Central and Eastern Europe: Structural Current Account Deficits and Increasing Foreign Debts (III)
Persistant current account deficits and increasing foreign debts are alarming though hardly discussed trends of East Central Europe's economic development. Part III: Estonia, Latvia, and Lithuania.
Rainer Tomassovits and Joachim Becker - Oct. 13, 2006
In 1997 the trade balance deficit of Estonia was for the first time higher than one billion €. During the following years a slight reduction has occurred, since 2002 it has risen again to the present value of 1.5 billion €. The service balance has a positive trend and exceeded 800 million € in 2004 and 2005. The income deficit of Estonia increased each year from 1998 on and reached the level of 560 million € in 2005. In 2004, Estonia displayed the highest current account deficit/GDP ratio among the Central East European states – a staggering 12.7%.
In 2005 this ratio was still at 10.7%. This extremely high deficit was obviously related to the currency board system and the ensuing overvaluation of the national currency. The financial account surplus has been over one billion for the last three years.
Latvia’s balance of trade deficit shows a continuously rising trend. It reached 2.4 billion € in 2005. The service account displays a constant surplus while the income has turned into the red balance only during the last three years. The current account displays a rapidly growing negative balance which amounted to 12.3% in 2004. With 12.4% in 2005, Latvia is the new record holder in the region. The surplus of the financial account has increased constantly to 1.6 billion € in 2005, dominated by the category of 'other investment'.
Lithuania’s figures show similarity to the other Baltic states although the ratio current account deficit/GDP has shown better results when reaching 7.2% in 2004 and 7.0% in 2005. The deficit of the balance of trade has tended to widen with 2.3 bn € in 2005. The balance of services has been positive whereas a sharp increase of the deficit of the income balance was has been recorded during the last three years.
Similar to Latvia, the importance of current transfers and a high surplus of the capital account has increased in the last two years. The financial account has reached its peak at the end of the 1990s before declining thereafter. It has remained constant for the last three years at a level of about one billion €.
One can conclude that all the observed countries have reported a trade balance deficit as well as a surplus of the service balance. The transfer balances have generally been positive (esp. in Poland and the Baltic states) and there appears to be a general tendency of significant increases of the deficits in income balances.
Foreign direct investments seem to have contradictory impacts on current accounts. On the one hand they contributed – at least partly – to the expansions of good exports. On the other hand they resulted in increasing profit remittances. In a number of states, the deficit of income balances hover around 4% to 5% of GDP. It is extremely difficult to reduce these deficits which mainly consist of interest and profit remittances.
While in the 1990s the negative balance of trade was the major cause of the current account deficits, the major cause of the present current account deficits has shifted to the extremely high profit remittances and interest payments. The figures of the current accounts of Central and Eastern European countries have been worse than those in Latin America in the second half of the 1990s which preceded the wave of financial crisis at the turn of the century.
With the exception of Nicaragua and Panama, no Latin American country had displayed a current account deficit of more than 10% of GDP. A current account deficit of more than 5% had been a rare occurrence (Cepal 2004: 356, tab. A-7). Since then the financial account surpluses have become more and more important for the balances of payments. But the composition of these surpluses vary from year to year and from country to country.
In 2005 this ratio was still at 10.7%. This extremely high deficit was obviously related to the currency board system and the ensuing overvaluation of the national currency. The financial account surplus has been over one billion for the last three years.
Latvia’s balance of trade deficit shows a continuously rising trend. It reached 2.4 billion € in 2005. The service account displays a constant surplus while the income has turned into the red balance only during the last three years. The current account displays a rapidly growing negative balance which amounted to 12.3% in 2004. With 12.4% in 2005, Latvia is the new record holder in the region. The surplus of the financial account has increased constantly to 1.6 billion € in 2005, dominated by the category of 'other investment'.
Lithuania’s figures show similarity to the other Baltic states although the ratio current account deficit/GDP has shown better results when reaching 7.2% in 2004 and 7.0% in 2005. The deficit of the balance of trade has tended to widen with 2.3 bn € in 2005. The balance of services has been positive whereas a sharp increase of the deficit of the income balance was has been recorded during the last three years.
Similar to Latvia, the importance of current transfers and a high surplus of the capital account has increased in the last two years. The financial account has reached its peak at the end of the 1990s before declining thereafter. It has remained constant for the last three years at a level of about one billion €.
Resume
One can conclude that all the observed countries have reported a trade balance deficit as well as a surplus of the service balance. The transfer balances have generally been positive (esp. in Poland and the Baltic states) and there appears to be a general tendency of significant increases of the deficits in income balances.
Foreign direct investments seem to have contradictory impacts on current accounts. On the one hand they contributed – at least partly – to the expansions of good exports. On the other hand they resulted in increasing profit remittances. In a number of states, the deficit of income balances hover around 4% to 5% of GDP. It is extremely difficult to reduce these deficits which mainly consist of interest and profit remittances.
While in the 1990s the negative balance of trade was the major cause of the current account deficits, the major cause of the present current account deficits has shifted to the extremely high profit remittances and interest payments. The figures of the current accounts of Central and Eastern European countries have been worse than those in Latin America in the second half of the 1990s which preceded the wave of financial crisis at the turn of the century.
With the exception of Nicaragua and Panama, no Latin American country had displayed a current account deficit of more than 10% of GDP. A current account deficit of more than 5% had been a rare occurrence (Cepal 2004: 356, tab. A-7). Since then the financial account surpluses have become more and more important for the balances of payments. But the composition of these surpluses vary from year to year and from country to country.
Read in part IV: External Debt
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