Ministry of Economic Affairs and Communications • Ministry of Finance

ECONOMIC SURVEY OF ESTONIA 2007

Tallinn 2008

Contents Macroeconomic situation...... 4 Labour market ...... 8 Foreign trade...... 10 Manufacturing industry ...... 14 Vladimir Obershneider: Investments were timely and sufficient ...... 16 Food and beverages industry ...... 18 Roland Lepp: Why should milk cost less than water in the shops? ...... 21 Textile industry ...... 22 Wearing apparel industry ...... 24 Wood processing and manufacture of wood products ...... 26 Production of pulp, paper and paper products...... 28 Publishing and printing ...... 30 Manufacture of chemicals and chemical products ...... 32 Manufacture of rubber and plastic products...... 34 Metal and metal products industry...... 36 Manufacture of machinery and equipment...... 38 Manufacture of electrical appliances and optical instruments...... 40 Manufacture of transport equipment ...... 44 Furniture industry...... 46 Construction...... 48 Priit Sauk: 2008 and 2009 will be the survival years...... 51 Real estate...... 52 Domestic trade...... 55 Raul Puusepp: 2007 was a year of high growth and profits...... 61 Tourism...... 62 Feliks Mägus: The state must introduce Estonia in a more coordinated way...... 67 Transport ...... 68 Tiit Vähi: Transit volumes will drop even more in 2009 ...... 72 The state helps new entrepreneurs to face challenges and improve competitiveness ...... 73 Annexes...... 75

Abbreviations in the text and diagrams: y-o-y – year over year r.s. – right scale * – preliminary statistical data

4 Economic Survey of Estonia 2007

Macroeconomic situation

% Economic growth in Estonia and Eurozone In 2007, economic growth decelerated to 7.1% in 14 Estonia. Economic growth was supported by 12 increased domestic demand, the annual growth of 10 which slowed down to 9.3% compared to 2006. The 8 deceleration of domestic demand took place due to 6 the dropping of growth rates of private consumption 4 and investments. Growth in domestic demand was 2 supported by increased inventories and growth in 0 final consumption expenditure of the government 2000 2001 2002 2003 2004 2005 2006 2007 sector. The share of domestic demand at current Estonia Eurozone15 prices fell by 1.4 percentage points compared to 2006, to 107.3% of the GDP. Source: Statistical Office of Estonia, Eurostat The growth in private consumption that had % Contribution to economic growth reached its peak at the beginning of 2006 stayed high 25 until the beginning of 2007 and then plummeted, 20 reaching the level of 3.3% in Q4. The lower 15 10 confidence of the population and rapidly increasing 5 consumer prices contributed even more to the low 0 real growth. However, annual consumption grew by -5 8.9%. -10 -15 Consumption of semi-durable goods grew at a higher 2000 2001 2002 2003 2004 2005 2006 2007 rate than average consumption in 2007, due to massive purchase of clothes and footwear starting in Consumption Investments and stocks Net export Economic growth 2006. The growth in consumption of durable goods (especially furniture) which had increased much since Source: Statistical Office of Estonia the beginning of the real estate boom, came to a halt in 2007 due to the lower number of real estate % y-o-y Domestic demand and import real growth % y-o-y transactions. As the share of durable and semi- 40 20 durable goods was only 22%, their negative growth 30 15 had only a slight impact on total consumption. The 20 10 consumption growth of non-durable goods has been 10 5 more stable and its pace a little lower than overall consumption. Services consumption showed modest 0 0 growth since prices had become higher due to rapid -10 -5 growth in salaries. -20 -10 In 2007, consumption was brought forward in time 2000 2001 2002 2003 2004 2005 2006 2007 because of consumer credits. But, in the second part Import Domestic demand (right scale) of the year the volume of new consumer and Source: Statistical Office of Estonia especially housing credits started to drop, while at the same time, due to increasing outstanding debts and interests, the financial obligations of the population continued to grow. This is probably one of the reasons why private consumption growth decelerated in the second part of the year in spite of a strong growth in salaries. As a result of the decelerated economic growth and less activity in the real estate market, investments growth slowed down to 7.8% in 2007. Investments growth fell in enterprises, households and the government sector. The vigorously increased investments in the commercial and construction sectors backed investments made by enterprises. The government has made extensive investments in recent years due to more support from the EU Structural Funds. Investments by households (purchase of new housing) started to drop in the second part of the year due to weak demand. The standstill in the real

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 5

estate market increased inventories of companies, % of GDP Savings manifested in development projects offered for sale 50 in the market or being still under development. 40

Exports grew only marginally in 2007 and its 30 contribution to economic growth lowered to 1.3%. The share of goods and services exports in GDP fell 20 by 6.6 percentage points compared to 2006, to 72.8%. 10 In 2007, export growth decelerated due to weaker exports of two commodity groups (fuels imported for 0 processing and electrical appliances). The other 2000 2001 2002 2003 2004 2005 2006 2007 commodity groups continued to show strong export Private savings Public savings growth. Foreign savings Domestic savings Imports growth slowed down as well but its growth Source: Statistical Office of Estonia rate was higher than that of exports, as a result of which the impact of net exports on economic growth % of GDP Current account structure 20 remained to be negative. In 2007, the growth rate of goods and services imports slowed down as a result 10 of lower domestic demand. 0 Current account deficit reached a record high -10 17.4% of GDP in 2007. It was caused by an increase -20 in revenue earned on direct investments by foreign investors. Reinvested investment income, in the case -30 of which no monetary transactions were actually 2000 2001 2002 2003 2004 2005 2006 2007 performed, accounted for 98.7% of the income Goods Services balance deficit. Thus, in spite of the decelerating Revenues Transfers economic growth and increased cautiousness of Current account investors, more and more income to be reinvested in Source: Bank of Estonia, local enterprises is earned in Estonia. Current account Statistical Office of Estonia deficit without reinvested income reached 10.7% % Contribution to value added growth which is a little less than in 2006. 14 Domestic savings dropped to 19.8% of GDP in 12 2007, due to the more modest savings in the private 10 8 and government sector. As expected, compared to 6 the exceptionally high budgetary surplus in 2006, the 4 government saved less in 2007. It is also expected 2 that, due to the weak budgetary situation, the public 0 sector savings in the coming years will be somewhat -2 lower than the peak in recent years. The private 2000 2001 2002 2003 2004 2005 2006 2007 sector’s savings fell because the value added growth Manufacturing industry Retail and wholesale Construction Transport etc. of enterprises has been negatively affected by both Property etc. Financial intermediation the increased labour costs and higher use/distribution Other of dividends, as a result of which more foreign capital Source: Statistical Office of Estonia had to be involved for investments. compared to 2006, to 6%, due to decelerated sales In 2007, value added growth slowed down both in growth which brought about a decrease in profits and the industrial sector and service sector. overall profitability. Growth in transport, storage and Manufacturing industry growth slowed significantly communications slowed down to 6.8%, mainly compared to 2006 (to 8.3%), caused in addition to the caused by a decrease in transit sector. The growth weaker domestic demand by lower export growth rate of construction sector dropped to 8.6%, caused resulting from weakened competitiveness. Service both by the lower growth rate of construction sector growth was slower than average economic activities and the consistently rising prices of growth, the reason being the significantly lower production inputs. Value added of financial domestic demand which, in its turn, resulted in intermediation grew at the same rate as in 2006 decelerated production growth and lower profitability (23.5%) and was mainly influenced by the economic in most service branches. results of commercial banks which were good regardless of the slowing growth rate of credits. Value added growth was the most affected by the dropping growth rate of the property, rental and Inflation accelerated from 4.4% in 2006 to 6.6% in business sector (to 1.8%), mainly due to the 2007. During the first half-year mostly domestic decreasing sales revenue in real estate business. The factors influenced the increase in consumer prices but growth rate of domestic trade fell by more than twice the second-half year brought along external factors

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 6 Economic Survey of Estonia 2007

% y-o-y Estonian and Eurozone CPIs intermediation, construction, hotels and restaurants 12 and real estate. 10 Unemployment rate dropped to the record 4.7% in 8 2007. Within a year the number of unemployed had 6 fallen by almost 8,500 persons, reaching 32,000. The 4 number of unemployed decreased mainly on account 2 0 of non-Estonian unemployed persons and those who had been jobless for more than a year. In addition, a 2000 2001 2002 2003 2004 2005 2006 2007 2008 Estonian CPI considerable number of students became active in the Estonian base inflation Eurozone CPI (MUICP) labour market. Source: Statistical Office of Estonia, Eurostat Average gross wage grew by 20.4% in 2007. Real growth of gross wage, i.e. wage growth minus th Employment and unemployment % inflation, was 13%. Gross wage increased the most in 50 16 construction, financial intermediation, transport and 40 14 public administration, reaching 25% on the average. 30 12 The rapid growth in wages was possible due to the 20 10 good economic results of 2006 and lack of qualified 10 8 labour. 0 6 -10 4 Average real wage growth exceeded labour -20 2 productivity growth (GDP at constant prices per 2001 2002 2003 2004 2005 2006 2007 employed) by more than twice. Labour productivity Change in number of employed grew by 5.6% in 2007. Unemployment rate (r.s.) Source: Statistical Office of Estonia Government sector budget surplus amounted to 6.9 billion Estonian kroons (2.8% of GDP) in 2007. % Labour productivity Compared to 2006, the absolute volume of the 16 government sector budget remained the same but 14 12 decreased as a percentage of GDP – by 0.6 10 percentage points. The central government and social 8 insurance funds showed a surplus – 2.5% and 0.6% 6 4 of GDP, respectively. Local governments had a 2 deficit at the end of the year (-0.3% of GDP). 0 The surplus of the government sector was partly the 2001 2002 2003 2004 2005 2006 2007 Real growth of wages Labour productivity result of revenues resulting from the rapid economic Real growth of GDP growth. Revenues had accumulated better than Source: Statistical Office of Estonia expected; moreover, lower expenditure compared to related to the rocketing prices of food and oil in the planned expenditure made a contribution. global market. The domestic pressure on prices was Tax revenues amounted to 78 billion kroons in 2007. caused by an increase in income that exceeded Tax burden was 32.1% of GDP. Indirect taxes had productivity, and vigorous consumption. Poorer the largest share (13.6% of GDP), followed by social crops due to weather conditions in various locations insurance payments (10.8% of GDP) and direct taxes in the world, the increasing food consumption in the (7.7% of GDP). developing Asian countries and more intensive use of fields for bio fuel production brought about a The debt burden of the government sector was considerable increase in the price of food basket. 3.4% of GDP at the end of 2007, being the lowest in Among commodity groups, higher prices of food, the EU. Out of the 8.3 billion kroons debt, the housing, transport and eating out affected inflation central government accounts for 2.6 billion and local the most. The rising housing costs were the result of governments for 5.7 billion. In 2007, the central an upsurge in administrative prices (heating) and free government lowered its debt burden considerably by market prices (rent, renovation). The price increase in buying back European bonds in the amount of 1.6 transport was related mainly to the more expensive billion kroons. public and other transport services, such as maintenance costs.

In 2007, growth in the number of employed slowed down to 1.4%, i.e. the number of the employed in 2007 exceeded that in 2006 by 9,100. In the first half- year, employment grew due to strong domestic demand mainly in closed sectors: financial

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 7

Economic forecast of the Ministry of Finance 2008-2012 (25 August 2008)

2006 2007 2008* 2009* 2010* 2011* 2012*

GDP real growth (%) 11.2 7.1 -1.0 2.6 5.7 5.2 5.2 GDP at constant prices (bn EEK) 157.9 169.1 167.4 171.6 181.4 190.9 200.9 Consumer price index (%) 4.4 6.6 10.7 6.0 3.6 3.5 3.4 Employment (thousand persons) 646.3 655.4 652.5 647.6 648.9 648.2 646.9 Employment growth (%) 6.4 1.4 -0.4 -0.8 0.2 -0.1 -0.2 Unemployment rate (%) 5.9 4.7 5.0 6.3 6.1 6.0 6.0 Labour productivity growth (by number 4.5 5.6 -0.6 3.3 5.5 5.4 5.4 of employed, %) Real growth of average wage (%) 11.6 13.1 4.2 1.4 4.9 5.5 5.6 Average wage (EEK) 9,407 11,336 13,082 14,064 15,287 16,693 18,229 Current account (% of GDP) -15.5 -17.7 -11.4 -9.4 -8.7 -8.2 -7.5 Budget balance of government sector 3.4 2.8 -1.3 -1.4 -1.0 -0.7 -0.7 Tax burden (% of GDP) 31.1 32.1 31.7 30.2 29.8 29.5 29.4 Government sector debt (% of GDP) 4.2 3.4 3.2 3.1 3.2 3.4 3.4

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 8 Economic Survey of Estonia 2007

Labour market

Number of employed by age group In 2007 the number of employed grew by 1.4% or th 9,100 people. Unemployment rate dropped to the 400 record 4.7%. The number of inactive persons fell by 320 3,300. 240 Employment grew in the first half of 2007 due to the 160 strong domestic demand mainly in the closed sectors: 80 financial intermediation, construction, hotels and 0 restaurants and property sector. In construction the 2000 2001 2002 2003 2004 2005 2006 2007 number of employed increased from 73,000 persons 15-24 25-49 50-74 at the beginning of the year to 82,000 persons at the Source: Statistical Office of Estonia end of 2007, making up more than one tenth of all the employed. % Unemployment rate 20 The number of discouraged persons stayed low due to the continuously strong domestic demand in the 15 labour market; the employment rate of non- 10 Estonians increased. By estimations there were 7,300 5 discouraged persons, i.e. persons who did not hope 0 to find a job. The share of non-Estonians in the 2002 2003 2004 2005 2006 2007 workforce continued to grow in 2007. North-Estonia Central Estonia NE-Estonia West-Estonia South-Estonia Unemployment rate among non-Estonians dropped from 10% in 2006 to 7% in 2007. Source: Statistical Office of Estonia There are still many unemployed and inactive persons th Unemployed and discouraged % among people of working age who, in case of 120 15 possessing suitable skills and qualifications, could 100 13 participate in the workforce. Among regions, the 80 11 employment rate was lower than the average in NE- 60 9 Estonia which still demonstrated a high percentage of 40 7 unemployed, although the unemployment rate 20 5 dropped from 12% to 9% within the year. The 0 3 employment rate was also low in South-Estonia 2001 2002 2003 2004 2005 2006 2007 where, although the unemployment rate was low Discouraged (4.8%), more persons at working age (15-74 years) Unemployed Unemployment rate (r.s.) than the average were inactive. Source: Statistical Office of Estonia Unfortunately, the number of inactive persons due to illness or injury increased during the last three years. Unemployed by unemployment duration In 2004 ca 43,000 persons could not participate in the th labour market due to illness or injury, but in 2007 the 35 30 number of such persons amounted to almost 52,000. 25 20 It is expected that labour demand will remain at the 15 level of 2007 in 2008. The private sector may show 10 some decrease in employment due to the diminished 5 economic activity, attributable, on the one hand, to 0 the rapid increase in labour costs, and on the other 2005 II III IV 2006 II III IV 2007 II III IV hand, to the falling demand. The public sector Less than 6 months 6-11 months 12 months or more 24 months or more expects to increase its workforce by 1.5% in 2008 due Source: Statistical Office of Estonia to the growing need for labour. The main factor influencing this growth is the manning of positions in the areas of government of the Ministry of Justice and the Ministry of Internal Affairs. In 2007, rapid growth of wages was possible due to the good economic results of 2006 and lack of qualified labour. Growth of average gross wage quickened to even 20.4% by the end of 2007, reaching 12,270 kroons in Q4. Due to accelerated inflation the real growth of gross wage (the wage from which inflation is already deducted) rose to

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 9

10.2% in Q4. Calculations on the basis of quarterly Monthly gross wages by sector data gave 11,328 kroons as the average gross wage for 2007, 13.0% as the real growth of gross wage and Financial intermediation 21 360 12.9% as the real growth of net wage. Slower Public administration economic growth allowed labour productivity to 14 327 grow only by 5.6%. It means that, for the second year Construction 12 932 in a row, wages grew by more than twice as fast as Mining 12 864 labour productivity. Thus, although in previous years Transport 12 558 enterprises had had a profit growth higher than the Energy 12 525 growth in labour costs, in 2007 the distribution of Property value added was more favourable for the employees, 12 254 as a result of which companies paid higher salaries to Average 11 328 their employees out of their own profit. Forestry 11 022 Health care Among sectors, construction, financial 11 012 intermediation, transport and public administration Commerce 10 884 showed the strongest gross wage increase; in these Manufacturing industry 10 688 sectors wages grew by 25% on the average. These Other 9 601 four sectors employ 29% of all the employed persons. Education 9 394 The rapid growth in wages became possible due the Agriculture good economic results of 2006 and lack of qualified 8 608 workforce. In the construction sector a certain Fishing 8 298 pressure due to lack of workforce still continued, Hotels and restaurants 7 257 supporting the wage increase. The wage increase in 0 6 000 12 000 18 000 24 000 the construction sector was also affected by the kr effective activities of the Tax and Customs Board in 2007 2006 legalising payment of wages. The wage increase in Source: Statistical Office of Estonia financial intermediation is related to the excellent economic results. % y-o-y Labour productivity 16 After Estonia’s accession to the European Union the 14 labour markets of several member states became 12 accessible. Therefore, some of the Estonian 10 workforce has found employment in Finland, UK, 8 6 Ireland, Sweden, Norway and other countries. 4 Estimations of the Statistical Office show that about 2 15,000 persons from Estonia work abroad, making 0 2% of all the employed persons in Estonia. The 2001 2002 2003 2004 2005 2006 2007 number of people working abroad has increased fast Real growth of wages Labour productivity since 2006. As a result of the lower unemployment Real growth of GDP rate and opening of foreign labour markets the Source: Statistical Office of Estonia position of workers to bargain about wages improved considerably.

The fact that real wages growth exceeded labour productivity growth by more than twice in 2007 will deteriorate the international competitiveness of companies. Under the conditions of slower economic growth and dropping profits it will not be possible to sustain this trend for long because companies will not be able to support a rapid wage increase. Therefore it is expected that average gross wage increase will decelerate in 2008 and wage and labour productivity growth will eventually even out. Investments in human resource development, up-to-date technology and R&D become more and more important, in order to increase value added generated per labour cost unit.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 10 Economic Survey of Estonia 2007

Foreign trade The third factor is that mineral fuels processing has % y-o-y Export and import growth been considerably reduced in Estonia; it gave a very 60 high comparison base for exports and imports in 50 2006. 40 30 In 2007, foreign trade turnover amounted to 20 302.7 billion kroons, exceeding that of 2006 only by 10 5%. Exports were 125.5 billion and import 0 177.1 billion kroons. The share of export in total -10 trade turnover reached 41.5% and that of import 1999 2000 2001 2002 2003 2004 2005 2006 2007 58.5%. Again, import grew faster than export Export nominal growth (growths 3.9% and 5.8%, respectively) and thus, the Import nominal growth share of export compared to 2006 dropped by one Source: Statistical Office of Estonia and a half percentage points. The significantly diminished trade growth rate Trade dynamics bn EEK brought about a positive change in 2007. In 2006, 150 trade deficit skyrocketed compared to the year before 100 (~50%) but grew only by one tenth in 2007, reaching 50 51.6 billion kroons. Trade in means of transport had 0 the highest negative balance (-13.8 bn kroons), having -50 risen by 1.7 billion kroons during the year. At the -100 same time trade deficit of machinery and equipment -150 fell by a billion kroons (to –11.9 bn kroons). The -200 negative balance of these two commodity groups 1999 2000 2001 2002 2003 2004 2005 2006 2007 totalled almost a half of the overall trade deficit. Exports Imports Balance Estonia continued to trade with surplus in wood and Source: Statistical Office of Estonia wood products, furniture and log houses and animal The growth rates of exports and imports slowed products. The positive balance of these three down significantly in 2007, reaching their lowest commodity groups increased compared to 2006. The in the last five years. Imports grew faster than foreign trade balance of pulp, paper and paper exports but due to import’s rather modest products also became positive in 2007. growth, trade balance deficit increase also Forecasts show that the trade balance will improve in slowed down considerably. 2008. Experts of the Estonian Institute of Economic 2007 saw the end of the successful global economic Research held the same opinion during the first cycle that had lasted for a dozen years. The first half- months of the year. Three quarters of them forecast a year still showed a positive economic development decrease in trade deficit and the rest were of the trend, affirmed by the improving economic situation opinion that the deficit will remain almost the same. in Western Europe, especially the significant However, any improvement in foreign trade balance acceleration of economic growth in Germany. Our can take place only as a result of low import growth main trade partners, Finland and Sweden, also due to the weakening domestic demand, because it is showed positive developments, and economic growth not expected yet that exports will considerably in Russia continued. But, in the second half-year, accelerate. global economy demonstrated an unexpected turn to the worse. The main reason was the cooling of Exports economic climate in the United States which has had In the years 2003–2005 export growth rates an increasingly high influence on the developments in accelerated by 10 percentage points per year. The Europe and Asia. peak continued in 2006 and exports grew by a quarter In 2007, the development of Estonian trade was compared to the year before. In 2007, however, a inhibited, on the one hand, by competition problems considerable backlash was experienced and export of Estonian companies producing mass products. growth reached only 4%. This was caused by notably increased labour costs, as Export growth decelerated due to lower export a result of which production had to be restructured to amounts of mainly two commodity groups, mineral manufacture export products that would involve products and machinery and equipment (19% and lower labour costs and higher value added. On the 12%, respectively). Export growth of most other other hand, raw material prices have grown rapidly in commodity groups was still vigorous. Within a year the global market, which in its turn has made the exports of prepared foodstuffs and beverages to products more expensive and has had an inhibiting foreign markets increased by almost a half, and effect on their competitiveness in foreign countries.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 11 exports of means of transport and pulp, paper and its Exports by commodity groups products by almost a third. Machinery and equipment Machinery and equipment has been the most important commodity group for a long time, making Mineral products up almost a quarter of all exports in previous years. As a result of the overall decrease in export amounts, Wood and products their share dropped to a fifth in 2007. Due to the rapid growth in labour costs the manufacture of Metals and products mobile phones was terminated in Estonia and the production was directed to China and East-European Means of transport countries with lower labour costs. This was the main Furniture, log houses, etc. reason for the diminishing exports of machinery and % equipment. 0 5 10 15 20 25 Wood and wood products and metals and metal 2006 2007 products each constituted ten percent of the exports. Source: Statistical Office of Estonia Their exports grew to the same extent – by 14%. The exports of wood and wood products accelerated Export target countries notably in 2007, backed, however, more by higher wood prices than growing amounts. By the beginning Finland of 2008 the expectations of wood companies for the coming months were much more optimistic than at Sweden the end of 2007. Many of them expected to have a larger number of orders. The export structure of the Latvia wood commodity group has been rather stable in Russia recent years. Sawn timber has given almost a quarter, construction details about one fifth and firewood and Lithuania round timber both about one tenth of the export volume. Germany % Contrary to wood products the export growth of 0 5 10 15 20 metals and metal products fell in 2007, reaching only 2006 2007 about half of the corresponding figure in 2006. In 2006 the solid export growth of metals was mainly Source: Statistical Office of Estonia backed by the rapid increase in metal prices in the comparison is based on 27 countries (including global market, and in 2007 the deceleration was partly Bulgaria and Romania); the same number of countries caused by the high comparison base. In the last was also used for comparison in 2006. The quarter of 2007 the price rise of metals almost accelerated export growth was backed mainly by the stopped. Metal structures, waste and scrap of ferrous new member states. Among old member states metal and steel ranked the highest in the exports of export grew the most to Italy, Austria, Portugal and this commodity group. the Netherlands. Exports of furniture which had the highest figures Export growth to the CIS countries slowed down to among other industrial goods, grew by a tenth in 14% in 2007 (2006 – 50%), mainly due to a 2007, showing a somewhat faster growth than in significant deceleration of growth of exports to 2006. However, furniture industry was influenced by Russia. Export volumes to the Ukraine were the same a significant rise in wood prices that considerably and to Belarus diminished by about a fifth. Among weakened competitiveness of manufacturers of solid associations of countries, only exports to NAFTA food furniture in foreign markets. Export growth of countries dropped, caused by lower export volumes pillows and blankets slowed a little in 2007 but was to the United States (by a third). still strong (20%). Estonian pillow and blanket producers have expanded their production to other During the past three years, Finland, Sweden, Latvia countries, acquiring new markets. Exports of log and Russia have ranked the highest among Estonia’s houses increased the same as that of furniture. Log export markets. In 2007, Lithuania rose to be the fifth house producers also have problems with increasing while Germany remained on the sixth position. In prices but have managed to preserve their 2004–2006, export volumes to Germany were about competitiveness in foreign markets thanks to their the same but in 2007 there was a turn to the better specific and firm market niches. and their growth amounted to 9%. Also, the faster growth of the German economy increased its demand In 2007, the share of the European Union in for exports. Estonia’s total exports augmented to 70%, rising by five percentage points compared to 2006. Exports to Finland’s share in Estonia’s total exports remained at EU internal market increased by 11%. This 18% in 2007. The decline in exports to Finland that

