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Viewing cable 06TALLINN597, ESTONIAN CENTRAL BANK CITES SIGNS OF

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Reference ID Created Released Classification Origin
06TALLINN597 2006-06-22 11:16 2011-08-25 00:00 UNCLASSIFIED//FOR OFFICIAL USE ONLY Embassy Tallinn
VZCZCXRO7159
PP RUEHAST
DE RUEHTL #0597 1731116
ZNR UUUUU ZZH
P 221116Z JUN 06
FM AMEMBASSY TALLINN
TO RUEHC/SECSTATE WASHDC PRIORITY 8776
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
RUEATRS/DEPT OF TREASURY WASHDC
UNCLAS TALLINN 000597 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
REF: TALLINN 0568 
 
E.O. 12958: N/A 
TAGS: ECON ETTC PREL EUN EN
SUBJECT:  ESTONIAN CENTRAL BANK CITES SIGNS OF 
OVERHEATING 
 
 
1.  (U) Summary: On June 14, Central Bank Governor Andres 
Lipstok warned of signs of overheating in the Estonian 
economy, announcing that wage growth was twice as large 
as productivity growth in the first quarter of 2006.  He 
urged the GOE to forego a planned supplementary budget 
and recommended using the estimated 3 billion kroon 
(about $250 million) budget surplus to prop up reserve 
funds such as the pension fund.  He also urged the public 
to curb consumption which is being fueled by record 
numbers of housing loans.  Reaction to the Central Bank 
warning was subdued as the Ministry of Finance continued 
its plan for the supplementary budget (part of which will 
be directed toward the pension fund). Major banks 
continue to state that the economy's fundamentals are 
good, even if inflation numbers call into question 
Estonia's ability to meet Maastricht criteria for euro 
adoption in the near future. End Summary. 
 
2.  (U) Central Bank Governor Lipstok gave a briefing 
about the Estonian economy shortly after his meeting with 
Treasury U/S Timothy Adams June 14 (reftel).  Lipstok 
cited newly-released first quarter economic figures which 
showed that growth in real wages was more than double 
productivity growth.  He said that while Estonia's first 
quarter economic growth was more than 11 percent, "the 
situation is not as rosy as the figures show."  He noted 
that export growth slowed somewhat in the first quarter, 
meaning that the high growth was fueled by wage increases 
and domestic demand.  He urged consumers to curb their 
hunger for easy credit, particularly housing loans, which 
were issued in record numbers in May.  Lipstok also urged 
the GOE to forego a supplementary budget and instead use 
its expected 3 billion kroon (about $250 million) budget 
surplus to increase reserves such as the pension fund. 
 
3.  (SBU) Reaction to the Central Bank's announcement was 
muted.  The Ministry of Finance continued with its plans 
for a supplementary budget, some of which will be 
directed to the pension fund.  The two leading banks 
announced that while May saw a record number of housing 
loans, the high season for such loans would end in June 
and then lending would drop off.  The CEO of Hansapank, 
Estonia's largest bank, told econoff June 16 that his 
bank viewed the Central Bank's warning as a message 
directed at politicians who might be tempted to boost 
spending in the run-up to presidential elections in the 
fall and parliamentary elections in spring.  He said the 
fundamentals of the Estonian economy are strong, as are 
the balance sheets of Estonian banks. He added that 
contrary to the Central Bank's warning, in Hansa's view 
the Estonian public is not over-extended. 
 
4. (U) Conclusions from an April IMF staff visit 
underscored the strong fundamentals of the Estonian 
economy, noting the country has achieved nominal 
convergence under its euro-linked Currency Board 
Arrangement and has maintained a history of fiscal 
surpluses and low interest rate spreads.  It stated that 
Estonia's plan to limit inflation to within Maastricht 
criteria bounds by re-phasing planned increases in excise 
taxes has a good change of succeeding, as long as the GOE 
maintains a strong fiscal posture.  Estonia now hopes to 
adopt the euro on January 1, 2008, but many analysts are 
saying this target could be postponed by one to two years 
given continued expectations for strong growth 
accompanied by higher inflation, in the next few years. 
 
5.  (SBU) Comment:  Current trends in growth and wage 
increases appear unsustainable.  Foreign investors are 
already talking about canceling plans for expansion due 
to rapid wage growth and a growing labor shortage. 
Still, Estonia's fundamentals are sound.  Public sector 
debt is the lowest in the EU, and with budget surpluses 
running over one and a half percent of GDP it will be 
politically difficult to argue that yet more fiscal 
discipline is required to reduce inflationary pressure. 
Though experts widely expect some bumps along the way 
(despite a recent plateau the potential for a real estate 
bubble is present), we believe the benign view of a 
gradual deceleration in GDP growth to the longer-term 
potential of approximately seven percent remains the most 
likely. 
 
WOS