05 03.08
-10%
-20%
Unemployment rate,% (LHS)
Y-o-Y employment growth (LHS)
Total employment (RHS)
Source: Estonia Statistics
April 2011
Stronger demand for workers has generated a
multi-speed labour market where excess demand
in some segments exists side by side with the excess
supply in other parts. All in all money wages are
once again drifting slightly upwards. The year-on-
year growth rate of the average nominal wage
turned positive already in the second quarter of the
last year (after having fallen for five consecutive
quarters). In the fourth quarter it rose already by
3.9 per cent, the sharpest upturn since the end of
2008. But inflation is still ahead of wage growth, so
that real earnings keep falling. The average real
wage has contracted since the last quarter of 2008
but the pace descent has slowed from 4.6 per cent at
the end of 2009 to 1.3 per cent a year later.
Manufacturing was again the primary engine
behind the nominal wage growth throughout 2010,
but in the last quarter it was also strongly
supported by construction sector.
If labour market gives some reasons to cheer – the
steady drop in real income notwithstanding – then
the support from credit and money market is much
weaker. Consumers continue to dump debt. The
total outstanding loan balance of household sector
has shrunk form EUR 7.7bn at the peak of credit
cycle (December 2008) to EUR 7.2bn in this
February (a cumulative decline of 6.5 per cent).
The year-on-year growth rate plunged below zero
800 in the middle of 2009 and the rate of contraction has
now stabilised around 3.3 per cent. Consumer
credits have fallen particularly sharply, their stock
is now 25 per cent lower than at the peak and the
double-digit rate of decline shows no signs of
700 abating. The housing loans account for more than
four-fifths of the outstanding household loans, so
in thousands
that their time path and growth rates are very
09.10
similar to the overall portfolio. The stock of
deposits held by households which over 2009 and
600 2010 grew only very sluggishly (it virtually ground
to a halt at the end of 2009), turned decisively up in
the lasts months of 2010. In February households
had EUR 4.3bn in their bank accounts (up from
EUR 4.0bn just four months earlier). The observed
500 upswing was primarily due to demand deposits,
the volume of which rose to EUR 2.1bn – a more
than 10% increase from October of 2010.
17/18
 Baltic Household Outlook April 2011

Household loans and deposits unprecedented downturn has dealt a severe blow
10 80 to the lean supply chains of car manufac-turers.

Consumer confidence which improved rapidly

8 60
from the spring of 2009 to the summer of 2010 has
since then fluctuated around a more or less stable
6 40 level. The same applies to the unemployment

y-o-y growth rate, &

expectations – most of the surveyed do not seem to
EUR bn

expect further rapid labour market improvements.

4 20
As regards prices, inflationary expectations have
also stabilised, after having surged in the first half
2 0 of 2010. Hence we seem to have reached a stage
where the further developments in household
sector as in the rest of the economy are heavily
0 -20
04.98 12.99 08.01 04.03 12.04 08.06 04.08 12.09
dependent on balance of payments flows.
Loans (LHS) Deposits (LHS)
Although the export recovery has been
Loans (RHS) Deposits (LHS) exceptionally strong, current account surpluses
Source: Estonia Statistics
have not been large enough to cover persistently
large financial account shortfalls. If these trends
On the whole, the willingness to consume is continue, the associated drain of domestic liquidity
crawling back, albeit from a very low level. Thus, might nip the incipient revival of domestic demand
the year-on-year growth rate of retail sales has been in its bud.
above zero since the last autumn; with this January Consumer survey results
being the only exception. The growth rate peaked 90

in November at 6 per cent and has since then fallen

to 2 per cent in February as consumers take time to 60
net balance of respondents, %

grow used to new bank notes and coins (although

retailers say that the switchover-generated 30

backlash has been weaker than initially feared).

The recovery is most visible in the car sales which 0
were up by almost 60 per cent in February,
although here the base effect had a particularly -30
large impact. Although the passenger car sales – as
measured by new registrations – are have indeed -60
recoiled from their most depressed levels in 2009, 07.09.
01.02

11.02

09.03

07.04

05.05

03.06

01.07

11.07

09.08

05.10

03.11
they are still barely a third what they were in the
Cons um er confidence
best months of 2007 and 2008. But the car dealers Unem ploym ent expectations
claim that they have hit the bottlenecks, as the Inflation expectations Source: Estonia Statistics

Financial assets, liabilities and net asset value of households mEUR

IVQ 2008 IIQ 2009 IVQ 2009 IIQ 2010 IVQ 2010
Financial assets 4 192 4 875 5 048 5 272 5 739
Domestic investment funds 70 64 70 70 77
Pension funds 792 920 1 022 1 073 1 163
Other 121 147 319 351 256
Private portfolios 83 58 64 70 58
Demand deposits 1 399 1 508 1 489 1 770 2 077
Time deposits 1 725 2 179 2 083 1 936 2 109
Liabilities (loans) 7 629 7 502 7 412 7 240 7 244
Net value of financial assets -3 438 -2 626 -2 364 -1 968 -1 505
* Source: FSA

© SEB 2011
This edition is intended for general circulation only and does not constitute a personal recommendation. The information in this document was obtained from sources believed to
be reliable, but its accuracy or completeness cannot be guaranteed. Any opinions expressed herein are given in good faith, but are subject to change without notice.

18/18