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 12 Economic Survey of Estonia 2007

The export volume of textile products has been the Imports by commodity groups same in recent years. Machinery and equipment In 2007, exports to Latvia continued its rapid growth. The growth rate decelerated a little in the second half- Mineral products year but was still very high (31%). Exports to Latvia had the highest growth among Estonian main export Means of partners. These developments raised Latvia’s share in transport Estonia’s total exports to 11%. The strong export Metals and growth was supported by all the main commodity products groups. Exports of means of transport increased by Chemical almost a half, that of machinery and equipment by a products third and exports of metals and metal products by a Prepared food quarter. and beverages % Export growth to Russia was not as speedy as in 0 5 10 15 20 25 30 previous years. In the first half-year exports increased 2006 2007 by a third but deceleration was witnessed already in Source: Statistical Office of Estonia April when relations with Russia cooled down. Annual export growth amounted to 17%. Growth Imports by countries of origin was mostly inhibited by smaller export volumes of metals and metal products (by 30%) and animal Finland products (by 13%). Export growth rate of machinery and equipment also slowed down. However, rapid Germany export growth (by two times) of prepared foodstuffs and beverages continued, mainly on account of Russia strong alcoholic drinks. Exports of mineral products, Sweden building materials, chemical products and means of transport also increased noticeably. Latvia It is forecast that export growth will slightly accelerate in 2008, especially in the second half-year when the Lithuania base effect of mineral fuels will disappear. However, % economic growth is slowing down in many countries, 0 5 10 15 20 including our main trade partners Finland, Sweden 2006 2007 and Latvia. As a result, import demand for Estonian Source: Statistical Office of Estonia goods may decline. Experts of the Estonian Institute had started in 2006 stopped in the second half-year of of Economic Research are of the opinion that the 2007 and, as a result, total exports to Finland grew by export development outlook for 2008 is moderately 2%. Growth was mainly inhibited by machinery and positive. But they also stress that companies and state equipment whose exports dropped by almost a agencies need to make serious efforts to quicken the quarter in 2007. The reasons were the same as for the development of exports. Experts consider that whole exports of machinery and equipment – mobile changing the structure of production would be one of phones. Exports of most other commodity groups to the main means of boosting competitiveness in Finland grew significantly. Mineral fuels had the most foreign markets. rapid growth (by more than two times), attributable to exports of electricity via the Estlink sea cable. The Imports exports of metals and metal products and means of The declining economic growth rate in 2007 resulted transport increased by the same amount – 40%. in smaller investment activity and private The share of Sweden in Estonia’s total exports rose consumption growth which in its turn reduced by one percentage point in 2007, reaching 13%. demand for imported products. Due to the still Export growth to Sweden slowed a little (to 12%) but strong domestic demand in the first half-year, import has been rather stable in recent years (11–16%). No growth still exceeded that of export. Imports grew by significant changes took place in the structure of 6% in 2007. exports. Machinery and equipment (40% of total Imports experienced the same development changes exports), wood and wood products (12%) and textiles as exports. Machinery and equipment and mineral and textile products (9%) were still the three main fuels were the main obstacles to growth. The rapid export commodity groups. Exports of machinery and price increase of oil in global markets in the last equipment increased at the same pace as total quarter somewhat levelled the import decline in exports. Exports of wood grew by more than a third, monetary terms. Imports of the other important backed mainly by the rapidly increasing wood prices. commodity groups continued to grow; only the import growth of textiles and textile products was

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 13 lower than 10%. It may be noted, however, that Import growth from Sweden slowed a little in the compared to the first half-year the import growth second half of 2007 but, as annual average, was still rates of many commodity groups slowed down. strong (18%). The growth was mainly backed by In 2007, the share of the European Union in means of transport, the imports of which rose by 2.6 Estonia’s total imports increased by five percentage times in 2007. As a result, this commodity group rose points, to 79%. However, import growth from the to the first place (with 28%). It may be assumed that EU was significantly lower than the year before Japanese passenger cars which were formerly brought (12%) 1. The surging import growth from the CIS to Estonia from Finnish ports, have partly been countries in 2006 was replaced by a 13% decline in redirected to Swedish ports and are brought to 2007. Again, it was due to Russia. Imports from the Estonia from there. The imports of metals and metal Ukraine grew by a third. products grew at the same pace as total imports while that of machinery and equipment was slightly smaller There were several changes in the ranking of compared to 2006. Estonia’s import partners in 2007. Finland kept its first position, Germany restored its second position It is expected that import growth will be smaller than and Russia again fell to the third place. Sweden has export growth in 2008. The slowing of private been ranking fourth for the last three years. Imports consumption growth and investment activity that from Latvia showed considerable growth, as a result started in 2007 will continue in 2008. Also, domestic of which Latvia took the fifth position and pushed demand is strongly influenced by the cooling of the Lithuania to the sixth. construction sector, as a result of which imports of goods related to this sector will drop. In 2007, Finland’s share in Estonia’s total imports continued to decline; its import volume diminished by 8%. The import volume of means of transport dropped the most (-43%), that of machinery and equipment fell by a tenth and the imports of textile products also showed some decline. The import volume of other main commodity groups rose as before. Import growth from Germany has been slowing continuously in recent years and was only 7% in 2007. As previously, it was mostly due to a slight decrease in the imports of machinery and equipment. At the same time, rapid growth in imports of cars and metals and metal products continued. Among the main import partners of Estonia only imports from Russia decreased in 2007 (by 17%). It was mostly due to a decline in imports of mineral fuels which fell by a quarter compared to 2006. The share of fuels constituted almost 60% of all imports. Imports of chemical products dropped by almost a half but their share is small compared to fuels (3–5%). As a result of the fact that Russia raised its wood export duties and introduced other restrictions from the 1st of July, imports of wood from Russia diminished notably. However, the total import growth per year amounted to a quarter. Imports of metals and metal products also showed strong consistent growth.

1 To make the comparison base equal, imports from Bulgaria and Romania has been added to the figures of 2006.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 14 Economic Survey of Estonia 2007

Manufacturing industry Manufacturing industry sales have grown by more than twice during the last six years. The most rapidly developing subsectors have been manufacture of electrical appliances and optical instruments, rubber and plastic products industry, metal industry and wood industry. Wood industry and metal and metal products industry contributed to the sales growth the most during this period – each gave a share of more than a tenth. A considerable part of the production is exported; in 2007 almost 60% of the output was sold in foreign markets. The main target markets were Finland and Sweden, countries which have invested the most in the Estonian manufacturing industry. The continuous modernisation of equipment in manufacturing industry has made it possible to significantly raise productivity, as a result of which the number of employees has been stable in recent years. In Finland’s manufacturing industry ten times more value added was created per employee in 2000 than in Estonia. In 2005, the productivity gap between Finland and Estonia was still sixfold. As investment activity increases, the gap is expected to close even more. In 2007 more than 5,200 enterprises belonging to manufacturing industry by their principal activity operated in Estonia. About 300 of them have more than 100 employees but three quarters of the companies employ fewer than 20 persons. As of the end of 2007, although their workforce decreased, the largest manufacturing industry enterprises were still AS Elcoteq Tallinn in Tallinn and AS Kreenholmi Valduse in Narva. Other companies employing a rather high number of labour force were the shipbuilding and metal processing group AS BLRT Grupp, wearing apparel company AS Baltika, safety belts manufacturer AS Norma, and Rakvere Lihakombinaat (meat processing). Sales of the manufacturing industry continued to Share of manufacturing industry in Estonian % economy % grow fast at the beginning of 2007 but in the 100 100 second half-year rapid growth of producer prices 94,7 80 80 and deceleration of growth rate of domestic 57,9 60 60 consumption started to influence it. 40 40 In 2007, output volumes at constant prices increased 16,5 20,6 20 20 by 5.1% and sales of industrial goods at current prices by 12.3%. Sales in the domestic and export markets 0 0 showed almost the same growth rate. Share in value Export share Share in Ratio to added in sales employment average wage Producer price index grew by 8.4% in 2007. On the Source: Statistical Office of Estonia one hand, the faster price increase was triggered by labour cost growth, and on the other hand, by the Share of sub-branches sales rapid price rise of raw materials. Prices rose the Appa- Chemical fastest in wood industry (by 17.5%), metal industry ratuses Furniture industry (11.6%) and building materials industry (11.3%). industry industry 10% 5% 12% Wood Preliminary estimations show that industrial Metal industry production grew faster in Estonia than the EU industry 21% average, regardless of the slowdown during the last 10% months of the year. Again, new member states Other demonstrated higher growth in volumes. Producer Building industries price index also grew faster in Estonia than the EU materials Food Textile 14% average. industry industry industry 7% 17% 4% By sales volume growth, the year was successful for Source: Statistical Office of Estonia manufacturers of machinery and equipment and electrical appliances and apparatuses; sales at current Sales and exports prices grew by almost a quarter in both. Both sectors mill EEK % y-o-y were successful in augmenting export at the same rate 150000 25 with sales. Negative trends took place in light industry 20 where sales growth was still low (1.7%) and export 100000 15 volumes dropped. Unemployment rate continued to 50000 10 5 decrease in 2007 and the number of employees still 0 0 increased, although mainly on account of services and 2001 2002 2003 2004 2005 2006* 2007* construction. Initial data show that the number of workforce in manufacturing industry fell by 0.5%. Sales Exports The decline was the most evident in the textile sector Change in sales (r.s) Change in exports (r.s.) where the number of employees dropped by 1,000 Source: Statistical Office of Estonia people.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 15

Rapid economic growth and high inflation at the EEK %y-o-y beginning of the year brought about an upsurge in 12 000 Average gross monthly wage 25 wages in practically all sectors. The average gross 10 000 wage of Estonia grew by about 20.4% in 2007. The 20 8 000 wage increase in manufacturing industry was about 15 6 000 the same – 20.8%. Wages rose the fastest in 10 manufacture of metals and machinery and paper 4 000 industry – by more than a quarter. 2 000 5 In 2007, manufacturing industry invested more than 8 0 0 billion kroons in fixed assets, by 6.7% more than a 2001 2002 2003 2004 2005 2006 2007* year ago. However, the growth was the slowest in Average wage Change in wage (r.s.) recent years. Almost half of the investments were made in metal, machinery and apparatuses industry. Source: Statistical Office of Estonia Large investments were made also in the food and wood sectors. Almost half of the investment volume EEK Labour cost productivity % y-o-y is attributable to purchasing machinery and 2,0 3 equipment. Compared to 2006, investments grew the 2 1,5 most in manufacture of machinery and equipment. 1 1,0 0 -1 A survey conducted by the Estonian Institute of 0,5 Economic Research among company managers -2 showed that expectations as regards the first half of 0,0 -3 2008 had improved but were more modest than a 2001 2002 2003 2004 2005 2006 2007* year ago. Enterprises hoped for an increase in orders Labour cost productivity based on value added and production volumes for the coming three Change in labour cost productivity (r.s.) months. In contrast to the previous survey there were Source: Statistical Office of Estonia lower expectations about increase in product prices. This is probably due to the sufficiently high prices th % y-o-y that had started to undermine competitiveness. The 145 Number of employed 6 most positive expectations about future 140 4 developments of the industry were expressed by 135 2 companies operating in chemical industry, and the 130 0 most negative in manufacture of wearing apparel. 125 120 -2 115 -4 110 -6 2001 2002 2003 2004 2005 2006 2007* Number of employed by labour survey Number of employed by enterprise statistics Change in number of employed (r.s.) Change in number of employed in enterprises (r.s.) Source: Statistical Office of Estonia

mill EEK Investments by enterprises % y-o-y 10000 30 8000 6000 20 4000 10 2000 0 0 2001 2002 2003 2004 2005 2006 2007*

Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 16 Economic Survey of Estonia 2007

Vladimir Obershneider: Investments were timely and sufficient Vladimir Obershneider, Chairman of the Supervisory Board of AS Glaskek, considers that the investments made in the plant were timely, even in the light of the cooling economic climate as it is the only way to compensate for the declining trends and find new export outlets.

What was the year 2007 like for Glaskek? Which of your hopes and expectations were fulfilled? What were the surprises? 2007 was a good year for AS Glaskek, maybe even very good. The rapid increase in real estate prices and Photo: private collection the skills of real estate companies to operate in the market, to pursue the same behaviour in the name of pricing, was a surprise. Major real estate companies We consider our investments as timely and sufficient made their largest investments in land which was the in order to compensate for the declining trends and right decision. For Glaskek, the objective of the 2003 to have an opportunity to export. The plant enabled strategic plan of reaching a turnover of one billion or us to manufacture up-to-date warm windows meeting higher was achieved. the EU standards. We have fulfilled our programme The abrupt change in the market situation was a in raising thermal insulation of the windows by a surprise. It was not by any means a soft landing. third, an indicator meeting both modern and Norwegian standards.

Last year, Glaskek opened a new wooden windows manufacturing plant in Tartu, What are Glaskek’s goals for 2008? increasing thus considerably its production AS Glaskek will pass several development stages in volume. How do you assess the importance and various new projects in 2008 and will surely see a soundness of this investment today? growth in turnover. It is also clear that we will have a It was a planned investment because, already in 2006, lower profit under the currently depressed market, we predicted a decrease in plastic windows by 30%. increased competition and companies bringing new products to the market. However, for us it is most Consumption of concrete, or more specifically, important to develop and increase our reputation and cement, is the key indicator for the construction our market share. sector. The used tons indicate the market volume for other materials.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 17

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 18 Economic Survey of Estonia 2007

Food and beverages industry Food industry is the biggest industry in Estonia by production volume; food production is the principal activity for almost 400 companies. Its production is mainly sold in the domestic market, export share in sales is less than one third. During the last five years, the output of food industry has increased by almost one quarter. Still, due to the increased efficiency, as indicated by enterprise statistics, the number of employed in this sector has dropped to 16,700 people. Food industry enterprises are geographically located quite evenly over Estonia. Among the large companies in all regions of Estonia there are also food producers. Meat processing enterprise AS Rakvere Lihakombinaat in Lääne- Viru county is the largest enterprise in food industry, followed by meat processing companies AS Saaremaa Liha- ja Piimatööstus and AS Valga Lihatööstus which are somewhat smaller. AS Leibur, AS Pere Leib and AS ETK Leib are the major bakeries. The major food industry enterprises also comprise the breweries AS Saku Õlletehas in Harju county and AS A. Le Coq in Tartu county, and dairy firms AS Tere and AS Põlva Piim. AS Maseko operating in Harju and Pärnu counties is the largest fish processing company. There is tight competition in the Estonian food market. In addition to local companies several Latvian and Lithuanian companies try to enter the market. This, however, has not prevented rapid growth in food prices. Due to the vigorously growing domestic market many companies have directed their resources to gaining or reinforcing a domestic market share. The entry of large retail chains and foreign competitors (e.g. Lithuanian producers) in the Estonian market makes the situation for Estonian food producers even more difficult because it intensifies price pressure and brings additional foreign supply to the market. It is probable that this situation will force smaller producers to merge or change their field of activity. Thus, no significant growth in employment is projected for this sector. Food industry showed growth in sales and output % Share of sector in Estonian economy % 100 100 volumes in 2007, mainly on account of the high 80 88,1 80 domestic demand. Rising prices of raw materials 60 26,9 60 and other production inputs pushed up the 40 40 prices of products; this process accelerated 20 1,9 7,8 13,2 20 especially in the second half of 2007. 0 0 Share in Share in Share of Share in Ratio to In food industry, the growth rate of sales was the value man. export in man. average highest for the past six years; however, as an industry added industry sales industry wage focusing on the domestic market the development of exports employ- the sector greatly depends on the growth of purchase Source: Statistical Office of Estonia ment power of the Estonian inhabitants and their purchase preferences. In 2007, sales of food industry increased mill EEK % y-o-y 20 000 Sales and exports 20 by 13.4% compared to 2006 and export growth 15 000 15 slowed down to 8.2%. Production increased by 2.9% 10 compared to the previous year (at constant prices). 10 000 5 5 000 0 The high sales figures were backed by a significant 0 -5 rise in sales prices. Producer prices grew by 10.9% in 2001 2002 2003 2004 2005 2006* 2007* 2007 which was much higher than the growth rate of previous years. The rapid increase in raw material Sales Exports prices continued in 2007. Raw material prices for Change in sales (r.s.) Change in exports (r.s.) Source: Statistical Office of Estonia dairy industry and bakeries and pastry companies increased. Sales grew in all sub-branches except fishing industry. The lower sales volumes in fishing industry were Share of sub-branches in sales caused by the modest results at the beginning of the Meat year. Dairy industry, bakeries and beverages industry Other industry showed a growth exceeding one tenth. Food industry 8% 18% has made major investments in product development Beverages Fish industry and sales promotion in recent years, but nevertheless, industry the sales growth is attributable only to the domestic 21% 7% market. Thus, local producers have been able to hold Bakeries their position regardless of competition from Prepared Dairy and pastry feed industry imported products. Dairy industry contributed the 15% industry 29% most to food industry’s export growth, succeeding in 2% increasing export volumes by more than a quarter. Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 19

Although only about 30% of the food production is share of exports among sub-branches of food exported, it is still an important export group for industry. The situation is even more complicated due Estonia (its share being slightly less than 10% of total to its dependence on the Ukraine and Russia to which exports). Beverages make up almost a third of the half of the industry’s exports is directed. industry’s exports and dairy products constitute more than a quarter. In 2007 Estonia increased its food Main export commodity groups exports to Russia, Germany and Norway. Exports to Other Dairy Lithuania, Ukraine and Switzerland diminished. 19% products Dairy sector is the largest food industry sector; 27% however, its development was inhibited by the rocketing raw materials prices in the second half-year. Fish Milk price increase in the global market pushed up products Meat the prices of local raw materials and products became 16% products much more expensive. Almost two thirds of the sales 7% growth in dairy industry came from exports. Beverages 31% Germany, Latvia and Russia were the main target Goods of Estonian origin markets. Source: Statistical Office of Estonia Sales of meat industry increased mainly thanks to the Number of employed and wages %y-o-y growing demand in the domestic market, similar to 25 000 20 the previous years. Its share of export was low (less 20 000 15 than 13%) and sales in foreign markets diminished 10 15 000 compared to 2006. However, the population’s 5 10 000 increased purchase power in 2007 helped to boost the 0 consumption of more expensive meat products. The 5 000 -5 main export markets for meat industry were Latvia, 0 -10 Lithuania and Finland. 2001 2002 2003 2004 2005 2006 2007* Beverages industry showed sales growth of about one Number of employed fifth in 2007. Investments in product development Everage wage (kroons) Change in number of employed (r.s.) and vigorous sales in the domestic market continued. Change in wage (r.s.) Domestic sales grew in spite of various restrictions Source: Statistical Office of Estonia for selling alcohol in several municipalities. At the end of the year the sales were influenced by an increase in excise tax valid from the beginning of Employment by sub-branches 2008, which was the reason for the higher sales figures at the end of 2007. In exports, US-origin Meat strong alcohol (whisky, cognac), bottled in Estonia industry and exported to Russia, gave a high share. Beverages 18% industry Fish In 2007, bakeries and pastry companies increased 12% industry their sales mainly on account of the domestic market 15% (by 17%). First and foremost, this high growth was Dairy due to more expensive inputs that made final industry products more expensive. Output of bakeries and Other 15% pastry companies grew by less than 2% at constant foodstuffs Prepared prices. Although the share of exports is small, industry feed 38% companies succeeded in boosting exports to the industry neighbouring countries – Russia, Latvia and Source: Statistical Office of Estonia 2% Lithuania. Fishing industry’s difficult times continued in 2007. The number of employees did not fall any more but sales dropped by one tenth compared to 2006. The industry succeeded in holding its sales level in the domestic market but export decreased. Fishing industry’s sales diminished in most foreign markets. Among the major export partners, sales figures were the same only in the Ukraine which in previous periods had appeared to be a relatively insecure market. Such developments are problematic for fishing industry because three fourths of the production are exported. The industry has the highest

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 20 Economic Survey of Estonia 2007

mill EEK Value added, labour cost and productivity % y-o-y Employment rate in food industry is still slowly 4 000 15 declining. The fastest decrease in employment was 3 500 10 experienced in the production of other food products 3 000 5 2 500 (bakeries, confectionary). The average gross wage in 0 2 000 food industry increased by almost 18% compared to -5 1 500 the year before. Due to the rapid increase in labour 1 000 -10 and raw material costs, the price of final products has 500 -15 also grown quickly. 0 -20 2001 2002 2003 2004 2005 2006 2007* In recent years, food industry enterprises have Value added continuously increased their investments in fixed Labour costs Total productivity growth (r.s.) assets. Thus, the technology used is rather modern. Labour cost productivity growth (r.s.) Food industry invested about 1.6 billion kroons in Source: Statistical Office of Estonia 2007, by 15% more than in 2006. Most investments were made in machinery and equipment, the total mill EEK Investments by enterprises % y-o-y amount being almost one billion kroons. 1 800 50 1 600 40 Companies questioned by the Estonian Institute of 1 400 30 Economic Research were less optimistic about the 1 200 20 future than a year ago. However, more than half of 1 000 10 the respondents expected production volumes to 800 600 0 grow in the first half of 2008. They also forecast 400 -10 further increase in sales prices and hoped for more 200 -20 demand in export markets. 0 -30

2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 21

Roland Lepp: Why should milk cost less than water in the shops? Roland Lepp, one of the owners of AS Maag Grupp, recalls the increase in milk prices in 2007 in the dairy sector. He forecasts a further tightening in competition and more pressure from the commercial sector for 2008.

What was the year 2007 like for Maag Grupp? Which of your hopes and expectations were fulfilled, what were the surprises? In the light of the general situation it would be unjust to say that we did not do well. However, one can always do better. Surely, the purchase of Rakvere Piim was the top event for us in 2007. The negotiations were started in 2006 and the agreement was signed at the end of 2007. The merger of Maag dairy industry and Rakvere Piim will take place in May this year. We hope that it will bring good synergy and savings. Photo: Äripäev What were the main developments for the whole sector? What will be the main challenges for the food The increase in milk price is of some consequence. It and beverages industry in 2008? is a two-edged sword – Maag Grupp has a dairy farm Competition will still be one of the major factors. It and therefore we are happy about the price rise. On will be strong and become even fiercer. The other the other hand, we have a dairy industry. However, I development I see is the continuing pressure of consider the increase in prices to be normal. Taking supermarket chains to the producers. And surely it into account all the investments from cow milk to a will be felt that people have less money and they will package of milk in the supermarket, a justified check more on the prices before putting products in question arises: why should milk cost less than water their basket. in the shops?

Also, tightening competition, in all fields, is an essential factor. What are the goals of Maag Grupp for 2008? We are observing companies in Latvia, Lithuania and Poland for the purpose of finding prospective What does Maag Grupp do to survive in this partners and making more acquisitions. I would not tightening competition? like to specify before agreements are signed. We try to develop, especially in offering services. We There are three elements that we want to pay the plan to renew and modernise our logistics centre. The highest attention to: customer service quality, main thing is not to have a standstill – an enterprise motivation and well-being of employees in our group, that has outgrown being a family undertaking, has to and continuing rapid and aggressive development. look for export markets. We also put our stakes in people, and this is not only a slogan.

The economic situation is different now from that in 2007 when you decided to acquire Rakvere Piim. Does it still seem to be a good deal today? Yes, it was a good deal. We are optimists. Most certainly we have made wrong decisions but Rakvere Piim is surely not one of them. The cooling of the economy affects the real estate sector most of all. We feel that the situation has become easier in the industrial sector – it is much easier to find workforce.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 22 Economic Survey of Estonia 2007

Textile industry Estonian textile industry is an industry focused on export markets comprising over 200 enterprises. Textile industry has overcome the shocks caused by the external environment after Estonia regained its independence. The industry has retained the level of its sales over the past five years. The share of exports in sales amounted to 83% in 2007. The number of employees in this branch has dropped by one quarter in the last five years and is now 8,000 people. There are large textile companies in several regions in Estonia. The major companies making home textiles AS Wendre and AS Toom Tekstiil are located in Pärnu and Viljandi counties, technical textile producers OÜ Pärnu Linavabrik and AS Mistra-Autex are located in Pärnu and Harju counties, Polar Tekstiil OÜ is situated in Lääne county and Kreenholmi Valduse AS and some others are in Ida-Viru county. No growth in sales is forecast for the textile industry. However, productivity is increasing all the time thanks to the introduction of more efficient production technologies. The dropping output volumes and increasing productivity indicate that employment will decline even more. The textile industry has been affected by simplified access of Asian textile products to the European Union market introduced at the beginning of 2005 but most companies have been able to adjust. Since 1 July 2006 textile imports from China and several other countries is again limited by a quota system. In 2007, textile industry’s output declined a little. % Share of sector in Estonian economy % 100 100 Efficiency increased compared to the previous 83,1 80 80 year, resulting in higher productivity and, similar 62,6 60 60 to previous years, a dropping number of 40 40 employees. 20 0,7 5,5 6,3 20 No major changes took place in the development of 0 0 textile industry in 2007. In the second half-year Narva Share in Share in Export Share in Ratio to Kreenholm’s output figures continued to fall and the value man. share in man. average company reduced its workforce even more. The added industry sales industry wage output volume of the whole sector at constant prices export employ- fell by 5.7%. ment Source: Statistical Office of Estonia Export share in the industry’s sales is high − in 2007 Exports by target countries 83% of the output was sold in export markets. In manufacturing industry only the electronics sector has USA a higher share of exports than textile industry. Hence, the development of this industry is mainly influenced Netherlands by its competitiveness in export markets. UK As before, textile industry exported most of its Germany output to Sweden and Finland, comprising 40% of all Sweden exports of this sector. Exports to the United States Finland showed considerable growth, increasing by almost two times. As regards the most important markets, 0% 5% 10% 15% 20% 25% exports to Germany, the UK and France decreased. The main export articles were, as before, blankets and 2006 2007 pillows whose exports in 2007 increased in the largest Source: Statistical Office of Estonia markets and the United States. In recent years the number of employees in textile mill EEK Sales and exports % y-o-y 5 000 100 industry has been continuously dropping. One of the 80 underlying factors is the gradual decrease in 4 000 Kreenholm’s workforce. In 2007, employment rate in 60 3 000 textile industry was by one tenth smaller than in 2006. 40 The average gross monthly wage increased by 18% in 2 000 20 2007, being, however, by one third lower than the average Estonian gross wage. Due to the diminishing 1 000 0 number of employees, production costs increased 0 -20 slower than in most sectors. 2001 2002 2003 2004 2005 2006* 2007* Sales Exports Investments in fixed assets dropped by about two Change in sales (r.s.) Change in exports (r.s.) times in 2007, regardless of the relatively low Source: Statistical Office of Estonia comparison base. More than two thirds of the investments were made in machinery and equipment.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 23

However, investments in machinery and equipment Main export commodity groups showed the largest decline. Textile industry companies did not have any specific Wool thread and forecast for the first months of 2008 but their Cotton textiles Carpets and outlook was more negative than a year ago. The textiles 3% other textile companies responding to the Estonian Institute of 7% floor covers Economic Research estimated that they had smaller Other 6% than an average number of orders but expected textile finished production volumes to grow. They also expressed the Blankets opinion that sales prices would not change. Nobody products and pillows 18% predicted growth in labour force. Shortage of labour Other 46% and low demand were pointed out as the main textile obstacles to production growth. products 20% Goods of Estonian origin Source: Statistical Office of Estonia

Number of employed and wages %y-o-y 12 000 25 10 000 20 15 8 000 10 6 000 5 4 000 0 -5 2 000 -10 0 -15 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 1 500 40 30 1 000 20 10 500 0 -10 0 -20 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 500 90 400 60

300 30

200 0 100 -30

0 -60 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 24 Economic Survey of Estonia 2007

Wearing apparel industry In recent years, wearing apparel production volumes have grown at a much slower pace than those of manufacturing industry. In 2007 the sales volumes were even lower than in 2001. Many companies use more subcontracting from Asia and the geographically closer East-European countries, resulting in smaller output figures in Estonia. Export share in the sales of this sector has been traditionally high; enterprises exported 67% of their output in 2007. During the last two years the number of employees in the sector has decreased by more than two thousand. The largest wearing apparel producers are AS Baltika and AS Silvano Fashion Group in Tallinn and AS Sangar and AS Ilves- Extra in Tartu. The ending of the WTO Agreement on Textiles and Clothing (ATC) on the 1 st of January 2005 resulted in the removal of import quotas for WTO members. The result was an increased inflow of garments from Asian countries to Europe. Asian garments are cheaper than Estonian due to low production costs and economies of scale but are of good quality. Estonian producers lack strong brand names, thus we are forced into price competition with Asian producers. The ending of the ATC has made it difficult to sell Estonian wearing apparel in foreign markets. In the long-term, these Estonian manufacturers who compete with Asian mass production, need to find market niches for their products, as it will not be possible to achieve the price advantage that Asian companies have. Moreover, long- term price competition is not reasonable in economic development terms. Estonian firms’ competitive advantage is their flexibility and a geographical location closer to the target markets. The year 2007 was rather difficult for the wearing % Share of sector in Estonian economy % 100 100 apparel industry; production and sales both went 80 67,0 80 down. Employment and investments in the 57,0 60 60 sector continued to fall. 40 40 Sales of wearing apparel industry decreased by 1% in 20 0,6 2,2 7,4 20 2007; output at constant prices fell by 7.7%. Sales 0 0 grew on account of the domestic market while Share in Share in Export Share in Ratio to exports, being important for this sector, fell. value man. share in man. average However, investments in production improvement added industry sales industry wage and finding market niches have enabled companies to exports employ- endure competition. ment Source: Statistical Office of Estonia In recent years, the largest enterprises in the sector mill EEK Investments of enterprises % y-o-y (AS Baltika and AS Silvano Fashion Group) have 200 40 made large investments in restructuring and creating 150 20 their own retail chains. They have also started subcontracting instead of being subcontractors. In 100 0 the case of smaller companies it is also noticeable that 50 -20 they have reduced the share of cheap contract work. 0 -40 Wearing apparel is mainly oriented to export markets; 2001 2002 2003 2004 2005 2006 2007* export share in sales is over two thirds. 2007 turned out to be unfavourable in terms of exports, and Investments in fixed assets Change in investments (r.s.) export volumes dropped. Finland and Sweden are still the main export partners; exports to these two Source: Statistical Office of Estonia countries constituted 60% of the total exports of the sector. It was positive, considering such high export mill EEK Sales and exports % y-o-y concentration, that the share of Sweden somewhat 3 000 20 decreased and that of Latvia strongly emerged. 2 500 15 Exports to Russia in the same commodity groups 10 2 000 diminished, possibly as a result of redirection of 5 1 500 products. 0 1 000 The main export articles were men’s and boys’ shirts, -5 500 one of the fastest growing commodity groups, and -10 sports and working clothes of various materials. 0 -15 2001 2002 2003 2004 2005 2006* 2007* Wearing apparel industry’s employment rate has been Sales Exports clearly declining in recent years and the trend Change in sales (r.s.) Change in exports (r.s.) continued in 2007. Labour force diminished by one Source: Statistical Office of Estonia tenth compared to 2006. At the same time, reducing the number of people helped to boost efficiency.

Similar to other industries salaries increased

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 25 considerably in this sector (16%) but stayed notably under the average salary level in Estonia. Exports by target countries Wearing apparel industry’s investment to sales ratio was 2% in 2007, being one of the lowest figures Russia among all industries. Investments fell by about 8% compared to 2006, mainly on account of purchasing Germany buildings and facilities. Investments in construction Norway and reconstruction of buildings and facilities grew considerably. Latvia At the beginning of 2008, the companies responding Sweden to the Estonian Institute of Economic Research had Finland rather modest hopes for the near future. It was expected that output would fall and sales prices 0% 10% 20% 30% 40% would increase. 44% of the respondent enterprises mentioned insufficient demand as a growth-inhibiting 2006 2007 factor. However, in spite of the overall low salary Source: Statistical Office of Estonia level in the sector the problem related to lack of labour is not topical any more, since it was mentioned Main export commodity groups only by one third of the respondents (the respective figure was 80% a year ago). T-shirts and Sports under-shirts Other clothes 8% 17% 11%

Women's wearing Men's apparel wearing 24% apparel 40% Goods of Estonian origin Source: Statistical Office of Estonia

Number of employed and wages % y-o-y 15 000 20 15 10 000 10 5 0 5 000 -5 -10 0 -15 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 1 400 10 1 200 5 1 000 800 0 600 -5 400 -10 200 0 -15 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 26 Economic Survey of Estonia 2007

Wood processing and manufacture of wood products Besides food industry, wood industry is one of the largest industries in Estonia. Over 900 enterprises engage in wood processing and manufacture of wood products, the total employment in the sector is about 18,000 people. In 2001- 2007 output volumes grew by more than 1.6 times; share of export in total sales is 60%. The number of employed by the sector has grown by one fifth which shows an increase in production efficiency. The Estonian wood industry is closely related to the Scandinavian wood sector through ownership relations. The product mix of wood industry is comprehensive, ranging from sawn timber production and processing to manufacture of log homes, windows and doors. The largest number of employees work at the veneer factory AS Balti Spoon, plywood products manufacturer AS Technomar & Adrem and laminboard factory AS Repo Vabrikud. The largest plywood manufacturer is UPM Kymmene Otepää. Sawmills have the highest turnovers (but their employment is several times smaller than that of the above companies, due to their technology- intensive character). The largest sawmills by output are Imavere Saeveski and Paikuse Saeveski (both belong to the Scandinavian wood and paper company Stora Enso) and AS Toftan. Wood industry is evenly spread all over (mainland) Estonia. The largest wood industry enterprises are located in Pärnu, Järva, Harju, Tartu and Viljandi counties, employing one tenth or even more of the industry’s workforce. The year 2007 was rather bleak for the wood % Share of sector in Estonian economy % 100 100 industry. Annual sales and export growth rates 80 95,1 80 fell and the number of employees dropped. The 60,6 problems related to raw materials that had 60 60 started in 2006 continued as the price of raw 40 40 materials continued its rapid growth. 15,5 14,2 20 2,6 20 0 0 In 2007, sales of wood industry at current prices grew Share in Share in Export Share in Ratio to by 7.8% compared to the previous year and the value man. share in man. average output volumes at constant prices dropped by 5.4%. added industry sales industry wage Most of this growth was due to domestic sales; export exports employ- growth was slower. Thus, the domestic market Source: Statistical Office of Estonia ment accepted the rapid increase in prices better than the export market where the competitiveness of our mill EEK Investments of enterprises % y-o-y companies diminished. However, a decline in output 1 500 40 volumes could be observed in several countries, 30 pointing to the possibility that lower demand is a 1 000 20 general trend in Europe. 10 Wood industry’s producer price index grew by 17.5%, 500 0 placing wood industry on the third position in -10 manufacturing industry after dairy products and production of flour and grains. The price increase 0 -20 was triggered by an increase in the price of domestic 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets and imported raw materials by about one quarter, Change in investments (r.s.) accompanied by rapid growth in labour costs. Higher Source: Statistical Office of Estonia producer prices were also noticeable in the rest of Europe, although to a lesser extent. mill EEK Sales and exports % y-o-y 16 000 35 In the past couple of years the felling volume in 14 000 30 Estonian forests has been about 5-6 million cubic 12 000 25 meters per year (in some earlier years, the felling 10 000 20 volume exceeded 10 million cubic meters). Felling 8 000 volumes have mainly dropped in private forests 15 6 000 because their owners are rather passive in forest 4 000 10 management. Private forest owners have mentioned 2 000 5 two main reasons for this: unfavourable tax 0 0 conditions and complicated administrative 2001 2002 2003 2004 2005 2006* 2007* procedures (most private owners lack any experience Sales Exports in forest management). In state forests the felling Change in sales (r.s.) Change in exports (r.s.) volume has been more or less stable. As a result of a Source: Statistical Office of Estonia continuous decrease in the annual felling volume, increment has significantly exceeded felling volume for several years now, especially as regards broad- leaved trees. However, at the end of 2007, due to the rapidly increasing wood prices, forest owners started

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 27 to show more interest towards a better management Exports by target countries of their forests.

Shortage of raw materials in wood industry, as well as Denmark the price of raw materials which had stayed stable for a long time, have affected the producer price index in Sweden wood industry. In 2007, producer prices were on the Germany average 17.5% higher than in 2006, both due to the higher raw material prices and sales prices of UK domestic products. At the end of the year, however, it Norway seemed that raw material prices did not grow any more. Finland More than 60% of wood products are sold in export 0% 5% 10% 15% markets. The main Estonian export articles are sawn 2006 2007 timber, log houses and construction details. . Exports grew only thanks to increased prices. Exports of sawn Source: Statistical Office of Estonia timber, the most important export article, plummeted due to problems with raw materials experienced at Main export commodity groups the beginning of the year, and the declining Construc- competitiveness related to high prices. On the Profiled tion details positive side, exports of construction details went up, wood 21% mainly to Norway. Log homes still constitute an 8% important part of wood industry’s exports, the main target markets being Norway, Germany and the UK. Firewood Log houses 11% 17% According to the data given by enterprises, employment in the wood sector decreased by more Sawn than a thousand employees in 2007 and the number timber of employees dropped to almost 18,000. Companies 23% Other employing over 100 people reduced their workforce 20% the most. Average wage grew by 20%, about the same Goods of Estonian origin as the growth rate of average wage in Estonia. As a Source: Statistical Office of Estonia result, labour costs increased faster than total costs and sales revenues. Number of employed and wages % y-o-y 20 000 30 Wood industry’s investments in fixed assets dropped 15 000 20 by 11.2% in 2007. The decline was mainly caused by 10 000 10 smaller investments in construction and 5 000 0 reconstruction of buildings and facilities. Machinery 0 -10 and equipment formed the largest part of investments 2001 2002 2003 2004 2005 2006 2007* (almost a half). Number of employed Expectations of companies, surveyed by the Estonian Average wage (kroons) Change in number of employed (r.s.) Institute of Economic Research at the beginning of Change in wage (r.s.) 2008, were quite optimistic as regards the near future. Companies expected their output volume to grow Source: Statistical Office of Estonia and the number of export orders to increase. They were also of the opinion that sales prices would not Value added, labour costs and productivity change much. However, Russia’s plans to increase mill EEK % y-o-y customs duties for wood by more than three times in 5 000 15 2009 makes companies wary of the future. 4 000 10 3 000 5 2 000 0 1 000 -5 0 -10 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity cost (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 28 Economic Survey of Estonia 2007

Production of pulp, paper and paper products Paper industry is an industry with long traditions, established in Estonia already in the 17 th century. Currently there are about 60 paper, pulp or paper products enterprises in Estonia, with a workforce of 2,000 people. In the years 2001-2007 the output of paper industry grew by two times; more than 80% of the output is exported. Sales have grown thanks to exports but domestic demand for paper products is also growing. Compared to the rest of Europe, consumption of paper per person in Estonia is quite low (by more than two times), enabling us to forecast a certain growth in the domestic demand for paper products. Paper industry is a heavily concentrated industry in Estonia – the two larger companies employ more than half of the workforce and give over half of the total turnover. AS Estonian Cell, aspen pulp factory in Kunda, launched in 2006, reached a significant output volume in 2007. Smead Eesti AS in Kohila is the largest manufacturer of paper products. AS Räpina Paberivabrik is a smaller manufacturer producing paper and cardboard from waste paper. Most of the companies make paper products from imported paper. In 2007, sales and export volumes of paper % Share of sector in Estonian economy % 100 150 industry escalated considerably. The number of 82,2 80 109,0 120 employees increased slightly; productivity surged 60 90 upwards. 40 60 In 2007, paper industry showed large growth figures. 20 0,4 3,9 1,5 30 Sales at current prices grew by 37.5% compared to 0 0 the previous year and output at constant prices Share in Share in Export Share in Ratio to augmented by almost 18%. The new aspen pulp mill value man. share in man. avarage in Kunda was definitely one of the driving factors, added industry sales industry wage (r.s.) affecting most of the sector’s enterprises. exports employ- ment Export was the main driving factor to support sales Source: Statistical Office of Estonia growth. Export of the industry was distributed rather evenly among the major target markets; the three mill EEK Sales and exports % y-o-y 3 000 50 most important partners were Germany, Italy and 2 500 40 France as most of the aspen pulp made in Kunda was exported to these countries. Compared to 2007, 2 000 30 uncoated paper and paperboard dropped to rank 1 500 20 second. These two commodity groups gave almost 1 000 10 90% of the industry’s total exports in 2007. 500 0 Employment rate has been rather stable in paper 0 -10 industry for years (1,700 to 1,800) but increased by 2001 2002 2003 2004 2005 2006* 2007* one tenth in 2007 and reached almost 2,000 people. Sales Exports Average monthly gross wage rose the fastest among Change in sales (r.s.) Change in exports (r.s.) all manufacturing industry branches (by 28%), Source: Statistical Office of Estonia amounting to 109% of the Estonian average salary. It was probably the effect of the new highly efficient Exports by target countries plant. Production sales revenues increased at a higher rate than costs and the sector’s profit grew threefold. Productivity figures based on value added were much Poland higher than in previous year. Austria Investments in fixed assets were the same as in 2006 Netherlands because the large investments made in Kunda aspen pulp factory were not any more in the comparison France base. Most investments were made in machinery and Italy equipment and renovation and construction of buildings. Germany In the coming years companies that use wood as their 0% 5% 10% 15% 20% primary raw material may face difficulties since wood prices have undergone a rapid increase and Russia 2006 2007 intends to increase its export duties even more. Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 29

Main export commodity groups Value added, labour costs and productivity mill EEK % y-o-y 1 000 40 30 Uncoated 800 Other 20 paper and 2% 600 10 paper-board Recycled 0 34% 400 paper of -10 200 cardboard -20 waste Boxes, bags 0 -30 and other 8% 2001 2002 2003 2004 2005 2006 2007* packaging Value added 4% Labour costs Total productivity growth (r.s.) Wood pulp Labour costs productivity growth (r.s.) 52% Source: Statistical Office of Estonia

Goods of Estonian origin mill EEK % y-o-y Source: Statistical Office of Estonia 600 Investments of enterprises 300 500 Number of employed and wages % y-o-y 200 14 000 30 400 12 000 300 100 10 000 20 200 0 8 000 10 100 6 000 0 -100 4 000 0 2001 2002 2003 2004 2005 2006 2007* 2 000 0 -10 Investments in fixed assets 2001 2002 2003 2004 2005 2006 2007* Change in investments (r.s.) Number of employed Average wage (kroons) Source: Statistical Office of Estonia Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 30 Economic Survey of Estonia 2007

Publishing and printing Publishing and printing has developed rapidly in the past five years. In 2007 the production volume of the industry exceeded the volume of 2002 by about 1.8 times. Publishing is the principal activity for over 550 companies, the largest of which are located mainly in Tallinn and Tartu. The industry has two main sub-branches: publishing and printing. The sector employs almost 5,800 people; about 60% of them engage in publishing and about 40% in printing. The production is mainly targeted to the domestic market; export share is less than one fifth. Domestic market is, however, rather limited, and it forces the companies to search opportunities in export markets. Export share in sales has grown from 6% in 2001 to 17% in 2007. The production volume will continue to grow and employment is expected to stabilise at the current level. Extensive investments give an additional impetus to the development of the sector. The largest companies publish newspapers, magazines and periodicals, e.g. AS Äripäev, Eesti Päevalehe AS, AS Ajakirjade Kirjastus and AS Postimees. AS Eniro Eesti and AS Infopluss Eesti publish telephone directories. The largest printing enterprises are AS Printall and AS Kroonpress, focused mainly on printing periodicals. The largest companies engaged in book printing are OÜ Tallinna Raamatutrükikoda and OÜ Greif. Printing of advertising matter is also an important part of the printing industry. Publishing had a rather successful year in 2007. % Share of sector in Estonian economy % 100 150 The industry managed to sustain its high growth 80 130,6 120 rate both in the domestic and export markets. 60 16,8 90 Sales of the industry increased by 13% compared to 40 60 the previous year; sales in the domestic market grew 20 0,9 1,1 4,6 30 faster than in export markets. Production volume at 0 0 constant prices exceeded the level of 2006 by 9.5%. Share in Share in Share of Share in Ratio to value man. export in man. average About 17% of the total output of the sector is added industry sales industry wage (r.s.) exported, thus the industry’s development depends exports employ- highly on the domestic market. The latter is ment developed and its development is stable. In recent Source: Statistical Office of Estonia years the positive results of the publishing and printing industry were backed by the high domestic mill EEK Sales and exports % y-o-y 5 000 80 demand supported by rapid economic growth. But 70 due to the limited domestic market the companies try 4 000 60 to find more opportunities in export markets. 3 000 50 Export share dropped in 2007 regardless of the fast 40 sales growth. Although the domestic market is 2 000 30 limited, it has not been possible for the companies to 20 1 000 10 have rapid growth in foreign markets. The role of Nordic countries in exports has decreased and that of 0 0 Western Europe increased. Sweden is still the main 2001 2002 2003 2004 2005 2006* 2007* Sales Exports export market but Ireland’s share has also grown. Change in sales (r.s.) Change in exports (r.s.) Exercise books sold to Ireland constitute almost one Source: Statistical Office of Estonia fifth of all exports. Export to the Netherlands (folders, portfolios) has grown as well. Exports by target countries By the data of enterprises, the number of employees in publishing dropped in 2007, being now 5,800 Netherlands people. Salaries continued to increase relatively fast (14.2%) but the growth rate was significantly lower Russia than the Estonian average. However, average wage in Norway publishing, printing and recording was higher than in other industries. Companies have paid attention to Finland raising efficiency, as a result of which production Ireland costs grew slower than sales revenues. Thus, the Sweden profitability of the sector improved.

0% 5% 10% 15% 20% 25% 30% Investments in fixed assets were smaller than in 2006. 2006 2007 Total annual investments in fixed assets dropped by Source: Statistical Office of Estonia 12%. But, publishing (especially printing) is highly technology-intensive and the industry is currently equipped with competitive equipment. Thus,

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 31 investment volumes may vary a lot due to the one- Main export commodity groups time purchases of large equipment. Books, Periodicals brochures 34% and other printed material 11% Other 8% Commer- cial advertising, Exercise product books Folders, catalogues 21% protfolios 11% 15% Goods of Estonian origin Source: Statistical Office of Estonia

Number of employed and wages % y-o-y 20 000 25 20 15 000 15 10 10 000 5 5 000 0 -5 0 -10 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 2 500 20 2 000 15 1 500 10 1 000 5 500 0 0 -5 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 350 100 300 80 250 60 40 200 20 150 0 100 -20 50 -40 0 -60 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 32 Economic Survey of Estonia 2007

Manufacture of chemicals and chemical products The Estonian chemical industry has been tightly linked to oil shale industry but other chemical industry branches are also being developed. Due to reconstruction of production, employment has continuously dropped in this sector. In 1997 more than 8,000 people worked in this industry but by 2007 their number had fallen by two times. Sales and output volumes have increased due to higher productivity. Although productivity has grown, it is still significantly below the level of productivity in developed countries. In 2006, value added per employee in Estonia and Finland were about 450,000 kroons and 2 million kroons, respectively. More than half of the Estonian chemical industry is located in Ida-Viru county, one third of the workforce is in Tallinn and Harju county. The largest chemical industry companies are VKG Oil AS (shale oils) and VKG Resins AS (adhesive resins) − both affiliates of Viru Keemia Grupp, Kiviõli Keemiatööstuse OÜ (shale oils), ES Sadolin AS, AS Tikkurila-Vivacolor and AS Eskaro (paints and varnishes), AS Silmet (rare metals), Henkel Makroflex AS and OÜ Krimelte (assembly foams), Velsicol Eesti AS (benzoic acid, sodium benzoate), Orica Eesti OÜ (explosives), AS Nitrofert (mineral fertilisers, ammonia and carbamide), AS Nycomed Sefa and Tallinna Farmaatsiatehase AS (pharmaceuticals). The sector has low productivity, therefore labour productivity has to be increased. That may bring about lower demand for labour. The need to raise efficiency derives from the more expensive production inputs but in the chemical industry increased costs related to environmental protection also play an important role. On the other hand, growth in oil prices has boosted interest in alternative fuels, including shale oil, which may bring about more employment in the sector. Chemical industry’s 2 production growth was the % Share of sector in Estonian economy % 100 150 same as in 2006. Sales revenues grew 90 81,8 80 109,0 120 considerably due to higher exports and prices. 70 60 90 The number of employees increased for the first 50 40 60 time in several years. Profitability of enterprises 30 20 30 remained quite high regardless of higher costs. 10 1,0 8,2 3,3 0 0 In 2007, chemical industry’s output was by 6% higher Share in Share in Share of Share in Ratio to than in 2006. The first half-year showed especially value man. export in man. average strong growth rates, while in the second half-year the added industry sales industry wage (r.s.) increase was not so high. Due to an increase in exports employ- ment product prices, sales revenues surged up at an Source: Statistical Office of Estonia accelerated double pace. Producer prices rose by 6%, export prices even more (by one tenth). Import mill EEK Sales and exports % y-o-y 7 000 40 prices, on the other hand, have been rather stable for a long time. The price of the main input for chemical 6 000 30 5 000 industry, oil, increased during the year, and that will 4 000 20 probably be reflected soon in the prices of chemical 3 000 10 products. 2 000 0 1 000 Sales of chemical products in domestic markets had 0 -10 modest growth (4%). In the first half-year, growth 2001 2002 2003 2004 2005 2006* 2007* exceeded 10% but later, the cooling of the Sales Exports construction sector had an effect on consumption and sales of chemical products needed in Change in sales (r.s.) Change in exports (r.s.) Source: Statistical Office of Estonia construction (e.g. varnishes and paints). The sector’s development was mainly supported by export that Export target countries gave four fifths of all sales revenues. Russia Export volumes increased in all the main commodity Latvia groups. Sales of shale oil to export markets grew by Sweden USA almost a half. Sales of urea, joint mixtures, benzoic Netherlands acid, paints and varnishes demonstrated rapid growth. UK Ukraine Lithuania France Germany 2 This sector embraces, besides production of Finland chemicals and chemical products (NACE 24), the 0 5 10 15 20 production of coke, purified oil and oil shale products 2006 2007 % and atomic fuel (NACE 23). Output and sales figures Source: Statistical Office of Estonia reflect only the production of chemicals and chemical products.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 33

Compared to 2006 significantly more products were Main export commodity groups sold in the Netherlands (shale oil), the UK (shale oil, urea), Finland and Russia (paints and mastics). Sales also grew in respect of the other main trade partners. Fertilisers 13% Mineral Workforce has been the same or dropped in this fuels and Inorganic sector for years, while efficiency has considerably oils chemicals, improved. In 2007 the number of employees 27% com- increased by one tenth, one of the reasons being the pounds of inclusion of many small companies in the statistical rare earth Paints, sample. The Commercial Register’s data, however, metals varnishes 9% show that not many undertakings have been mastics established lately. The data of larger enterprises also 23% show an increase in their labour force. Organic Other chemicals Chemical industry raised its wages in 2007 by a fifth, 20% 8% the rate being the same as the Estonian average. The Goods of Estonian origin increased wages and number of employees pushed Source: Statistical Office of Estonia labour costs up by one third. Since labour costs form only one tenth of total costs of the industry, the Number of employed and wages % y-o-y chemical sector is not affected by the rapid wage rise 14 000 25 as much as other industries. The rise in total costs 12 000 20 was by more than two times slower than that of 10 000 15 labour costs, and also slightly lower than sales 8 000 10 6 000 5 revenues growth. Labour cost productivity figures 4 000 0 were somewhat worse than in 2006 but other 2 000 -5 indicators characterising productivity (turnover and 0 -10 value added per employee or total costs) improved. 2001 2002 2003 2004 2005 2006 2007* Number of employed Chemical industry’s investments surpassed those of Average wage (kroons) 2006 by three quarters. Enterprises producing oil Change in number of employed (r.s.) Change in wage (r.s.) shale products made the largest investments and their Source: Statistical Office of Estonia investment volumes doubled compared to a year before. Other branches of chemical industry also Value added, labour costs and productivity made more investments than in 2006. Investments in mill EEK % y-o-y buildings and facilities and machinery and equipment 2 500 25 20 grew. 2 000 15 At the beginning of 2008, in contrast to the general 1 500 10 outlook expressed by companies in manufacturing 1 000 5 0 industry, the chemical enterprises responding to the 500 Estonian Institute of Economic Research were rather -5 positive about their market situation and future. Their 0 -10 2002 2003 2004 2005 2006 2007* situation as regards orders for the first months of the Value added year was about the same as a year ago, although there Labour costs were fewer export orders. However, only export can Total productivity growth (r.s.) be the growth factor for this sector, as no significant Labour costs productivity growth (r.s.) domestic market growth is expected in 2008. More Source: Statistical Office of Estonia than half of the enterprises forecast growing mill EEK Investments of enterprises % y-o-y production volumes for the coming months. They 900 100 also expected a considerable increase in prices. One 800 80 company out of three intended to recruit more 700 60 employees. Shortage of labour was not a big problem, 600 as pointed out by companies, instead, insufficient 500 40 demand was mentioned as the main factor inhibiting 400 20 production growth. 300 0 200 100 -20 0 -40 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 34 Economic Survey of Estonia 2007

Manufacture of rubber and plastic products Manufacture of rubber and plastic has developed vigorously in recent years. Sales in the domestic market have gone up but most of the sales growth is due to expanded exports which have grown by several times. New enterprises have emerged and more jobs have been created in the sector. The largest enterprises in rubber and plastic industry are AS Plasto, AS Glaskek Group (plastic windows), AS Estiko- Plastar (film and plastic bags), Pipelife Eesti AS (plastic pipes), AS Polyform (videotape cases, packages for food industry), Promens AS, AS Baltic Components/Bladhs Eesti AS (plastic products for automobile industry), Greiner Packaging AS (plastic packages), OÜ Merinvest (rubber o-rings, membranes) and AS Balteco (baths). The largest enterprises are located in Tallinn and Harju county (almost half of the workforce), Ida-Viru and Tartu counties (about one-tenth of the workforce), and Hiiu and Saare counties also employ quite a lot of labour. It is expected that positive developments in rubber and plastic industry will continue in the next years. Sales are expected to increase both in foreign and domestic markets (thanks to the expanded assortment of products, the development of the construction sector and other industries supporting this sector, and a wider use of packages in food industry). A rise in employment and labour productivity may also be forecast. Rubber and plastic products industry had about % Share of sector in Estonian economy % 100 100 the same production figures in 2007 as in 2006. 80 94,6 80 New undertakings have entered the market, 60 48,5 60 resulting in an increase in workforce. However, 40 40 mass production has the tendency of moving out of Estonia. 20 0,6 3,4 3,7 20 0 0 The first half-year of 2007 showed a production Share in Share in Share of Share in Ratio to growth rate exceeding 10% but in the second half- value man. export in man. average year production fell and annual output figures were added industry sales industry wage smaller than a year before. Sales volumes grew a little, exports employ- due to an increase in producer prices. The lower ment Source: Statistical Office of Estonia demand in Estonia (e.g. for plastic doors and windows) had some influence and exports also fell in mill EEK Sales and exports % yo-y the second half-year. The results of the industry were 4 500 60 influenced by the liquidation of Nolato Tallinn 4 000 50 3 500 Polymer, the largest plastic products manufacturer, in 40 3 000 the second half of 2007. In 2006, the enterprise’s 2 500 30 turnover formed about one tenth of the overall sales 2 000 20 of the industry and its workforce was also about one 1 500 10 tenth of the total number of employees in the sector. 1 000 500 0 Production in Estonia was terminated because mobile 0 -10 phones manufacturing was transferred to Asia and 2001 2002 2003 2004 2005 2006* 2007* plants in Europe were closed, as a result of which the Sales Exports production of components also shifted to the east. Change in sales (r.s.) Change in exports (r.s.) Source: Statistical Office of Estonia Exports grew in respect of several plastic products, such as furniture and car accessories, pipes and hoses Number of employed and wages % y-o-y and packages. Export of rubber products and plastic 12 000 25 school and office supplies dropped compared to 10 000 20 2006. Export to the most important target markets 8 000 15 increased, with Sweden and Finland ranking the first. 6 000 10 Although winding up of Nolato had an important 4 000 impact on the sector’s employment, the sector has 2 000 5 been in a rapid growth phase and new enterprises 0 0 have continuously emerged. Moreover, statistical 2001 2002 2003 2004 2005 2006 2007* coverage as regards this industry has improved. Thus, Number of employed the number of employees of the sector grew in 2007 Average wage (kroons) Change in number of employed (r.s.) (by 4%) but fell below the level of 2006 in Q4. It is Change in wage (r.s.) possible that the liquidation of Nolato may still Source: Statistical Office of Estonia continue to influence labour figures of this industry at the beginning of 2008.

In spite of the rather modest sales of the industry financial results were quite satisfactory. Revenues did not grow much but costs did not grow significantly

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 35

either and thus, profits increased slightly. The wage Export target countries level in the sector increased by one quarter and labour costs showed the same growth. Growth in Sweden other expenditures was two times lower. Hence, Finland several productivity indicators improved and only Latvia labour cost increase surpassed value added and sales Germany Norway growth. Lithuania By preliminary data, investments of rubber and Netherlands plastic products industry stayed at the level of 2006. Russia Construction, purchase and renovation of buildings 0 5 10 15 20 25 30 and facilities decreased considerably. Investments in 2006 2007 % machinery and equipment increased. Investment Source: Statistical Office of Estonia growth was present in almost all size groups of enterprises. Main export commodity groups By the survey conducted by the Estonian Institute of Other Economic Research, companies of rubber and plastic 10% products industry assessed the market situation in the Office and school second half-year of 2007 to be worse than usual. The Vulcanised same assessments were given at the beginning of supplies, rubber accessories 2008. Enterprises complained of too few orders and products 40% did not expect an output growth for the first half-year 6% of 2008. No increase in workforce was expected. In Boxes, January three thirds of the respondent companies said Plastic pipes crates, Plastic that their main problems were related to insufficient and hoses bottles, etc. sheets and 7% 26% demand. Similar assessments had also been given at film the beginning of previous years. 11%

Goods of Estonian origin Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 500 200 400 150 300 100 200 50 100 0 0 -50 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 1 500 10

5 1 000 0 500 -5

0 -10 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 36 Economic Survey of Estonia 2007

Metal and metal products industry Metal industry has developed extremely fast during our re-independence period. Output of the industry has grown fivefold in ten years, thanks to exports but also the increased domestic demand (in machinery and equipment and construction sectors). Expanded sales figures and production facilities have brought about more need for labour. The industry employs more than 13,000 people (by a labour survey encompassing people doing metal work in other sectors and people working abroad, the number is 18,000), being one of the largest sectors in this respect. Metal industry is concentrated in Tallinn and its vicinity (more than half of the workforce) and Ida-Viru county (almost one sixth of the workforce). The largest enterprises engage in manufacture of metal structures (AS Kohimo, AS Viljandi Metall, Hiab Balti AS, OÜ BLRT Marketex, AS Remeksi Keskus), building structures (Ruukki Products AS, AS Saku Metall), manufacture of products needed by power plants and servicing power plants (AS Energoremont), metalworking (AS Tarkon, AS Favor, OÜ BLRT Masinaehitus), metal packages (Metaprint AS), production of galvanised steel (Galvex Estonia OÜ), aluminium alloys (AS Demidov Industries) and metal pipes (AS Veeseadmed). The sector has positive outlooks for the next years. According to forecasts, domestic demand and exports are on the growing trend. Due to labour productivity growth employment will not grow as much as sales but it is estimated that the sector will create additionally ca 1,500-2,000 jobs by 2014. Similar to other industries, output growth % Share of sector in Estonian economy % 100 125 decelerated in metal industry in 2007. However, 80 100 due to the increase in product prices, revenues 61,0 109,1 60 75 grew faster than expenditure so profitability was 40 50 rather good. 20 1,7 10,9 10,2 25 The output volume of metal industry increased by 5% 0 0 in 2007. This growth was brought about by strong Share in Share in Share of Share in Ratio to demand in Q1. During the rest of the year production value man. export in man. average figures stayed practically at the 2006 level. Production added industry sales industry wage (r.s.) growth was inhibited mainly by lower demand in the exports employ- domestic market due to the less active construction ment Source: Statistical Office of Estonia activities. Export’s growth rate also started to fall at the end of the year but annual export growth was still mill EEK Sales and exports % y-o-y over one fifth. The relatively high sales figures were 12 000 60 partly supported by the higher prices of products. 10 000 50 The increased prices of raw metals forced companies 8 000 40 to raise their sales prices; however, there was a long lag until more expensive inputs were reflected in final 6 000 30 prices. Annual producer prices increase was 12%. 4 000 20 Export prices showed the same growth. 2 000 10 Export was mostly backed by metal structures. Their 0 0 exports boosted export volumes to Finland, Norway, 2001 2002 2003 2004 2005 2006* 2007* Denmark and Lithuania. Flat-rolled products export Sales Exports dropped compared to 2006, mostly affecting sales to Change in sales (r.s.) Change in exports (r.s.) Russia and the USA. Source: Statistical Office of Estonia Employment in metal industry continued to grow in Export target countries 2007 and new companies entered the market. The number of employees grew by 8%. Jobs were mostly Finland created in smaller companies employing fewer than Sweden 50 persons. Rapid wage rise continued due to the lack Turkey of qualified labour. Salaries grew by more than one Norway quarter. At the end of the year, however, the labour Germany problem was somewhat alleviated, mainly due to the Denmark decreased demand. Poland The increased workforce and wage growth Latvia augmented the sector’s labour costs by 30%. Other 0 5 10 15 20 costs did not increase so fast and total expenditure 2006 2007 % increase was smaller than revenue increase. As a Source: Statistical Office of Estonia result, profits of companies grew by 60% and profit margin was almost 10%. Labour productivity figures

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 37 improved as well and value added created increased significantly. Main export commodity groups

Metal industry’s investments in 2007 were about the Iron and same as in the record year of 2006. Investments were steel supported by the favourable financial situation. Iron and products Investments in buildings and facilities and in steel 35% machinery and equipment were the largest of all 41% investments. Land purchases were much more extensive than in 2006. Alu-minium and Respondents to the survey conducted by the products Estonian Institute of Economic Research mentioned 7% that they had fewer orders at the beginning of 2008. Other They hoped to increase production in the coming 12% Copper and months but the expectations were more modest than products at the same time a year ago. Insufficient demand was 5% mentioned as the main obstacle. In January, only Goods of Estonian origin about 70% of the production capacity was used. Source: Statistical Office of Estonia Companies forecast that sales prices would not Number of employed and wages % yo-y change. They were slightly positive about recruiting 16 000 30 new employees. 14 000 25 12 000 10 000 20 8 000 15 6 000 10 4 000 2 000 5 0 0 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mln EEK % y-o-y 4 000 20 15 3 000 10 2 000 5 0 1 000 -5 0 -10 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 800 90

600 60

400 30

200 0

0 -30 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 38 Economic Survey of Estonia 2007

Manufacture of machinery and equipment The output of the machine engineering sector has continuously grown in recent years but, due to higher production efficiency, the demand for labour has dropped. The development of machine engineering has been promoted mainly by foreign markets; most of the production is exported. The largest companies are AS Hekotek (wood processing equipment), OÜ TMT Group (industrial air coolers), AS Fors MW (timber trailers, log lifts), and AS Finmec (parts of machinery). However, smaller enterprises are dominating in the sector. The workforce of the industry is distributed quite evenly across Estonia; the largest enterprises are concentrated around the largest cities, Tallinn and Tartu, and in the Ida-Viru county industrial region. By forecasts, thanks to the growth of exports and sales in the domestic market, the value added generated in this sector is expected to be about 1.5 times more in 2014 than in 2006 (at constant prices). Output volume will be primarily supported by productivity growth and thus, the number of people employed by the sector will remain at the same level. The need to raise productivity quickly is related to the lagging compared to the productivity level of the sector in developed countries and the increased production costs. Demand for machine engineering products was % Share of sector in Estonian economy % 100 150 high in 2007 and production figures increased 80 66,9 112,8 120 considerably. Thus, companies made large investments and recruited new people. 60 90 40 60 In 2007, output of the machinery and equipment 20 30 sector grew at the highest pace in recent years. The 0,8 4,0 4,6 production volume increased by 19%. Sales grew by 0 0 one quarter at current prices. Two thirds of the sales Share in Share in Share of Share in Ratio to growth was given by export growth but domestic value man. export in man. average sales also increased significantly. added industry sales industry wage (r.s.) exports employ- Exports increased in many commodity groups. ment Source: Statistical Office of Estonia Lifting and transportation mechanisms and their parts contributed the most. Exports grew the most to Italy, mill EEK Sales and exports % y-o-y Finland, Russia, Germany and Norway. 4000 35 Higher demand brought about a need for more 3500 30 employees. By preliminary data, the number of 3000 25 employees in the sector rose by more than one tenth 2500 20 in 2007. 2000 15 Finding qualified labour is difficult and thus, more 1500 10 and more attention is paid to improving technology. 1000 The investments of machine engineering industry 500 5 showed record figures in 2007. Preliminary statistical 0 0 data show that investments in fixed assets grew by 2001 2002 2003 2004 2005 2006* 2007* more than twice compared to the previous year. Sales Exports Almost 40% of the investments were made in Change in sales (r.s.) Change in exports (r.s.) machinery and equipment. The sums spent on Source: Statistical Office of Estonia machinery and equipment were by 2.5 times higher than the year before. Investments in the construction Export target countries and renovation of buildings and facilities also grew significantly. Investment activity increased both in Finland small and large enterprises. Sweden The revenues and expenditure of enterprises grew at Russia about the same rate and thus, cost-based productivity Germany figures did not change much. Labour costs increased, Italy due to a wage increase and recruitment of new Norway employees, by almost 40%. Producer prices rose, as a USA result of more expensive inputs, by the average of 8% per year. 0 10 20 30 40 50 Compared to other industries, low demand was not 2006 2007 % yet a problem for machine engineering industry in Source: Statistical Office of Estonia 2007. Companies responding to the Estonian Institute of Economic Research noted that they still

had a lot of problems in finding labour and there

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 39 were many companies who did not mention any problems in relation to increasing the production at Number of employed and wages % y-o-y 16 000 30 all. Production capacity use was stable. At the 14 000 25 beginning of 2008 the expectations related to an 12 000 20 increase in prices were very high; also, problems in 10 000 15 relation to demand started to come up. 8 000 10 6 000 5 4 000 0 2 000 -5 0 -10 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 2 000 25 20 1 500 15 10 1 000 5 0 500 -5 -10 0 -15 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 500 150 400 100 300 50 200 0 100

0 -50 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 40 Economic Survey of Estonia 2007

Manufacture of electrical appliances and optical instruments Manufacture of electrical appliances and optical instruments has developed fast in recent years. Compared to 2001, the sales have grown by about 3.5 times. Employment has increased by more than one third. The sector has strong orientation on export markets because most of the larger enterprises are based on foreign capital. Almost 350 companies engage in the manufacture of electrical appliances and optical instruments. Geographical concentration in Tallinn and its nearest vicinity is characteristic of the manufacture of electrical appliances and optical instruments but it also has a strong influence on regional development. Electrics industry has been one of the most important job creators in Saare county, Pärnu, Sindi, Elva and Koeru. Manufacture of electrical appliances and optical instruments is divided into four sub-branches. AS Ordi and AS ML Arvutid, engaging in assembly and sale of computers, are the largest enterprises in the office equipment and computer branch. Contrary to the industry’s main trend, production of office equipment and computers focuses mainly on the domestic market. In manufacture of electrical appliances and apparatuses, ABB AS is the leading enterprise, its principal activity being manufacture of power distribution equipment and apparatuses. Other larger enterprises are AS Konesko which is dealing with manufacture of electric motors and parts, and AS Draka Keila Cables, a related company to AS Harju Elekter group, that produces various types of cables. The larger enterprises producing television and communication equipment are AS Elcoteq Tallinn (communication equipment and components), Enics Eesti AS (electronic components for industrial and medical equipment) and Stoneridge Electronics AS that makes electrical systems for motor vehicles. In the branch of medical equipment, optical instruments and precision instruments, OÜ JOT Eesti is the largest enterprise producing miscellaneous automatic equipment. The industry has had relatively fast growth until now but the forecast about the near future is less optimistic. Companies will continue to invest in technology in order to improve production efficiency and to save labour costs. In 2007, manufacture of electrical appliances and Share of sector in Estonian economy optical instruments was one of the driving 100% industries for growth in manufacturing industry. 80% The industry was successful thanks to the 60% 86,0 89,5 persistent foreign demand. The number of 40% 18,5 11,6 employees did not change much. 20% 1,6 0% 2007 was a successful year for enterprises engaging in Share in Share in Share of Share in Ratio to manufacture of electrical appliances and optical value added man. export in man. average wage instruments. Annual growth rate of production industry sales industry volumes (at constant prices) and sales (at current exports employment Source: Statistical Office of Estonia prices) increased significantly, amounting to 20% and 24%, respectively. Sales figures were mostly affected mln EEK Sales and exports % y-o-y by developments in foreign markets because the 12000 60 industry exports most of its output. However, sales in 10000 50 domestic markets also increased remarkably in 2007. 8000 40 Rapid sales growth was supported by the industry’s 6000 30 two subsectors: manufacture of electrical appliances 4000 20 and apparatuses and manufacture of medical 2000 10 equipment, optical instruments and precision 0 0 instruments, whose sales volumes increased by about 2001 2002 2003 2004 2005 2006* 2007* one quarter in 2007. In both branches exports has Sales Exports amounted to the average of 85% of total sales in Change in sales (r.s.) Change in exports (r.s.) recent years. Source: Statistical Office of Estonia In the manufacture of electrical appliances and % Sales growth by sub-branches apparatuses domestic sales showed, in addition to 60 exports, strong growth (by 25%) after a decreasing 40 trend in two previous years. It was backed by 20 favourable developments in the construction market 0 and renovation of power networks. The vigorously -20 growing sales in domestic and foreign markets have 2001 2002 2003 2004 2005 2006* 2007* boosted the share of this subsector’s sales in the total Office equipment and computers sales of the sector to more than a half. Electrical appliances and apparatuses Radio, TV and communication equipment Manufacture of radio, television and communication Medical equipment, optical and precision instruments Source: Statistical Office of Estonia equipment had a major slowdown in 2006. In 2007 a

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 41 turn to the better took place, the growth rate of its Electrical Sales by sub-branches Radio, TV sales doubled and amounted to 13%. But the largest equipment and company in this branch, Elcoteq Tallinn, did not do and appa- communi- well because manufacture of mobile phones came to ratuses cation 50% equipment an end and all production was reorganised. Mass Office Medical33% and production is being transferred to Asia and East- equipment precision European countries where labour costs are smaller. and instru- However, many other companies with fewer computers ments employees were able to expand their output and sales 4% 13% volumes in 2007. Several companies mentioned, as Source: Statistical Office of Estonia before, lack of labour as an inhibiting factor to expand production. Export target countries The sales volume of the office equipment and Other computers branch was slightly lower than in 2006. UK 18% 2% This is attributable to the low figures of Q4 when Sweden 38% sales dropped by 20%. Computers are sold mainly in France the domestic market and only 5% of the output is 2% exported. Due to the considerable slowdown of Nether- economic growth in Q4, companies were forced to lands 3% save costs by not renovating their computer Germany networks. Also, due to the rapid technology 5% Finland development, computer prices are continuously Source: Statistical Office of Estonia 32% lowering, resulting in smaller sales in terms of money. In 2007, Sweden became the primary export market Number of employed and wages % y-o-y for electrical appliances and optical instruments, with 15 000 40 Finland ranking second. Due to the winding up of 12 000 30 manufacture of mobile phones in Estonia, exports of 9 000 20 the communication equipment branch to Finland, 6 000 10 China and Hungary diminished significantly. As a 3 000 0 result, the latter two countries fell by several places in 0 -10 2001 2002 2003 2004 2005 2006 2007* the list of the primary export markets for this sector Number of employed (they ranked third and fourth in 2006, respectively). Average wage (kroons) Change in number of employed (r.s.) Exports of electrical appliances to Finland grew Change in wage (r.s.) considerably but it did not compensate for the major Source: Statistical Office of Estonia decrease in the exports of communication equipment. Value added, labour costs and productivity Apart from Finland, exports of electrical appliances mill EEK % y-o-y and optical instruments increased to all main target 4 000 10 countries. Total export growth to Sweden was, 3 000 5 0 2 000 however, rather low, but exports of electrical -5 appliances increased by almost a half during the year. 1 000 -10 Exports to France and the Netherlands grew the 0 -15 most; cable sets for automobile industry were the 2001 2002 2003 2004 2005 2006 2007* Value added main export articles for both countries. Labour costs Total productivity growth (r.s.) Electrical appliances and optical instruments industry Labour costs productivity growth (r.s.) has shown moderate growth in labour force in recent Source: Statistical Office of Estonia years. In 2007 the number of employees exceeded mill EEK Investments of enterprises % y-o-y that in 2006 only by 2%. By branches, differences 1 000 80 were more noticeable. The rapidly developing 800 60 manufacture of electrical appliances and apparatuses 40 600 showed an increase by almost one quarter while that 20 400 of communication equipment reduced its workforce 0 200 by 16%. In all other branches there was a small -20 0 -40 decline in employment. 2001 2002 2003 2004 2005 2006 2007* Wages continued to increase rapidly in 2007 but Investments in fixed assets stayed under the Estonian average growth rate. As Change in investments (r.s.) before, wages were the lowest in the radio, television Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 42 Economic Survey of Estonia 2007 and communication equipment branch. In the The expectations of enterprises manufacturing electrical appliances and precision instruments branch electrical appliances and optical instruments are not the average wage was almost the same as the so optimistic at the beginning of 2008 than a year Estonian average. Due to favourable developments ago. At the beginning of 2007, many companies productivity figures improved as well. Value added responding to the survey of the Estonian Institute of created increased faster than labour costs and total Economic Research mentioned lack of labour as the expenditure; value added per employee rose by one main obstacle to output growth; however, at the fifth. beginning of 2008 insufficient demand ranked first. Investments continued to fall in electrical appliances In March, however, the expectations for the next and optical instruments industry in 2007. Investments three months were more positive. About 30% of the in fixed assets were the same as in 2003. Compared to manufacturers of electrical appliances and 2006, only investments in means of transport apparatuses expected an increase in production and increased. More than 60% of total investments were 40% predicted more export orders. More companies made in purchase of machinery and equipment and than in other branches intended to recruit new 30% to build and reconstruct buildings and facilities. employees. Such development expectations raised the Almost 60% of the sector’s investments were made confidence indicator for this branch to the positive by companies manufacturing electrical appliances and side but it was still much lower than in March last apparatuses and 30% by companies producing radio, year. Enterprises manufacturing radio, television and television and communication equipment. The first communication equipment were also more optimistic showed investments on the level of 2006, the latter in March than at the beginning of the year. One third had a decline by one tenth. of the enterprises announced that they planned to increase production, and a half expected more export orders. At the same time, employment is decreasing. The confidence indicator remained negative.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 43

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 44 Economic Survey of Estonia 2007

Manufacture of transport equipment Manufacture of transport equipment depends mainly on sales to foreign markets. Export makes up two thirds of the sales in this sector. Increased export and domestic market sales have expanded the output and promoted recruitment of new employees. The sector’s productivity has still some room for improvement; its productivity is 3-4 times lower than the productivity of this sector in Finland. The largest enterprises are AS Norma (safety belts), Loksa Laevatehase AS (structures for ship building); affiliates of Balti Laevaremonditehas (ship repair) – OÜ Tallinna Laevatehas, OÜ BLRT Rekato, OÜ BLRT Laevaehitus, OÜ Tehnomet and AS Baltic Premator; OÜ Tarmetec (car accessories), AS Ühinenud Depood (repair of railway rolling stock), Universal Industries OÜ (exhaust systems). The largest companies are concentrated in Tallinn and Harju county (more than 70% of the sector’s workforce), but are also located in Tartu, Ida-Viru and Saare counties. It is predicted that exports will expand the sales even more but domestic sales will also grow. The growing output figures are backed by productivity growth because lack of qualified labour and growing labour costs force companies to focus on more expensive products. The situation in the labour market is complicated by working abroad; also, the industry competes with other sectors for the employees. 3 % Share of sector in Estonian economy % Manufacture of transport equipment grew the 100 150 fastest after Estonia’s accession to the European 76,3 80 120 Union, due to growing exports. Companies hired 105,5 more employees. 60 90 Manufacture of transport equipment grew by one 40 60 tenth in 2007. Manufacture of motor vehicles and 20 30 0,8 6,4 4,1 trailers increased slightly faster but that of other 0 0 transport equipment (ships, railway rolling stock) was Share in Share in Share of Share in Ratio to more modest. Practically all sales growth came from value man. export in man. average exports. added industry sales industry wage (r.s.) exports employ- Export of safety belts continued to grow, as well as ment that of trailers, yachts and boats. Export of various Source: Statistical Office of Estonia car body parts in foreign markets fell. The highest growth in export sales was experienced as regards mill EEK Sales and exports % y-o-y Finland (many products) and Russia (safety belts, 6 000 35 trailers), and decreased the most in respect of Sweden 30 5 000 (car body parts). 4 000 25 20 The number of employees in this sector grew by 6% 3 000 15 in 2007, mainly thanks to manufacturers of motor 2 000 10 vehicles and trailers. As regards other means of 1 000 5 transport, employment stayed at the 2006 level. In 0 0 contrast to many other sectors, wage growth 2001 2002 2003 2004 2005 2006* 2007* decelerated in this industry (to 13%). Labour costs Sales Exports and total costs went up by one fifth. However, Change in sales (r.s.) Change in exports (r.s.) revenues grew more than costs and the total profit of Source: Statistical Office of Estonia the sector was about 80% higher than the previous year. Considerable profit increase took place mainly Export target countries in ship building while the profits in manufacture of motor vehicles and trailers only rose slightly. Sweden Manufacturers of other means of transport also Finland increased productivity. In previous years labour costs grew faster than value added but in 2007 the situation Russia reversed. Norway Investments of the sector stayed on the level of 2006. Latvia The investment activity of manufacturers of motor Germany vehicles and trailers increased while the producers of Lithuania other means of transport invested less in fixed assets

0 10 20 30 40 50 2006 2007 % 3 Manufacture of transport equipment is manufacture Source: Statistical Office of Estonia of motor vehicles, trailers and semitrailers (NACE 34) and other means of transportation, such as ships and railway rolling stock (NACE 35).

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 45 but still gave the largest share of the industry’s investments. Purchases of machinery and equipment Main export commodity groups increased by half, making up 60% of total investments. Less was spent on purchasing buildings Motor Trailers and and facilities but construction and reconstruction vehicle semi-trailers volumes grew. parts and 23% accessories Yachts and Modest developments are predicted for the sector in 52% boats 2008. Output may not increase as quickly as in 2007; 12% the number of employees may, however, grow slightly. Rail containers Other 4% 9% Goods of Estonian origin Source: Statistical Office of Estonia

Number of employed and wages % y-o-y 14 000 25 12 000 20 10 000 15 8 000 10 6 000 5 4 000 0 2 000 -5 0 -10 2001 2002 2003 2004 2005 2006 2007* Number of employed Average wage (kroons) Change in number of employed (r.s.) Change in wage (r.s.) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 1 600 20 1 400 1 200 10 1 000 0 800 600 -10 400 -20 200 0 -30 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 400 60 350 50 300 40 250 30 200 20 150 100 10 50 0 0 -10 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 46 Economic Survey of Estonia 2007

Furniture industry In Estonia, over 450 enterprises engage in furniture manufacture. In the years 2002-2007 production volumes at constant prices grew by about a sixth; more than two thirds of the output is exported. Output has grown thanks to exports but in recent years domestic demand has also grown continuously. In export markets competition with furniture manufacturers from China, Poland and other countries has become tighter. After an increase in the number of employees, the workforce has been slowly diminishing and now, by the enterprise statistics, they employ about 9,000 people. Due to the rapid increase in raw material prices, enterprises are actively modernising their technologies and equipment and thus, as a result of more efficient technologies, a decline in employment is expected. The largest companies in the furniture sector by their number of employees are located in Harju county and in SE- Estonia. In 2007, AS Tarmeko (pinewood furniture, manufacture of which came to an end at the end of the year, and soft furniture) and Flexa Eesti AS (children’s furniture) were the industry’s largest companies. The other larger furniture manufacturers are OÜ Twinset (soft furniture), Valga GOMAB Mööbel AS (solid wood furniture) and AS Standard (office furniture). AS Jalax is the largest manufacturer of metal furniture. Due to tight foreign competition, furniture % Share of sector in Estonian economy % 100 100 industry developments in 2007 were 79,5 80 66,1 80 characterised by modest sales growth and diminishing output. Investments increased 60 60 compared to 2006, and the employment decline 40 40 trend halted. 20 20 1,1 5,3 7,3 0 0 In 2007, sales of furniture industry increased by 3.5% Share in Share in Share of Share in Ratio to compared to 2006; output at constant prices was the value man. export in man. average same. Sales in the domestic market were supported by added industry sales industry wage fast economic growth in the first half-year of 2007, exports employ- the resulting increase in income and active housing ment construction. The industry had a 3% producer price Source: Statistical Office of Estonia index growth.

Export target countries Export has an important role in the development of furniture industry. In 2007, its share in sales 2 Latvia amounted to about /3. Sales in the domestic market have not grown as fast as export. Companies in the Germany sector have partly been influenced by tighter Norway competition from Asia and other new EU member Denmark states (Poland, Romania), due to which manufacture of mass products has moved away from Estonia. Sweden More than two thirds of the furniture produced in Finland Estonia was exported in 2007. The Nordic countries 0 10 20 30 40 50 were still the primary export market, taking in almost three quarters of export. Exports to Latvia increased 2006 2007 % by more than two times; Latvia rose to rank sixth Source: Statistical Office of Estonia among the sector’s export markets. The main export articles were, like before, bolstered seats with wooden mill EEK % y-o-y 6 000 Sales and exports 35 frame, furniture details and dining room and living 5 000 30 room furniture. 25 4 000 20 The furniture sector’s employment rate (together with 3 000 15 production not specified elsewhere – NACE 36) 2 000 10 increased by 2.7% in 2007, bringing the number of 5 employees to 9,200. Gross wage of the industry grew 1 000 - 0 rather fast (17.9%) but its growth rate was lower than 0 -5 the Estonian average. Costs grew faster than sales 2001 2002 2003 2004 2005 2006* 2007* revenues, as a result of which there was a slight Sales Exports decrease in total profit. Change in sales (r.s.) Change in exports (r.s.) Investments in fixed assets grew by more than 40% Source: Statistical Office of Estonia in 2007. 90% of all investments were made in purchase of machinery and equipment, construction and reconstruction of buildings and purchase of land. Compared to 2006, investments increased mainly on

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 47 account of construction and reconstruction of buildings and facilities. Main export commodity groups At the beginning of 2008, by the survey of the Estonian Institute of Economic Research, most of Other furniture the companies in this sector were optimistic about Wooden products short-term output growth and increase in export bedroom 26% orders. They also expected a growth in sales prices in furniture Seats the coming three months. The utilisation rate of 8% 38% production capacity in the industry was 67% at the Dining and beginning of 2008 (84% a year ago) and one fourth of living room furniture Furniture the companies intended to diminish their workforce 12% parts in the near future. 16% Goods of Estonian origin Source: Statistical Office of Estonia

Number of employed and wages % y-o-y 15000 40 10000 20 5000 0 0 -20 2001 2002 2003 2004 2005 2006 2007*

Number of employed Average wage* (kroons) Change in number of employed (r.s.) Change in wage* (r.s.) With production not specified elsewhere (NACE 36) Source: Statistical Office of Estonia

Value added, labour costs and productivity mill EEK % y-o-y 2 500 15 2 000 10 5 1 500 0 1 000 -5 500 -10 0 -15 2001 2002 2003 2004 2005 2006 2007* Value added Labour costs Total productivity growth (r.s.) Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia

mill EEK Investments of enterprises % y-o-y 600 50 500 40 30 400 20 300 10 200 0 100 -10 0 -20 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets Change in investments (r.s.) Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 48 Economic Survey of Estonia 2007

Construction The Estonian construction sector focuses to a great extent on the domestic market and, therefore, its development is mostly influenced by the overall economic development of Estonia. The construction market is more sensitive to changes than economy as a whole. In good times, construction volumes grow faster, and in bad times, they may even diminish. This has also happened in Estonia. The 1999 recession had a substantial effect on the construction market (mainly due to a decline in the construction of office buildings). In 2006-2007 an opposite trend took place as a result of the construction boom. Recent years have witnessed a rise in construction volumes of housing and facilities. Productivity (value added per employee) of the construction sector has risen together with the overall expansion of the sector but the rapid increase in employment in recent years has brought about opposite trends. The larger general construction companies are Skanska EMV AS, AS Merko Ehitus, AS YIT Ehitus and Koger ja Parterid. In road building, Teede REV-2, AS ASPI and AS Talter are the main contributors. Forecasts show that in long-term the construction market will grow more rapidly than economy on the average, although some more modest developments may take place from time to time. The development is backed by additional investments in the infrastructure and the quickly increasing demand for housing. The high growth arises mainly from increased productivity and, when more stable times come, employment numbers will drop to the level of earlier years. % Share of sector in Estonian economy % The construction market stabilised in 2007. Sales 100 150 and investments grew but not as fast as in 113,8 80 120 previous years. Construction activities outside Estonia gathered momentum. Construction 60 90 prices and the number and wages of employees 40 60 continued to grow. Significantly more residential 12,3 and non-residential buildings were given in use 20 30 7,9 but the number of construction permits for new 0 0 sites issued was smaller than in 2006. Share in value Share in Ratio to average added employment wage (r.s.) The sector performed works in Estonia and outside for 58.1 billion kroons in 2007 which at constant Source: Statistical Office of Estonia prices was 8.5% more than the previous year. In 2006, construction volumes had increased by 30%. % y-o-y Construction sector developments % y-o-y 15 50 With their own forces, the sector performed works 40 for 38.7 billion kroons. The growth rate of the 10 30 industry dropped to 9.5% and was inhibited by the 20 5 constantly growing construction prices. Regardless of 10 the stabilisation of construction market, net sales of 0 0 construction companies increased by 22.8% 2001 2002 2003 2004 2005 2006 2007* compared to 2006. In 2007, the sector built buildings for 26.8 billion and facilities for 11.9 billion kroons, Construction price index (left scale) being by 13.9% and 1.6% more compared to 2006. Buildings construction volume index (right scale) 22.4 billion kroons were invested in repair works in Facilities construction volume index (right scale) 2007, surpassing the level of 2006 by 13% at current Source: Statistical Office of Estonia prices. In spite of the overall deceleration of economic th Number of employed % y-o-y 100 000 35 growth in 2007, construction volumes increased in 30 Estonia and abroad. Construction companies 80 000 25 performed works for 2.3 billion kroons in foreign 60 000 20 countries, which is by 69% more at current prices 15 than in 2006. Construction abroad constituted 4% of 40 000 10 all construction works; most works were carried out 5 20 000 in the neighbouring countries. The average 0 0 -5 construction volume of the member states of the EU 2001 2002 2003 2004 2005 2006 2007* rose by 4% in 2007; Estonia ranks seventh by growth Number of employed by labour survey rate among all member states while Romania is the Number of employed by enterprise data first. Change in number or employed (r.s.) Change in number of employed in enterprises (r.s.) Construction companies built for their own purpose Source: Statistical Office of Estonia for 156 million kroons which is 102% more than a year ago. They invested the most in purchase of machinery and equipment and construction and

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 49

reconstruction of buildings and facilities − by 38% Wages % y-o-y and 36% more than in 2006. 15 000 30 Construction price index increased by 2.4 percentage 10 000 20 points compared to 2006, to the level of 12.7%. 5 000 10 Prices of construction increased due to the price increase of all inputs needed for construction. Labour 0 0 cost, as before, rose the most (22.1%), followed by 2001 2002 2003 2004 2005 2006 2007* the price of building materials (8.3%) and services by construction machines (8.6%). However, the price rise was slower than in 2006. Average wage (kroons) Change in wage (r.s.)

2007 was a less successful year for the producers of Source: Statistical Office of Estonia building materials than expected. Production grew in respect of building blocks and cement. Production of mill EEK Construction works with own forces % y-o-y other materials was lower than in 2006. Sales of 50 000 40 building materials grew by 71.1%, amounting to 40 000 6.8 billion kroons. Building materials became more 30 expensive in all commodity groups but the price 30 000 increase was the highest for mastics, roof covering 20 materials, sanitary engineering equipment and lifts. By 20 000 10 the market barometer, the prospects of building 10 000 materials producers are rather good; there is demand 0 0 for their products, and the increase in selling prices 2001 2002 2003 2004 2005 2006 2007* and the number of employees in the sector is expected to be the same as in previous year. Construction works abroad Construction works in Estonia As regards construction machines, the price per Construction works in Estonia, % y-o-y working hour of bulldozers and excavators increased Source: Statistical Office of Estonia the most (by 20.5% and 15.7%, respectively). Investments of enterprises In 2007 the number of people employed by the mill EEK % y-o-y 2 500 70 construction sector grew by 28.8%. As a result of an 60 2 000 inflow of labour, the industry rose to rank third 50 among all economic sectors in terms of the number 1 500 40 of employed. Labour moved to this sector due to the 30 growing construction volumes and the rapid increase 1 000 20 10 in wages. In 2007, gross wage in the construction 500 sector went up by 28.5%, exceeding the average 0 Estonian wage by 13.8%. The average wage of the 0 -10 construction sector competed mainly with those in 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets mining, energy and water supply sectors. Change in investments (r.s.) In 2007, construction volumes in Estonia grew by Source: Statistical Office of Estonia 9.8%, being more than twice lower than in 2006 % y-o-y (23.4%). This is, however, a positive result. In 2006, 2,0 Labour costs productivity 6 growth was achieved mainly as a result of the 4 construction of new buildings and facilities but in 1,5 2 2007 mainly buildings were constructed. Construction 1,0 volumes growth compared to 2006 was considerably 0 lower both in terms of buildings and facilities; the 0,5 -2 volumes built in Estonia with the companies’ own forces were 13.1% and 0.6%, and in 2006 39.8% and 0,0 -4 13.4%, respectively. The Estonian Register of 2001 2002 2003 2004 2005 2006 2007* Buildings issued 249 building permits in 2007, most Labour costs productivity based on value added of them for construction of roads and streets and Change in productivity (r.s.) communication and electricity lines. 145 new facilities Source: Statistical Office of Estonia were given into use, the major part of them being communication and electricity lines. Vigorous construction of buildings continued in 2007 regardless of the stabilisation of demand in the real estate sector. Residential space ranked first, followed by industrial and commercial buildings.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 50 Economic Survey of Estonia 2007

construction permits were issued for 1,004,400 m 2 of % Housing loan interests and residential space 2 th m residential space. 12 given into use 600 10 500 For the construction of non-residential buildings 8 400 2,554 permits were issued in 2007. As a result, 6 300 0.13 million m2 of non-residential area will be created 4 200 corresponding to 0.8 million m3. The number of 2 100 permits issued fell by 1.7% compared to 2006. The 0 0 largest number of permits were issued for the 2001 2002 2003 2004 2005 2006 2007* construction of new office, commercial and storage buildings. Area of residential space given into use Loan interests given to private persons In 2007, 1,097 non-residential buildings were given Source: Bank of Estonia, Statistical Office of Estonia into use, their total area being 917,700 m2 and total space 5.9 million m 3, all in all 473 buildings less than The slowing down of the construction market growth in 2006. However, the area and space of non- due to the stricter loan conditions, interest rate residential buildings grew by 2% compared to 2006. increase and the ever growing construction and Mostly new industrial and commercial space was property prices had an impact on the demand in the given into use. Non-residential buildings were mainly residential space market in 2007. Also, quality has completed in Ida-Viru, Harju, Tartu and Rapla become an increasingly important factor in counties. consumers’ preferences. New development projects are not so extensive any more because companies The survey made by the Estonian Institute of have not been able to find owners to the existing new Economic Research showed that construction residential rooms as fast as in 2006. In 2007, 7,232 companies’ prospects and confidence dropped in units of new residential space were built and given 2007. Lack of labour force was still pointed out as the into use, their total area being 574,500 m2. The main bottleneck. Confidence about the future had number of residential rooms permitted to take into fallen by the end of 2007 primarily due to the use was by 2,164 (by 41.4%) more than in 2007. 3-5- decreasing number of orders and the constantly storey apartment houses were the main type of raising construction prices. Companies were residential buildings. Residential space grew the most somewhat more positive about lack of building in Tallinn, Tartu and Pärnu and municipalities materials and machinery, as well as funding surrounding these cities. opportunities. Under the conditions of the dwindling real estate and construction boom, 8,925 construction permits were issued in 2007 – 31% less than a year before. Residential construction will, however, continue;

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 51

Priit Sauk: 2008 and 2009 will be the survival years Priit Sauk, chairman of Board of AS YIT Ehitus, says that it had been almost impossible to predict the extraordinarily rapid change in the market situation that took place in 2007. However, massive discount campaigns had been by all means justified.

What was the year 2007 like for YIT Ehitus? Which of your hopes and expectations were fulfilled, what were the surprises? The year 2007 may be considered to be an ordinary year for YIT Ehitus. We fulfilled and even surpassed our sales target of one billion kroons. The fallback in the second half-year in residential area sales was certainly a surprise.

How much were you able to predict the events that took place in the property and construction market in 2007? It was difficult to foresee such a rapid change in the market situation, especially because the residential market almost came to a standstill. Also, subcontracting prices stopped increasing in the second half-year of 2007 and everything points to their decline in 2008. Photo: Äripäev YIT Ehitus was one of the first developers to start major discount campaigns. How much did What are the goals of YIT Ehitus for 2008? it justify itself? Our plans are still ambitious. We hope to reach the It was our thoroughly considered choice and has sales figure of about one billion kroons this year. In resulted in success. The number of apartments sold fact, the years 2008-2009 may be survival years in during the four first months of 2008 was higher by terms of the whole construction and development almost a half compared to the year of 2007. market.

What are the biggest challenges that the construction and real estate sector will face in 2008? Getting new orders will certainly be a major challenge for all builders. Competition has become tighter and, due to the diminishing subcontracting prices, it is difficult to predict sales prices and properly assess the risks to be taken. Developers still have the problem of completed but unsold sites. Overheating now affects, in addition to the residential market, the office space market. Thus, office buildings to be completed in the near future will probably not quickly attain a 100% accommodation rate.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 52 Economic Survey of Estonia 2007

Real estate Real estate sector includes real estate development, purchase, sale and renting, as well as real estate management. In addition, many real estate companies provide brokerage services and real estate valuation service. More than 6,000 companies in this sector have been registered in the Commercial Register and, by the data of the Statistical Office, more than 4,000 of them are active. The sector employs over 14,000 persons. Companies with the largest turnover engage in real estate development and rental of their own property (e.g. owners of shopping centres) but there are also many small companies in the market. Companies employing the largest number of people are those active in real estate management (e.g. OÜ BREM Kinnisvarahaldus and OÜ Minu Vara, Arkaadia Halduse AS). The largest real estate agencies are OÜ Kinnisvarabüroo Uus Maa, AS Arco Vara Kinnisvarabüroo, AS Pindi Kinnisvara, and BREC Kinnisvara AS. Many small developers emerged as a result of the construction boom but, as the market situation deteriorates, they may leave the market. Provision of management services is growing. It is predicted that the sector’s employment level will remain at the current level in the coming years.

% Share of sector in Estonian economy % 100 100 80,5 80 80 In 2007, the extremely rapid development of the 60 60 real estate sector slowed down. The number of transactions and investments dropped due to 40 40 lower demand, especially in the residential 20 11,3 3,1 20 market. Weaker demand has increased the stock 0 0 of unsold properties of real estate companies and Share in value Share in Ratio to average they have more projects offered for sale and added employment by wage unfinished projects. However, no significant enterprise statistics decrease in value took place in 2007. The Source: Statistical Office of Estonia confidence of real estate companies has started to drop but, regardless, the number of employees th Number of employed % y-o-y has grown all the time. The real estate and 60 000 35 30 construction boom is coming to an end and the 50 000 25 development of these sectors is stabilising. The 40 000 20 markets are re-orientating from housing projects 15 30 000 which so far were preferential, to non-residential 10 20 000 5 property and civil engineering (infrastructure). 0 10 000 -5 The real estate market was moderately active in 2007, 0 -10 although the number of transactions dropped by 2001 2002 2003 2004 2005 2006 2007* 13,000 or 20.8% compared to 2006, coming down to Number of employed by labour survey the level of 2004. The total number of notarial Number of employed by enterprise data purchase-sale transactions concluded in 2007 was Change in number of employed (r.s.) 49,788, for the value of 58.5 billion kroons. Most of Change in number of employed in enterprises (r.s.) the transactions were real estate contracts (49,464) Source: Statistical Office of Estonia but there were also 324 contracts concerning right of superficies. Since 1 January 2007 no data is gathered Wages % y-o-y for sales transactions with movable assets because it 12 000 40 is not possible to enter into transactions concerning 10 000 30 8 000 movable property since the end of 2006. Although 6 000 20 the number of transactions in 2007 fell considerably 4 000 10 compared to 2006, the average value of transactions 2 000 0 0 stayed on the same level. 2001 2002 2003 2004 2005 2006 2007* By enterprise statistics, value added of property activities and rental at current prices rose by 4.5% in 2007, the reason being the overall slowing of Average wage(kroons) Change in wage (r.s.) economic growth, changes in the residential market and slowing down of real estate investments growth. Source: Statistical Office of Estonia The sales revenue of real estate companies grew slower than the costs. Labour costs increased by 25.6% compared to 2006 and total productivity based on value added dropped by 13.5%. Also, investments of real estate companies in fixed assets fell by 4.5%.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 53

The sector’s workforce increased in 2007 in spite of Labour costs productivity % y-o-y the slowdown of its growth rate. The number of 8 60 employees grew by 5.5% and amounted to 3.1% of all 7 50 the employed. Average wage increased somewhat 6 40 slower than in other sectors, its growth amounting to 5 30 20.9%. 4 20 3 10 The number of transactions fell mainly due to a 2 0 decrease in sale transactions for apartments and 1 -10 residential houses. The number of transactions 0 -20 concerning apartments was 27,915 and the number of 2001 2002 2003 2004 2005 2006 2007* transactions for immovable property with residential Labour costs productivity based on value added houses 6,256, which was by 16% and 38% less than Change in productivity (r.s.) in 2006, respectively. The total value of sale Source: Statistical Office of Estonia transactions concerning apartments amounted to 25.7 billion kroons, dropping by 16% compared to Total number and average value of transactions th kroons 2006 but still surpassing the value of transactions in 70000 2005. It shows that the real estate market is not 1200 60000 cooling down completely but that price growth is 1000 50000 stabilising. 40000 800 The number of transactions for non-residential 30000 600 premises amounted to 2,233 in 2007, being about the 20000 400 same as in 2006. The value of transactions was also 10000 200 the same, dropping only by 1%. However, non- 0 0 residential premises are mainly rented and 69% of 2001 2002 2003 2004 2005 2006 2007* such rental contracts were concluded in Tallinn. The Total number of transactions largest number of transactions was made for office Average transaction value (r.s.) space, the average price for square metre being 153 Source: Statistical Office of Estonia kroons per month. Rental prices for office space rose mill EEK Investments of enterprises % y-o-y continuously but the increase will probably come to a 12 000 100 halt in 2008 when new office space due to active 10 000 80 construction activities will be given into use. This 8 000 60 kind of construction is active because companies 6 000 40 prefer now to develop high quality office space 4 000 20 instead of residential property. Also, the market 2 000 0 becomes more and more renter-based, as a result of which rental pricing policy has to adjust. 0 -20 2001 2002 2003 2004 2005 2006 2007* Commercial and service space had the highest rental Investments in fixed assets prices. These prices have risen constantly. Since the Change in investments (r.s.) growth rate of retail trade has slowed down due to the slower growth rate of economy it may be Source: Statistical Office of Estonia assumed that the rental prices for commercial and The number of transactions concerning the right of service space will stabilise. superficies dropped by 13.1% compared to 2006 but Although there was a general increase in rental prices their value increased by 39.2% in 2007, those of storage and production buildings (total value 847 million kroons). Transactions related fell by 1.5%. The reason is that only smaller buildings to the right of superficies constituted 0.6% of all sale are built for general renting, whereas larger ones are transactions. tailor-made for renting for cheaper prices for a specific company. In the future, however, some The number of transactions fell in all counties except growth in rental prices is forecast, especially due to an Jõgeva county where it even rose slightly. The decline increase in land tax. was the most noticeable in Saare and Rapla counties, by 32% and 29%, respectively. Real estate market is In 2007, 12,060 transactions with unimproved still the most active in Harju county and Tallinn; the building land were made, their total value amounting number of transactions is the highest there. In 2007, to 10.4 billion kroons. It was by 40% less than in 52.2% of all transactions were concluded in Harju 2006. The average value of a sale transaction county, their total value amounting to 44 billion concerning an unimproved immovable dropped due kroons. Most of these transactions were related to to an increase in the market share of movable purchase and sale of residential space and apartment property in cheaper regions. ownerships, followed by transactions with unimproved immovables.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 54 Economic Survey of Estonia 2007

In Tallinn, as before, the centre and Pirita area were The property investment market grew in 2007. the most expensive districts, with price per square Foreign investors are very interested in the Estonian metre of 34,500 and 33,100 kroons, respectively. The market in spite of its smallness; thus, its productivity highest increase in average sales price took place in has almost reached the level of the Nordic countries. the northern part of Tallinn (by 26.3%); this district is This is mainly due to searching for markets among now ranking third after the centre and Pirita. the new EU member states, the favourable local tax Prices of transactions for apartments in other regions system and interest towards the Estonian commercial of Estonia continued to grow but not as much as in and logistics sectors. 2006. In 2006, the average price growth for 2- and 3- Surveys show that the outlook and confidence of room apartments in Tartu and Pärnu amounted to property developers fell compared to 2006. The 66%; in 2007 prices dropped by about 5.6%. This turnover of real estate services dropped because the price increase does not include, for the sake of demand dropped. No growth in demand is predicted, reliability of statistics, the extraordinary price decline rather, it will probably remain at the same level for in one segment – the price of 3-room apartments in the next three months. Companies do not think that Pärnu dropped by 32% on the average. The average finding labour is a problem. No special price increase price of a 2-room apartment in satisfactory condition for real estate services is forecast. However, the in Tartu and Pärnu amounted to 16,875 and general confidence indicator for real estate companies 18,767 kroons per square metre, respectively. has dropped by 12.5 percentage points compared to In 2007, the average rental price per square metre in 2006, probably due to a decrease in the number of the residential districts in Tallinn (without utilities) transactions and the general slowdown of the sector. amounted to 135 kroons. Rental apartments were the most in demand in the centre. The average rental price in Tartu grew, exceeding 100 kroons per square metre. Rental price for Pärnu apartments also rose and almost doubled, amounting to the average of 82 kroons per square metre by the end of 2007.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 55

Domestic trade The commercial sector comprises retail and wholesale businesses (also enterprises engaging in sale of motor vehicles and their parts and enterprises selling motor fuel). Commerce is an important industry, giving 15% of the total value added. About 90,000 people, i.e. 13% of all the employed, work in the commercial sector. In the past five years, the retail market has witnessed an upsurge, many new large outlets and shopping centres have been built (Viru and Ülemiste shopping centres, the new department store in Tartu, Tartu Lõunakeskus, Järve shopping centre, expansion of the Kristiine shopping centre, Mustamäe shopping centre, Mustakivi shopping centre Centrum, etc.). Foreign chains such as Maxima, Prisma, Rimi Eesti Food AS (including the Säästumarket chain), have undergone rapid growth. Chains based on the Estonian capital also develop vigorously (ETK, Selver, Comarket, OG Elektra, etc.). Chains are moving outside Tallinn. The market share of the largest retail chains has grown year by year, enabling them to save on marketing and logistics and to be more efficient. It is predicted that the sales growth in the commercial sector will slow down in the coming years due to the cooling of economy and the dropping purchasing power of the population. As a result, value added will fall. The expansion of retail chains will increase workforce in the bigger outlets, while small companies are driven out of the market. Also, although employment in the retail sector may increase, it is expected that in long-term, the workforce and the number of enterprises in the wholesale sector will diminish. In the second part of 2007, the purchasing power Share of commercial sector in Estonian % of the population continued to grow in spite of economy the decelerating economic growth. The feared 100 backlashes concerning the retail sector did not 80 95,6 take place. Retail sale volumes grew by 14% 60 (without sales of vehicles). However, the sales 40 growth of retail trade was by 6 percentage points 15,1 20 13,4 slower than in 2006. The sales revenue of retail vehicle businesses increased by 26% 4 (at current 0 prices). Turnover growth was supported by a Share in value Share in Ratio to average rapid increase in the population’s income and added employment wage inflow of loan money, in spite of deceleration of Source: Statistical Office of Estonia borrowing growth rate in Q4. Tallinna Kaubamaja group was one of the most successful companies in 2007. The group’s figures for In 2007, the growth rate of retail trade slowed slightly department stores, supermarkets and car sales compared to 2006 but exceeded that of 2005 by 1 exceeded average figures of the sector and increased percentage point. Sales results showed that retail trade its profit considerably. In addition to a growth in sale had a strong hold in spite of the general slowdown of of foodstuffs and primary consumer goods and economic growth at the end of the year. fashion goods, the group started a new successful The larger retail chains continued to grow in 2007. activity, car trade. Establishment of a chain of beauty Currently, five large retail chains give most of the shops was another new field of activity. In February retail turnover of unspecialised food stores; this trend 2008, the group bought a footwear chain of 18 is continuing. Selver, Maxima, ETK Group, Rimi outlets operating under the trademark of Suurtüki (incl. Säästumarket) and Prisma were the most and Stepper. By this acquisition, the group pursues its successful among sellers of primary consumer goods. active expansion strategy. Its Selver chain is another Earlier, shopping centres focused on regions with a business expanding outside Estonia; it will open its larger number of population but now they are also first outlets in Latvia in 2008. The aim of Selver chain present in smaller towns. is to grow and increase its market share in the retail sector by opening new supermarkets in county New commercial space is being built vigorously in centres and smaller towns where the number of Estonia; however, in 2007 less commercial space was modern outlets is still small. The group has, however, built than in 2006. In 2007, permits for use were promised to pay more attention to raising the granted to about 50% more commercial and catering efficiency of its outlets which, under the conditions buildings than in 2006 but their area was slightly of the slowing economic growth, is the right smaller. Permits for use were given to 131 buildings, approach. their total area being 174,000 m2, which is by 3% less in terms of area than in 2006.

4 Also sale of cars sold by leasing; retail sales of cars does not include leasing.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 56 Economic Survey of Estonia 2007

doors in Pärnu. The new supermarkets turned out to th Number of employed in commercial sector96,8% y-o-y 100 88,1 15 be very successful because, in addition to a wide 80 9 assortment, they also offer cheaper prices. So far, 60 3 Maxima has opened outlets in places where there 40 -3 were no shops at all. Now they have a new approach 20 -9 and will open outlets also in places where 0 -15 competition is tight. The scarcity of salespeople and 2001 2002 2003 2004 2005 2006 2007* cash register personnel has not affected the expansion Number of employed by labour survey of the group. Maxima opened many outlets in smaller Number of employed by enterprise data towns of Estonia where it was possible to find the Change in number of empl. by labour survey (r.s.) necessary workforce. Change in number of empl. by enterprise data (r.s.) Rimi started to adjust its hypermarkets to its new Source: Statistical Office of Estonia concept in 2006 and continued to do so in 2007. The year was successful also for ETK – outlets were Wages in commercial sector % y-o-y renovated and they now have the same appearance. 12 000 20 10 000 15 Shops were less concerned with lack of labour in the 8 000 second half-year because the basic wage of sales 10 6 000 personnel was raised and employees moved from one 5 4 000 chain to another. Increase in labour costs was the 2 000 0 biggest problem. Labour costs grew by one 0 -5 percentage point faster than sales revenues, the 2001 2002 2003 2004 2005 2006 2007* reason being the rapid wage increase. Real wage rose by 12% in 2007, being by one percentage point Average wage (kroons) slower than the growth rate of the average Estonian Wage real growth (r.s.) real wage. In earlier years growth of revenues was Source: Statistical Office of Estonia higher than growth of labour costs but in 2007 profits grew slower than labour costs. Thus, some outlets mill EEK Investments of enterprises % y-o-y 8 000 45 paid their workforce higher salaries on account of their profit. 6 000 30 By enterprise statistics, the number of employees in 4 000 15 the commercial sector grew by 4.9% 5. It grew mainly 2 000 0 in larger companies employing over 50 people (by almost 12%). Workforce in companies with 1– 0 -15 20 employees increased by only 1%, although the 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets number of such companies grew by 17%. By the Change in investments (r.s.) labour force survey, the number of the employed fell Source: Statistical Office of Estonia by 0.7%. Total employment in Estonia increased by 1.4%. The labour force survey includes also Value added, labour costs and productivity Estonians working abroad for less than one year. bn EEK % y-o-y 30 30 Investments in commerce increased by 40%, 25 amounting to 7 billion kroons. Investments in 20 20 purchase and reconstruction of buildings and facilities 15 10 grew the fastest (doubled), demonstrating positive 10 expectations of companies for the future. 0 5 Investments in machinery, equipment and inventory increased by 7%. Investments grew the most in the 0 -10 subsector for motor vehicles and motorcycles 2001 2002 2003 2004 2005 2006 2007* Value added (1.8 times). Labour costs Labour productivity growth (r.s.) Profit margins fell by 1 percentage point in 2007 Labour costs productivity growth (r.s.) compared to 2006 (to 19%). The value added Source: Statistical Office of Estonia increment of the commercial sector dropped to 6% in 2007 due to lower demand (in 2006, it grew by 13%), In addition to Selver, Maxima increased its market being by 1.1 percentage points lower than the share in 2007, expanding aggressively. Their turnover Estonian average. increased by 1.5 times. The group opened new shops in smaller places which so far seems to be the right strategy. In addition to Maxima X-type outlets Maxima XX supermarkets were opened and in spring 5 2008 the first Maxima XXX hypermarket will open its Enterprise statistics does not include self-employed persons.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 57

Sales revenues grew fast, resulting in rapid growth of industrial goods had a profit of 0.5 billion kroons. productivity based on net sales – by 20%. Unspecialised industrial goods stores showed a profit Productivity based on value added and the data of of 0.4 billion kroons. labour force survey (including self-employed persons) The number of workforce in companies employing 0- increased by 6.7% compared to the previous year. By 20 people fell by 7%. Companies employing over 100 the enterprise statistics labour productivity based on people had 47% of the total labour of the retail value added increased by 13%. sector, exceeding the 2006 figure by 3 percentage All in all, 2007 was a successful year for the points. As a result of the expansion of large commercial sector – sales grew rapidly and all companies, the market share of retail companies with activities of the sector showed a profit. more than 100 employees increased by 2.3 percentage points in 2007, reaching 59%. Retail trade The average number of companies in retail trade was In 2006, the turnover of the retail sector grew by 18- 3,664 in 2007, being by 1.8% more than a year ago. 22% depending on the month; in the last months of The number of enterprises with more than 100 2007, however, the growth did not even reach one employees increased the most, by 10%. The number tenth. Retail sales amounted to 65 billion kroons of of businesses employing 10-19 people decreased by which 53.6 billion kroons were attributable to retail 7% and their workforce diminished by 10%. Small trade companies. Total growth amounted to 14% businesses are forced to close down due to the rapid compared to 2006. Retail sales, including sales of cars, price increase, tighter competition and declining increased by 15% 6. The retail sales of enterprises profitability. engaging in sale of motor vehicles, excluding sale of Shopping centres were still the most prevalent type of cars by lease, grew by 16% at constant prices. The retail businesses in the commercial space market. growth of sales of enterprises engaging in sale of Their success allows many of them to plan expansion. motor vehicles, reflecting both retail sales and lease, Several will undertake expansion in the near future. was 26% compared to 2006. In 2007 there was still high demand for commercial In retail trade companies sales revenues grew by 18%. space which exceeded the offer. The most valuable Retail sales grew the fastest in large companies and in commercial space was in well operating and attractive those that had joined chains; additional turnover shopping centres. As a result of the expansion of came from the opening of new stores. The net sales large chains smaller shops will find it increasingly of companies employing over 100 persons increased difficult to cope and will be forced to wind up. by 23% and that of businesses with less than 10 employees by 10%. Sales revenues in companies Investments of previous years in commerce employing 10-19 people was by 1% lower than in contributed significantly to the development of the 2006. In almost all size groups labour costs grew sector. The number of retail outlets of chains and faster than sales revenues. Labour costs in companies sales shows a continuous increase. Investments in employing over 100 persons grew by 34% and in retail trade grew by 40% compared to 2006. Almost companies with 0-9 persons by 10%. In companies half of the total investments were made in the with 10-19 people labour costs increased by 9%. In construction and reconstruction of buildings and the latter group, the number of businesses dropped facilities, 20% in purchase of machinery, equipment by 7%. By enterprise statistics, due to the faster and inventory and 16% in purchase of land. growth of labour costs, the share of labour costs in Investments almost doubled in enterprises employing the created value added increased by 0.6 percentage 10-19 persons and increased by 1.6 times in those points. employing more than 100 persons. Profit in the retail sector grew by one quarter Three quarters of the retail sector’s investments were compared to the previous year. Total profit and net made by companies employing over 100 persons. It sales ratio was 4.7%, while the sales margin was 29%, shows that the investment activity of large companies exceeding the margin of 2006 by one percentage has not dropped. Investments in the construction and point. Profit increased the most in businesses reconstruction of buildings by large companies grew employing more than 100 people (40%) and those the fastest (by 4 times); last year they had made their employing fewer than 9 persons (47%). The total largest investments in purchase of land. Investments profit of the retail sector equalled 3 billion kroons. Of in construction and reconstruction amounted to 56% this, 0.7 billion was given in equal shares by outlets of their total investments. selling furnishings, home appliances, hardware and Outlets of industrial goods showed the fastest growth building materials, and unspecialised food stores. of sales in 2007 (19%). As the income of the Outlets specialising in textile products, wearing population grew, a larger share of it was spent on apparel and footwear and other stores specialising in industrial goods.

In 2007, purchase activity was especially high as regards textile products, wearing apparel and 6 It does not include sale of cars by lease.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 58 Economic Survey of Estonia 2007

allowing people to buy new high quality clothes and Retail sale by fields of activity footwear. The sales of companies representing 4,8% 5,2% 5,7% expensive brands grew vigorously; new brand outlets and departments were opened. 5,7% 40,8% 12,8% Other specialised industrial goods outlets also showed an increase in sales, exceeding that of 2006 by 36%. 13,6% Sales were supported by the active selling of 11,4% computers and other IT products, travelware, photography goods, books and other products. Foodstuffs In the second half-year sales growth decelerated in Motor fuel stores selling home appliances, hardware and building Home furnishings and appliances, ironware, building materials materials but the growth rate was still rather high, 17%. The growth rate dropped due to the cooling of Other retail trade the real estate and construction market that inhibited Motor vehicles and parts the sales growth of building materials and furniture. Retail sale in unspecialised industrial goods stores 2007 was a successful year for car dealers because the Pharmacy and cosmetic products car market is in close relationship with the general Textile products, wearing apparel and footware economic situation. Sales growth figures of motor vehicles and spare parts were the same as in 2006 (20%). Growth was achieved on account of sale of Source: new cars. Registration of used cars fell by 15%. The net sales of companies engaging in sale of motor Sales revenue at current prices vehicles increased by 26% in 2007 of which the net bn EEK % y-o-y sales of motor vehicles and their spare parts 200 40 constituted 29% and that of motor fuel 6%. Sale of 150 30 motocycles increased rapidly; the number of new 100 20 registered motorcycles increased by 1.6 times. Some car dealers forecast growth figures also for 2008. But, 50 10 when the economic situation deteriorates, car dealers 0 0 are the first to feel it. This was the situation in 1998 2001 2002 2003 2004 2005 2006 2007* when the sales of motor vehicles and spare parts fell Retail trade by 30% but the total sales of retail companies still Motor vehicles and fuel increased by 13%. When the situation forces people Wholesale to change the structure of spendings, any plan to buy Change in retail turnover (r.s) a new car is considered more carefully. Ch. in retail turnover of motor vehicles and fuel (r.s) Change in wholesale turnover (r.s) Car selling companies invested 1.2 billion kroons in Source: Statistical Office of Estonia 2007, by 1.8 times more than in 2006. The largest investments were made in car selling centres – 1 billion kroons (growth two times). bn EEK Sales % y-o-y 200 40 35 Because of tight competition, fuel companies were 150 30 forced to keep their trade margin on the 2006 level 25 and, in spite of a 15% growth in turnover, their profit 100 20 dropped by 2%. 15 The sales of food stores grew by 9%. They gave 43% 50 10 of the total sales growth of the retail sector. 5 Consumers showed a preference to domestic high 0 0 quality food because their income had grown. At the 2001 2002 2003 2004 2005 2006* 2007* Retail trade with car trade** end of the year, growth was halted by the high food Wholesale prices. Large commercial chains were still more Retail sale change at constant prices (r.s.) successful than the average. Larger outlets are a one- Wholesale change at current prices (r.s.) stop shop for the consumers and thus, smaller shops ** Sale of cars without lease. lose customers and are forced to close. It is predicted Source: Statistical Office of Estonia that the price rise of foodstuffs will continue in 2008 footwear. These outlets increased their sales by one due to the constantly increasing raw materials but its third. The sales growth of wearing apparel and growth rate should be lower than in 2007. The price footwear is attributable to the opening of new shops level in Estonia is strongly influenced by the global and departments, as well as campaigns of fashion market where the prices of dairy products, grain and goods and discounts. Also, rapid increase in salaries fuel will probably stay high. However, food trade is and high employment contributed to sales revenues, sustainable and should not experience extensive

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 59 depression because consumption of food is rather Wholesale stable and is not much affected by economic growth. The growth rate of wholesale companies sales was Cooling of the Estonian economy will affect trade two times higher in 2007 than in 2006. Wholesale at and the growth rate of retail trade will slow down in current prices grew by 30%. Wholesale companies 2008. This has already been proved by the first and enterprises engaging in sale of motor vehicles and months of the year. People have become more motor fuel had 179 billion kroons worth of wholesale careful in spending money and are more sensitive to business in 2007; of this, enterprises engaging in sale prices. The high level of consumption which partly of motor vehicles and fuel accounted to 36 billion has been achieved on account of loan money, and the kroons (growth 27%). Wholesale of fuel, metals, rapid price increase of some goods and services will building materials, chemical products and waste not allow to continue the real growth rate amounted to 82% and that of food, beverages and experienced until now. Confidence level of tobacco products to 12% of the sales growth consumers started to fall in Q4 of 2007. Prices grew increment. and the purchase power of inhabitants dropped, resulting in lower growth rate of the commercial % y-o-y Retail trade sales volume index sector. Experiencing a decrease in their purchase power, consumers first give up expensive home 30 appliances, good cars and other expensive goods. 20 Opinions of consumers and commercial businesses gathered by the Estonian Institute of Economic 10 Research also point to a slowdown of sales. In 0 December 2007, confidence indicator in the -10 commercial sector was +5; this is by 9 percentage 2001 2002 2003 2004 2005 2006* 2007* points lower than at the same time in 2006. The Total retail trade Foodstuffs confidence indicator of consumers fell to the minus Industrial goods Motor vehicles, fuel side already in August 2007 (-2). In December, it was Source: Statistical Office of Estonia already –10, having been +7 at the same time in 2006. In March 2008 the outlook had improved and the % Contribution to retail turnover balance of sales and orders showed growth for the 25 growth by field of activity coming three months which was, however, lower 20 than a year ago and indicates a further deceleration of 15 sales growth. The beginning of Q2, however, showed 10 an increase in the consumption activity of the 5 population. 0 2001 2002 2003 2004 2005 2006* 2007* It is positive that many stores have an intention to expand and invest in 2008 and beyond – A-Selver, Unspecialised industrial goods outlets Rimi, Maxima, Prisma, Maksimarket, Konsum, Other industrial goods Comarket, Rautakesko, etc. Several shopping centres Textiles, wearing apparel, footware are already expanding their buildings: Home furnishings and appliances, ironware, etc. Rocca Al Mare shopping centre in Tallinn, second Foodstuffs Motor vehicles, fuel stage of Fama centre in Narva, Põhjakeskus in Rakvere, etc. In summer 2008, the commercial space Source: Statistical Office of Estonia in Tallinn at Mustamäe Road will be completed. The new Sakala centre currently under construction will % y-o-y Change in retail sector by size of enterprise add 6,500 m 2 of shopping area in central Tallinn. 30 20 All large chains and stores try to make their shopping area more modern and to open new outlets. Smaller 10 shops may find it more difficult due to higher prices 0 and the expansion of large chains. Because of the -10 continuing price rise they may not be able to compete 1-19 20-49 50-99 over 100 with the large chains that receive goods from Employees suppliers cheaper. Thus, the number of small shops Number of enterprises Number of employed will decrease and the share of large chains in turnover Sales revenue will increase. Source: Statistical Office of Estonia All in all, the turnover of the retail sector should grow in 2008 because the price rise will probably slow In 2007, wholesale of goods grew the most in down in the second part of 2008 and the comparison companies selling fuel, metals, building materials, base will be lower for the last months of the year. chemical products and waste (53%) and in those selling foodstuffs, beverages and tobacco products (32%).

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 60 Economic Survey of Estonia 2007

Sales of food, beverages and tobacco products had The number of companies in food wholesale stayed not grown for several years and had even dropped in on the level of 2006 and the workforce grew by 2%. some years, thus the comparison base was favourable Labour costs increased, due to the pressure on wages, in 2007. by 18%. Food wholesale companies invested by 52% less than in the previous year. As a result, their profit Wholesale by fields of activity increased by 1.7 times compared to 2006. Wholesale 5,0% 18,6% of motor vehicles and their parts grew by one third. Car sales were supported by the subsistence of 43,7% favourable lease conditions. Motor fuels wholesale 12,5% dropped by 11%, the reason being the very high 10,7% 9,5% comparison base of the previous two years. Due to the general cooling of the economic climate, Fuel, metals, building materials, chemical products and waste increasing prices and decreasing demand, the sales Foodstuffs, beverages and tobacco products growth rate of the wholesale sector will slow down in 2008. Smaller wholesale companies may find it Textile products, wearing apparel, footwear and home especially difficult and may not survive due to the furnishings extensive price rise. Machinery and equipment

Motor vehicles and parts

Other wholesale

Source: Statistical Office of Estonia

In general, wholesale companies had a profitable and efficient year in 2007. Their profit growth was, however, much lower than in 2006 (2.3%). Total profit increased only in wholesale of food, beverages and tobacco products (by 1.7 times) and in wholesale of fuel, metals, building materials, chemical products and waste (25%). The profit of other wholesale companies did not reach the level of 2006. Profit increased only in companies employing 10-49 people. Labour productivity based on value added and on net sales grew by 7.4% and 24%, respectively; in enterprises with over 100 employees labour productivity based on value added fell by 5% due to the decrease in sales revenues by 4%. Wholesale companies with more than 100 employees showed the weakest economic figures; in these companies, sales revenues, profits and labour productivity dropped. Employment grew by 1% and labour costs increased by 17%. Labour productivity increased the most in wholesale companies employing 0–19 persons - by 40%. Employment in this group of companies grew by 4% and the number of businesses by 25%. In general, costs increased by 1.8 percentage points faster than sales revenues (30.9%). Investments of the wholesale sector grew by one quarter compared to 2006, amounting to 3 billion kroons. Investments in companies with 1-9 employees grew the most (by 1.8 times). More than half of all investments were made in companies with 1-9 employees. Slightly more than half of the investments were made to purchase, construct and reconstruct buildings and facilities, one third to purchase means of transportation, machinery, equipment and inventory.

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Raul Puusepp: 2007 was a year of high growth and profits Raul Puusepp, chairman of board of Tallinna Kaubamaja, is of the opinion that the commercial sector needs to get used to a more modest growth phase after 2007, the year of high growth and profits.

What was the year 2007 like for Tallinna Kaubamaja? 2007 was a very good year for Tallinna Kaubamaja, in spite of the slowdown of economic growth at the end of the year. On the one hand, retail trade is strong (for several years in a row), but on the other hand, all enterprises of the group managed to grow much faster than the overall market. Last year showed again that all earlier strategic decisions for the development of the group and the smaller changes were correct and necessary, for example, moving into car business, opening of new Selver outlets or renovation of our department stores.

What were the main developments in 2007 in the commercial sector? In general, it may be said that 2007 was the year of “high growth and profits” for the commercial sector. Photo: Äripäev Investments were more modest but pressure on expansion and competition for good commercial space tightened. More attention was paid to What will be the challenges for the commercial efficiency, especially in the light of the growing labour sector in 2008? costs. The market adjusted. Consumers show more- All companies are probably most interested in how informed consumption decisions and wish to buy the consumers will react under the conditions of high quality goods; price is not the only argument any slower economic growth. The first months more in making a purchasing decision. corresponded to our forecast: the sales growth figure of the group had still two digits – thus, it may be said that we have reached a more stable growth phase. How much and how has Tallinna Kaubamaja adjusted to these changes? Recent news allow us to predict that construction goods chains will get more attention because, having We have not only well adjusted to the changes, we new owners, they may have more need to prove their have even contributed to some of the changes as the strength to each other. Also, competition will tighten largest retail group in Estonia in terms of balancing in the food retail business, especially among the market by establishing new modern shopping supermarkets and neighbourhood stores. centres. However, as an expanding company we must always take into account the constant wage pressure and lack of qualified sales personnel. What are the goals of Tallinna Kaubamaja for 2008? How much has the addition of car sales to the The group is expanding this year again, thus our main group’s business been justified? goals are related to expansion. We want to grow faster than the market, like we did last year. I am Starting car sales was a very useful step, proved by certain that this goal can be achieved. sales figures in black and while – annual growth amounted to almost 80%, this being more than we dared to predict. Kia is growing in Estonia and other Baltic countries, much as a result of the joint activities of the group.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 62 Economic Survey of Estonia 2007

Tourism The tourism industry’s share in the Estonian GDP and employment is 8%, considering also indirect impacts; tourism contributes considerably to export revenues. Estonian tourism industry is based to a large extent on inbound tourism but domestic tourism has also gathered momentum in recent years. The majority of foreign visitors are one-day visitors from Finland. However, the dependence on the Finnish market has diminished gradually. The consistent increase in overnight stays is also a positive trend. The main tourism magnet is Tallinn that concentrates most of tourism enterprises. But gradually the interest towards other areas has grown as well, supported by the emerging of health resorts, accommodation and other service facilities. The hotel and restaurant sector comprises more than 1,500 enterprises, most of which are small companies with fewer than 50 employees. The larger accommodation establishments are Reval Hotelligrupi AS, AS Sokotel (Hotel Viru), Astlanda Hotelli AS (Radisson SAS Hotel), Scandic Hotels Eesti AS, OÜ TLG Hotell (Tallink, Pirita TOP SPA Hotel), Meriton Hotels AS. The largest catering businesses are Premier Restaurants Eesti AS (McDonald’s) and Fazer Amica Eesti AS. About 60% of the workforce employed in the hotel and restaurant sector work in Tallinn; among other regions Tartu and Pärnu can be mentioned. The tourism market is forecast to grow also in the next years but the industry’s growth rate will slow down. As the supply increases, there will be more need for additional labour. Although the number of one-day visitors will fall, export revenues will still grow thanks to more foreign tourists staying overnight. As a result of the increased income of the Estonian population, a growth is expected both in domestic tourism and outbound tourism. Tourism industry came to a standstill in 2007 – In terms of growth, 2007 was the worst year in the the number of overnight stays increased slightly last ten years for the Estonian tourist economy. but, like in 2006, due to the higher demand by Estonian accommodation enterprises had a decline of Estonian tourists. New businesses entered the 3% in overnight stays of foreign tourists. The number market but it brought about a decline in of Estonian clients grew but the total number of economic results. In 2008, the Estonian tourism visitors increased by only 3.7% compared to 2006 sector will be affected by the worsening (the number of overnight stays increased by 2.9%). economic climate in Estonia and elsewhere. At the same time, supply of accommodation services However, joining the Schengen system might grew vigorously, as a result of which their capacity have a positive effect. was used to a lesser extent and costs grew faster than revenues. Catering enterprises and travel agencies % Share of sector in Estonian economy % 100 100 were in a better situation, backed by strong domestic demand. 80 63,1 80 In 2007, the value added created in the hotel and 60 60 restaurant sector was by 2.6% higher than in 2006 (at 40 40 constant prices). There was a decline in Q3 which is 20 9,1 3,5 20 the most important period for the Estonian tourism 1,6 business. Most of the income is earned in summer 0 0 months, helping to cover the losses accruing in the Share in value Share of Share in Ratio to off-season period. added* tourist employ- average services in ment* wage* Domestic tourism grew fast also in 2007. The exports * Figures reflect accommodation and catering establishments, number of people staying at accommodation not the whole tourism sector establishments and the number of overnight stays Source:mitte kogu Statistical turismisektorit Office of Estonia increased by 16%. This growth was only half of that of 2006 but still comparable to the trend of recent bn EEK Tourist services years. The number of foreign tourists dropped more 20 than the year before (-3%), mainly as a result of the 15 diminished number of Finnish tourists but also due 10 to a significant decline in the number of Swedish and 5 Russian tourists. On a positive note, Latvian, 0 Lithuanian and Norwegian tourists showed more -5 interest about Estonia. -10 -15 Developments related to health rehabilitation centres 2001 2002 2003 2004 2005 2006 2007 were similar to the general trends of the accommodation market. The number of beds Exports Imports Balance of tourist services increased by 4% but the number of overnight stays Source: Statistical Office of Estonia dropped by 5%. The demand among the Estonian

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 63

inhabitants grew but it could not balance the decline th Number of employed % y-o-y in the number of foreign guests. 25 45 20 The number of accommodated people dropped 30 mainly in Tallinn. In other regions developments 15 were mainly positive thanks to the increased number 15 of domestic tourists. However, it was noticeable all 10 0 over Estonia that there were fewer foreign tourists. 5

Although demand for accommodation services did 0 -15 not grow much in 2007, the number of beds offered 2001 2002 2003 2004 2005 2006* 2007* grew considerably. 2,900 new beds were added in Number of employed by labour survey 2007 to the existing ones (growth 9%). The increased Number of employed by enterprise data supply resulted in a decline in use of capacity which Change in number of employed (r.s.) dropped by 2 percentage points compared to 2006, Change in number of employed in enterprises (r.s.) reaching 36%. Figures below that level were Source: Statistical Office of Estonia characteristic of Estonian accommodation market Wages % y-o-y until 2004. Compared to European countries, 8 000 30 however, the figures concerning accommodation capacity use in Estonia are average or even slightly 6 000 20 better. 4 000 10 Accommodation establishments have been expanded and new ones have been built all over Estonia. Due 2 000 0 to the undergoing projects it can be expected that supply will increase in 2008. Due to the standstill in 0 -10 the market less investment activity may be predicted 2001 2002 2003 2004 2005 2006 2007* for some time. By preliminary data, more than a Average wage (kroons) Change in wage (r.s.) billion kroons were invested in hotels and restaurants Source: Statistical Office of Estonia in 2007, which is by 60% more than the previous year. The investments of accommodation mill EEK Investments of enterprises % y-o-y establishments stayed at the level of 2006 but those 1 200 80 of catering establishments rose by more than two and 1 000 60 a half times. The same developments took place in 800 40 2006. 600 20 Establishment of new enterprises and expansion of 400 0 the existing ones brought about new jobs. By the 200 -20 statistics of enterprises the number of employees at 0 -40 hotels and restaurants increased by more than 2,000 2001 2002 2003 2004 2005 2006* 2007* persons (more than 10%). It did not bring about a Investments in fixed assets significant pressure on wages – the average wage in Change in investments (r.s.) hotels and restaurants grew by 18% in 2007, a little Source: Statistical Office of Estonia less than the average Estonian wage. restaurant owners were not so optimistic. They The increased wages and workforce pushed labour expected demand to grow and also planned to costs up by about 30%. Total expenditure, however, increase their labour force but their assessments were grew at a rate that was twice as slow. Revenue growth not as high as the previous year. of accommodation enterprises was smaller than that of costs, as a result of which profits did not reach the Inbound tourism level of 2006. Profits of travel agencies dropped by a By a border-crossing survey 3.5 million foreigners tenth but the aggregate results of catering businesses visited Estonia in 2007. It was as many as before were very good and their profits almost doubled. To Estonia’s accession to the European Union (without compensate for the increasing costs, prices were regular border-crossers). Enterprise Estonia estimates raised more than in previous years. In that Estonia was visited by 1.9 million tourists staying accommodation establishments the average overnight overnight in 2007 which was by 2% less than in 2006. stay became by about 4% more expensive but the Almost 1.4 million foreigners stayed at paid prices of catering establishments rose by 11%. accommodation establishments, their number being The tourism businesses responding to a survey of the by 3% less than in 2006. In 2007, tourism was Estonian Institute or Economic Research at the generally growing in Europe. In this light it may be beginning of 2008 said that the situation was quite said that Estonia’s competitiveness has dropped. similar to that at the beginning of 2007 but predicted Supply of tourist services has increased in the other stronger growth in demand for the coming months Baltic countries, their flight connections have also compared to the same time in 2007. Hotel and

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 64 Economic Survey of Estonia 2007

Number of foreign tourists and overnight Finns staying overnight at Estonian accommodation th stays at accommodation establishments % y-o-y establishments was by 6% smaller than the previous 3 500 45 year. The number of Finnish tourists and overnight 3 000 stays has fallen to the level of 2003. Finns have now 2 500 30 less interest for Estonia because many have visited 2 000 15 Estonia several times and the rapid price increase in 1 500 Estonia has made it less attractive as a shopping 1 000 0 500 place. For the Finns, Estonia’s advantage is easy 0 -15 access but it is just not enough. 2001 2002 2003 2004 2005 2006 2007 Number of accommodated persons Demand dropped also in respect of several other Number of overnight stays important tourism partners, e.g. Sweden, UK and Change in number of accommodated persons (r.s.) Germany. The number of Russian tourists staying Change in overnight stays (r.s.) overnight in Estonia showed an upward trend at the Source: Statistical Office of Estonia beginning of the year but dropped to the minus side in April. The number of tourists from Latvia, Overnight stays of foreign tourists by Lithuania, Norway and Poland grew significantly. countries The number of overnight tourists fell mainly in larger Other Finland cities: Tallinn, Pärnu and Tartu. Demand in other countries 48,9% USA 13,2% regions stayed on the level of 2006. In Saaremaa, 1,8% accommodation of foreign tourists increased mainly Italy on account of the increased demand of Finnish, 2,1% Lithuania German, Swedish and Latvian tourists. 2,1% Latvia The number of foreign tourists using the services of 4,1% Sweden travel agencies was slightly smaller than in 2006. UK Norway 6,7% However, 85% of their clients were one-day visitors 4,8% 5,1% Russia Germany and their number increased by one tenth. Thus, 2007 5,1% 6,1% was a rather successful year for travel agencies. Growth was supported mainly by the growing Source: Statistical Office of Estonia demand of Finnish inhabitants for the services of travel agencies in the first three quarters of the year; improved. It may be a temporary backlash but the number of clients declined in Q4. competition among countries is very tight. The number of cruise passengers visiting Estonia was The decreased number of foreign tourists brought 295,000 in 2007, the number dropped by 6% about a decline in export revenues. The export compared to 2006. Most of the cruise passengers volume of tourist services amounted to 16 billion were from the USA but people from the UK, kroons in 2007 which is by 5% less than in 2006. By Germany, Spain and Italy also travel a lot by cruise estimations, foreign tourists’ expenses dropped by ships. It is expected that the number of cruise 8%, to 11.7 billion kroons; private and business passengers will rise significantly in 2008. The Port of travellers both consumed less in Estonia. The Tallinn has been notified of an increase in arrivals acquisition of Silja Line by Tallinn in 2006 increased (310 visits) and cruise companies have started to use sea transport revenues, as a result of which total larger ships. It is forecast that 380,000 cruise passenger transport services exports grew to a certain passengers will come to Estonia in 2008. extent in 2007 (by 3%). The number of foreign It is expected that the downward trend related to the tourists staying overnight at Estonian number of foreign tourists will stop or even slightly accommodation establishments dropped for the first reverse in 2008. The larger number of time in 2006; the decline was even greater in 2007. accommodation establishments is a supporting factor, The number of accommodated people and overnight enabling to meet the peak demand in summer. The stays was by 3% smaller than in 2006 and in health ferry connection between Tallinn and Helsinki has rehabilitation centres demand dropped by even a improved thanks to an additional number of ships tenth. The main reason was the decreased number of crossing all the year round. New ships are expected in holiday-makers but there were also fewer people on 2008. Some new air connections will be opened. The business trips (incl. conference tourism) and travelling strongest influence, however, is expected as a result for other purposes. As the length of stay at spas and of Estonia’s accession to the Schengen area, enabling health resorts is generally the longest, the decline in citizens of countries who need a visa, to visit Estonia the number of overnight stays was mostly caused by with Schengen visa. lower demand for health rehabilitation services. The number of overnight stays of Finnish tourists at Estonian accommodation establishments has fallen for three years in a row. In 2007, the number of

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 65

Domestic tourism Accommodation of Estonian inhabitants at th accommodation establishments % y-o-y The number of trips made by Estonians in Estonia 2 000 40 increased considerably also in 2007. The number of domestic tourists staying overnight at Estonian 1 500 30 accommodation establishments grew by 16% in 2007. 1 000 20 The number of people travelling for holiday, business and other purposes (health rehabilitation) grew. 500 10 Estonians constituted more than 40% of the customer base of Estonian accommodation 0 0 2001 2002 2003 2004 2005 2006 2007 establishments, thus, the growing demand among Number of accommodated persons Estonians helped to balance the dropping number of Number of overnight stays foreign tourists. Change in accommodated persons (r.s.) Change in number of overnight stays (r.s.) Demand grew almost all over Estonia and in some Source: Statistical Office of Estonia counties the number of people staying overnight increased by more than 20%. Large growth figures Main destination countries are partly related to the fact that the number of (share in all people sent on trips) accommodation establishments included in statistics Russia increased. Italy Turkey As in recent years, the growing domestic tourism was Germany not reflected in the results of travel agencies because Latvia people make most of their domestic trips on their Spain own. The number of domestic tourists serviced Greece during the first part of 2007 grew significantly but Sweden then declined and, as a result, the number of Egypt domestic tourists was the same as in 2006. Finland 0 5 10 15 20 By Saar Poll’s survey concerning domestic trips in 2006 2007 summer, travelling in Estonia has become more % active. The number of people on day-trips and Source: Statistical Office of Estonia overnight trips increased in 2007. 70% of the Outbound tourism respondents made at least a 3-hour leisure trip in summer 2007 and 60% of the Estonian inhabitants The number of trips abroad has increased went on a trip with an overnight stay. Young people considerably in recent years as a result of the and those with higher education and higher income increased living standard, simplified travel procedures are the most active travellers. and cheaper travel. The spread of e-services and low budget airlines and their overall influence on the price The most popular destinations are, like before, level of all airlines have also contributed to making Tallinn, Pärnu, Saaremaa, and Tartu, for non- trips abroad Estonians also Ida-Virumaa. Estonians also visit South-Estonia frequently. The main objective of a A border-crossing survey shows that Estonians made trip is to visit relatives and friends or to have a beach almost 3 million trips abroad in 2007. Before holiday, and various family events. The majority of Estonia’s accession to the EU, for which there are people use the opportunity to stay the night at exact data about border-crossing, the number of trips relatives or friends. The share of paid overnight stays made by Estonians abroad amounted to 2.2 million of all overnight stays was less than one fifth. per year. Neighbouring countries Russia, Latvia and Finland were the main destinations. Holiday and Among reasons not to travel mainly lack of time and shopping trips constituted almost one fourth of all money were mentioned, as well as health reasons. trips; the share of business trips was slightly lower. People with higher income mentioned, apart from lack of time, preference of trips abroad. Compared to Tourist services imports grew by only 2% in 2007. previous surveys lack of money has become less The expenses of Estonian people while travelling important but lack of time has gained importance. abroad were the same as in 2006, but costs on transport grew by one tenth. Tourist services imports It is predicted that domestic tourism in Estonia will grew strongly at the beginning of 2007 but stabilised continue to gain popularity but growth rates will in Q2 or even dropped slightly. diminish. Slower economic growth and less confidence among the population will surely have a More than half a million trips abroad in 2007 were negative effect on travelling. made through travel agencies, being by 8% more than in 2006. The average number of days per trip increased by a quarter because the stays were longer; also, more trips were made to far-away destinations.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 66 Economic Survey of Estonia 2007

The number of trips organised by travel agencies grew in respect of all destinations. The main destination markets were Finland and Egypt. Other growing destinations are Greece, Turkey, Italy, Sweden, Thailand, the Czech Republic, Spain, and Bulgaria. The number of people travelling to Russia via travel agencies has declined since 2006 and the same trend continued in 2007. It is expected that 2008 will be characterised by the same decline in demand that was typical of the second half-year of 2007. The number of trips, however, will probably grow, but the growth may be modest. It is expected that people tend to spend less.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 67

Feliks Mägus: The state must introduce Estonia in a more coordinated way Feliks Mägus, head of Nordic Hotels, acknowledges that nobody was able to predict the sharp decline in the number of tourists after the spring events in 2007. He is of the opinion that tourists may be attracted to Estonia by more coordinated activities in introducing Estonia as a travel destination.

What was the year 2007 like for Nordic Hotels? Which of your expectations and hopes were filled, what were the surprises? The year was successful because we opened the Nordic Hotel Forum in Tallinn and almost completed the Nordic Hotel Bellevue in Riga. We created one hundred new jobs in Tallinn. The rapid rise in costs was surprising, as a result of which the pre-opening process of the hotel was more expensive than expected. It was also surprising that demand growth stopped.

How much were you able to foresee the developments in the tourism sector in 2007? The beginning of the year was positive. Until April, the number of overnight stays by foreign tourists from all our main target markets grew. However, April was followed by a sharp decline in the number Photo: Äripäev of overnight stays of foreigners from all our main target markets. It was certainly not expected. It was known that 20% new hotel rooms would come in use How to attract more tourists to Estonia? in 2007, thus, demand stayed on the same level only thanks to domestic tourism. The state and local governments should support Estonia as a destination in a more coordinated way. The state should pay more attention to tourism as an What will be the challenges for the tourism sector industry and not to expect only the private sector to in 2008? take care of it. Estonia needs more tourist products that would make tourists come here and stay here for It is a major challenge to find answers to the more than just one day or night. We need more direct following questions: how to restore Estonia’s air connections. And Tallinn needs a large conference competitiveness as an attractive travel destination, centre. how to reverse the declining trend of overnight stays by foreigners, how to preserve purchases by local inhabitants under the conditions of cooling economy and declining purchasing power, and how to cope with rising costs in the situation where sales are not increasing.

What are the goals of Nordic Hotels for 2008? We intend to raise the popularity and market share of the Nordic Hotel Forum. Also, we plan to successfully open the Nordic Hotel Bellevue in Riga and to place this hotel quickly to the market place.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 68 Economic Survey of Estonia 2007

Transport The Estonian transport system comprises railway, road, sea, inland water and air transport, electric public transport in cities and transport via pipelines. The transport sector employs over 50,000 people (ca 8% of all the employed). Transport contributes considerably to export revenues and balances the Estonian foreign trade balance. In passenger road transport Tallinna Autobussikoondise AS is the dominating enterprise, operating bus routes in Tallinn. Electric transport is represented by two companies - Elektriraudtee AS and Tallinna Trammi- ja Trollibussikoondise AS. In railway transport, AS Eesti Raudtee (Estonian Railways) is the largest company. The railway transport market is open in Estonia and several operators, such as AS Spacecom (until 2008), Westgate Transport OÜ, Edelaraudtee AS and Elektriraudtee AS, are active in passenger and cargo transport. In cargo transport, AS Schenker, DSV Transport AS and SP Transit Eesti AS are the leading logistics companies. The more important Estonian company in the water transport branch is AS Tallink Grupp, a shipping line operating passenger transportation and carriage of goods which, after the acquisition of Silja Line’s stocks, became the largest shipping line of the Baltic Sea. AS Tallinna Sadam is the main port operator, operating Ports of Muuga, Vanasadam, Paldiski Lõunasadam, Paljasaare and Saaremaa. AS Estonian Air, a company engaging in international passenger and cargo carriage, is the biggest enterprise in air transport. The employment figures of the sector have been stable. A slight growth in the number of employed is noticeable. No sharp changes in the employment trend are expected for the near future. % Share of sector in Estonian economy % 100 125 The rapid growth of transport volumes and revenues of transport companies continued in the 80 100 first months of 2007. Transit volumes started to 60 75 drop since May, mainly affecting the railway sector 40 109,7 50 Russia limited Estonia-bound railway transport by the 20 9,1 7,8 25 pretext of railway repairs, placing the whole Estonian transit sector in a difficult situation. Other sectors 0 0 had also difficulties in relation to exports and imports Share in value Share in Ratio to average added employment wage (r.s.)* with Russia.

*By enterprise statistics Volumes of rail transport increased by 7.8% in 2007, Source: Statistical Office of Estonia amounting to 66,076,000 tons. Oil products still constituted the largest part of all cargo – 33,676,000 Estonian transport by sales revenue in tons; transport of oil shale amounted to 18,132,000 2007 tons. Transport by rail grew mainly on account of domestic transport growth. The domestic volume of Air Railway cargo was 33,778,000 tons and its transport volume 6% 10% grew by 74.8%. Water 26% Exports by rail increased by 26.3%. The total volume reached 1,537,000 tons, of which 956,700 tons were building materials, mainly cement. Road Imports by rail declined by 22.7%, to 3,280,000 tons. 58% Oil products made up 1,235,000 tons and wood Source: Statistical Office of Estonia 892,000 tons. The volume of transit cargo by rail amounted to bn EEK Sales revenue % y-o-y 27,482,000 tons. Oil products were the main article – 80 20 20,562,000 tons, followed by coal – 3,358,000 tons 60 15 and natural and chemical fertilisers – 1,648,000 tons. 40 10 Transit volumes dropped by 24.7% in 2007. Although 20 5 transit transport grew by 14.3% in Q1 compared to the same period in 2006, there was a decline of 21.4% 0 0 in Q2 and of 46.6% in Q4. Transport of oil products 2001 2002 2003 2004 2005 2006 2007* fell by 30% in Q4 and transit of coal practically came Sales revenue Growth (r.s.) to a halt (the volume of Q4 in 2007 was only 2.9% of that in 2006). Transit of fertilisers dropped by 41.2% Source: Statistical Office of Estonia in Q4. This situation placed AS Eesti Raudtee in a difficult situation, forcing it to make about 200 employees redundant. The two other rail transit

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 69

companies, Spacecom and Westgate, were in a Container transport somewhat better situation and did not have a major through Estonian ports backlash. TEU 182328 200 000 On the one hand, plummeting of transit was caused 150 000 by the cooling of relationships with Russia in spring 100 000 2007. On the other hand, Russia has continuously 50 000 tried to reduce its transit dependence on the 0 neighbouring countries and use its own transport 2001 2002 2003 2004 2005 2006 2007 instead of foreign companies, especially its ports at the Gulf of Finland and the Black Sea and North Sea. Source: Statistical Office of Estonia For this purpose, public investments in the transport infrastructure, ports and roads in NW-Russia were Cargo transport by mode of transport increased sharply and extensive railway 2007 (th tons) Air; 4 reconstruction works were commenced. All this Sea; 1573 inhibited transit especially to Estonian ports. The cooling of relations only accelerated this process. Railway; Road; 66076 In 2007, trade turnover in Latvian ports increased by 38158 4.9% and in Lithuanian ports by 8.4%, but dropped by 10.1% in Estonian ports (including by 12.7% in Source: Statistical Office of Estonia Port of Tallinn). Some cargo was redirected from Estonia to the ports of other countries, in addition to Latvia and Lithuania to Finland and the Ukraine. Cargo transport through Estonian ports In 2006, 49,742,000 tons of cargo were handled in th t % y-o-y Estonian ports. In 2007, the respective figure was 60 000 20 44,715,000 tons. Handling of export cargo (6,671,000 50 000 10 tons) increased by 1.6% and that of import cargo 40 000 (5,213,000 tons) by 18.7% compared to 2006. The 30 000 0 20 000 volume of transit cargo fell by 15.3%. -10 10 000 Oil products were still the main article in ports – 0 -20 24,628,000 tons. The volume of oil products fell by 2001 2002 2003 2004 2005 2006 2007 10% in 2007. 3,856,000 tons of coal (-21,5%) and Total cargo 1,980,000 tons of fertilisers were handled (-48,5%). Transit Cargo volume growth (right scale) The volume of cargo transported on trailers Transit growth (right scale) (3,468,000 tons) grew by 7.2%. Source: Statistical Office of Estonia Transport of crude oil through Estonian ports has mill t Cargo % y-o-y practically come to an end because Primorsky Port 120 20 105,8 has taken over all operation. Terminals located in 100 Estonian ports are still used for handling of oil 15 80 products, but more and more, products are just 10 60 stored there and placed on the market at the time 5 when the market situation is the most favourable. 40 0 Transport of grain depends mainly on weather. As 20 regards container transport, cooperation has 0 -5 tightened with the Ningbo Port in China. The 2001 2002 2003 2004 2005 2006 2007 number of containers handled in ports grew by Transported cargo Change (r.s.) 19.2% in 2007, including by 16% for transit Source: Statistical Office of Estonia containers. These developments are rather positive in the light of all other products but not sufficient to Passenger transport in Estonia by mode of reverse the downward transit trend. transport (mill. passengers) In 2007, by the data of the Statistical Office, road 8 300 transport volumes amounted to 38,158,000 tons, 6 200 4 including 7,024,000 tons of international transport. 100 Cargo turnover was 10.7 billion tonkilometers and 8.2 2 billion tonkilometers, respectively. Transport volumes 0 0 increased by 25.7% and cargo turnover by 20.3%. 2001 2002 2003 2004 2005 2006 2007 Transport volumes grew mainly in Q1 (61.2%) and Railway (left scale) Water (left scale) Q2 (40.5%) and stayed on the 2006 level in the Air (left scale) Road (right scale) second half-year. Source: Statistical Office of Estonia

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Traffic accidents 931.1 km, in 2007 to 1,303.4 km. The decline in 4 000 3253 economic growth and cooling relations with Russia 3 500 forced transport companies to find orders at longer 3 000 2443 distances. 2 500 2 000 Haulage to Russia was restricted by two unsolved 1 500 1 000 problems – insufficient amount of transport permits 500 197 and long queues at border-crossing points. Therefore, 0 if possible, other markets are preferred, and thus, 2001 2002 2003 2004 2005 2006 2007 roads leading to our eastern borders are jammed Traffic accidents Dead Injured mainly by lorries from other countries. Source: Statistical Office of Estonia Cargo transport through Estonian airports doubled in 2007, increasing rapidly in the second half-year (by Number of employed and wages % y-o-y five times in Q3 and by three times in Q4) compared 50 000 25 to the same time in 2006. Cargo owners in SE-Asia 40 000 20 have discovered a suitable distribution centre for their 15 30 000 cargo in East-Europe – Tallinn Airport. It is 10 predicted that developments in 2008 will also be 20 000 5 positive. 10 000 0 Total passenger transport dropped in 2007. In 2006, 0 -5 the total number of passengers transported by city 2001 2002 2003 2004 2005 2006 2007* public transport, trains, buses and planes amounted Number of employed to 214.2 million but in 2007 the number was Average wage (kroons) Change in number of employed (r.s.) 212.9 million (by 0.6% less). Use of public transport Change in wage (r.s.) fell because of an increase in number of cars. The Source: Statistical Office of Estonia increase in fuel prices did not make public transport more popular because public transport ticket prices Value added, labour costs and productivity increased as well. The processes could be influenced mill EEK % y-o-y 14 000 20 positively, however, by increasing the average speed 12 000 15 of public transport vehicles by adjusting traffic lights 10 000 10 in their advantage and creating special public 5 8 000 transport lanes. 0 6 000 -5 The cooling relations with Russia did not influence 4 000 -10 passenger transport on railway. The number of 2 000 -15 0 -20 passengers grew by 2.6% and reached 5,441,000, 2001 2002 2003 2004 2005 2006 2007* passenger turnover increased even more – by 6.2%, Value added showing that distances became somewhat longer. The Labour costs railway connection to St. Petersburg is one of the Total productivity growth (r.s.) reasons. Apart from the connection to Moscow, it is Labour costs productivity growth (r.s.) Source: Statistical Office of Estonia the second international passenger rail connection. After the reconstruction of railway between Tartu bn EEK Investments of enterprises % y-o-y and Valga is completed, a third connection – to Riga 6 60 – will be opened. 5 45 The number of air passengers grew by 11%. In 2006, 4 30 the number of air passengers amounted to 1.58 3 15 million, in 2007 to 1.76 million. All of this growth 2 0 was achieved on account of Tallinn Airport where the passenger flow amounted to 1.728 million (by 12% 1 -15 more than the previous year). It is expected that more 0 -30 passengers will pass through the airport in 2008 due 2001 2002 2003 2004 2005 2006 2007* Investments in fixed assets to the extension of the airport lounge to be Change in investments (r.s.) completed at the end of March. Source: Statistical Office of Estonia Sea transport was used by 6,352,600 persons, the Average distance for road haulage dropped slightly in number exceeding that of 2006 by 8.6%. People the first half-year (due to the construction boom and undertook longer journeys, passenger turnover grew the resulting increase in domestic transport) but by 13.3% and the average length of an international started to grow in the second half-year, especially as sea trip was 165.3 km in 2007. regards international transport. In Q4 of 2006, the average distance of road haulage amounted to

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 71

By the enterprise statistics, the number of employed Fixed assets investments in transport in the transport sector grew by one tenth in 2007. sector in 2007 The growth was backed by road haulage companies and services related to transport (storage business, travel agencies). By statistical data, the largest number Railway of new enterprises was also registered in these 10,9% branches. Although the financial figures and value added of Road enterprises improved in the first half-year of 2007, 20,5% there was a decline in the second half-year, especially in rail transport and services related to transport. Activities Water related to 0,9% Investments of transport companies increased by one transport Air third in 2007. Services related to transport 67,5% 0,3% contributed the most to investment growth but investments also grew in all other branches except water transport. 60% of investments were made in Source: Statistical Office of Estonia construction of buildings and facilities, especially due to investments made in the storage and logistics branches. The other important investment objects were means of transport and other machinery and equipment. Average gross wage in the transport sector was higher than the Estonian average and wage increase surpassed the Estonian average by one tenth. Both hourly and real wage showed a growth trend. In 2007, the average gross real wage in the transport sector amounted to 11,582 kroons. It is expected that transit volumes will continue to decline in the first months of 2008, and from May, they may stay at the level of last year or slightly increase. Smaller domestic demand may, to some extent, limit the consumption of transport services but international transport and passenger transport will rather grow. The number of employees may diminish due to the declining cargo volumes but, in the long run, economic development should raise demand for transport services.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 72 Economic Survey of Estonia 2007

Tiit Vähi: Transit volumes will drop even more in 2009 Tiit Vähi, transit businessman, owner of Port of Sillamäe, said that 2007 was a turning point for the transit sector. He does not predict better times for 2008 and estimates that volumes of cargo going through Estonia will drop even more in 2009.

What was the year 2007 like for the transit sector and Port of Sillamäe? After the events in April, Russia blocked its transit through Estonia, leaving only those trains in operation whose redirecting was technically not possible. As a consequence of the April events, transit through Estonia has fallen by ca 40% while transit through Latvia grew by about the same figure, without major investments. Many investment projects initially planned for Estonia have been postponed or redirected to Latvia, Lithuania, Finland or Ust-Luga. These redirected investments will never come back to Estonia. The April events were a good excuse to allocate large funds from the Russian national budget to intensify the construction of Ust-Luga port. Ca 0.5 billion USD were additionally given from the national budget in 2007 and the planned investments in 2008 amount to ca 1 billion USD. In addition, Russian Railway’s investment plans foresee ca 1 billion USD Photo: Äripäev to build access roads to Ust-Luga port.

The 2007 results of Port of Sillamäe were as good as possible under the given conditions, but the volumes There will be no big changes in 2008 because what were twice as low than was forecast, due to reasons could be redirected at once, was redirected after the not related to us. events in April. Transit volumes will drop more in 2009 when the crude oil terminal of 8 million tons of capacity, a ro-ro and container terminal and a How much and how did Port of Sillamäe adjust multifunctional general cargo terminal will start to these changes? operating in Ust-Luga. All private investors must take into account changes in economic conditions. Due to the blocking of What should be the role of the state of Estonia in Estonian transit, ca 2 billion kroons worth of developing transit and logistics? investments of the so-called independent investors in Port of Sillamäe have been terminated or postponed. All depends on the policy. If Estonia does not wish The port itself was also forced to freeze some of its to be left aside in transit, we should try to normalise new investment projects. Today, we try to develop our intergovernmental relations with Russia: the preparedness of our port for transport of ro-ro enforcement of the border agreement is of and container goods to Russia, as well as production importance, an agreement on protection of war in the Sillamäe free technology and logistics zone. We graves needs to be concluded, Estonia has to be have started to build a container terminal constructively involved in the negotiations (0.8 mln TEU) and will try to sell the project to a concerning the Nord Stream gas pipeline. In addition, capable operator. We are looking for capable partners there should be less Russophobic rhetoric on the both in the east and west. level of top politicians; it is not necessary to “pick on” our eastern neighbour every day. Also, Estonia What will be the future of Estonian transit needs to continue the construction of border-crossing transport in 2008-2010? points in spite of the current situation.

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The state helps new entrepreneurs to face challenges and improve competitiveness • The development ability of managers Readers of this economic survey are now convinced and employees is one of the preconditions that 2007 was a turning point of the economic cycle for raising productivity; for Estonian economy. Economy, having grown • vigorously by the support of loan money inflow, real Cooperation, sharing of knowledge and estate boom, raising wages and domestic joint utilisation of resources ; consumption, started to show signs of cooling. • Foreign investors as a source of knowledge Almost all analysts of the private and public sector should be valued and used in introduction expect this trend to continue in 2008. They also agree of new technologies. that, in the coming years, an answer should be found to the question how to raise productivity which has Intermediaries of support funds not grown as fast as wages, and how to improve the The most important agencies implementing activities export capacity of our companies in order to restore focused on innovation and growth and intermediaries balanced development. of support funds are Enterprise Estonia (EE) In order to accelerate the adjustment process and to www.eas.ee and the Credit and Export Guarantee support the innovation capacity of enterprises, the Fund (KREDEX) www.kredex.ee , both in the area of Ministry of Economic Affairs and Communications government of the Ministry of Economic Affairs and with its partners has developed central national Communications. The homepages of EE and strategies, including comprehensive measures for KREDEX provide more specific information on the solving long-term and more urgent problems. supported activities, support conditions and application for support. For spring 2008, several new National policies programmes co-financed from Structural Funds are already available, and in the second half-year more The main sector-specific development plans to support measures can be used. improve competitiveness of enterprises are: • Estonian Enterprise Policy 2007-2013 Below, a short description of the most important http://www.mkm.ee/failid/Estonian_Enter activities of strategic development, to be supported prise_Policy_2007_2013.pdf , by the state in the coming years, are described. • Estonian Research and Development and Innovation Strategy „Knowledge-based Support to exporting enterprises Estonia” 2007-2013 The state offers various information services, training http://www.hm.ee/index.php?popup=dow events and seminars to companies still searching for nload&id=7669 , export opportunities and to those already exporting. • Estonian national tourism development plan Individual companies and companies planning joint for years 2007-2013 activities are offered opportunities to visit or https://www.riigiteataja.ee/ert/act.jsp?id=1 participate in fairs. To those enterprises that have 2755212 (in Estonian) developed a long-term export plan, support to A large part of the measures described in these implement the plan’s various stages is offered. Export development plans is funded from the Structural credit risks can be insured by a state export guarantee, Funds of the EU. The main principles and objectives enabling companies to offer better payment upon using Structural Funds to boost the conditions to buyers and to enter new markets. competitiveness of enterprises are decribed in the Operational Programme for the Development of Support to development of products and Economic Environment 2007-2013 services and improvement of productivity http://www.struktuurifondid.ee/public/maj.keskond In this field, involvement of highly qualified _ENG.pdf workforce and investments in new technologies is supported. Entrepreneurs and universities can get Principles support to develop new products, services, Although each of the above development plans has technologies and product development processes or its more specific focus, allocation of funds is based to improve the present ones. From this year it is on the following wider principles: possible to apply for support to find and recruit a • Taking into account the level of openness new employee for carrying out an innovation project. and the current development phase of our Industrial enterprises can introduce new technological economy, internationalisation and solutions thanks to technology investment support. innovation are the central topics; In addition, companies may use a state’s loan or lease guarantee to involve capital and equity loans.

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 74 Economic Survey of Estonia 2007

Support to development of knowledge and skills of managers and employees Involvement of foreign investments and follow-up services Enterprises are offered support to train their managers and employees and to use consulting The foreign representations of EE in nine countries services. EE with its partners offers trainings and have an important role in involving foreign cooperation seminars and the opportunity to investments. The activities to be implemented participate in a mentor programme to various target comprise investor awareness and contact events, groups. Enterprise diagnostics can help to identify arrangement of seminars, compiling and distribution bottlenecks in the future development of companies. of information materials. It is important to focus on Management quality is being developed, comprising involving foreign investments of high value added in training of managers, distribution of new technology development centres, science and management practices and helping SMEs to use technology parks and clusters, and to pay attention to better-informed management. www.aktiva.ee and the professional consultancy and follow-up services. information centre of EE offer a wide range of information to enterprises. In addition, there exist Development of tourism activities related to raising the awareness about entrepreneurship and innovation among the general The activities focused on the tourist sector involve public. introduction of Estonia as a tourist destination and increasing the demand for Estonian tourist products Support to enterprises with high growth in international target markets, but also raising potential awareness about domestic tourism and promotion of domestic holidays. Support is offered to the The state offers start-up and growth support and development and marketing of tourist products. A lot start-up loan guarantees to implement business ideas of attention is paid to promote product quality and at various development stages. Incubators and ensuring availability of tourist information. science and technology parks are supported to ensure the best development opportunities for the participating companies. To alleviate lack of capital of enterprises in science and technology parks, the Development Fund offers risk capital investments into the starting companies.

Promotion of cooperation In order to promote cooperation in strategic research among research institutions and enterprises, financial support to technological development centres is an important measure. Development of knowledge and skills and support structures related to knowledge and technology transfer in Estonian R&D institutions is supported under the framework of SPINNO programme. Cluster development programme helps to implements joint activities of various economic fields. Innovation vouchers will be offered to promote cooperation among SMEs and R&D institutions.

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Annexes Annex 1. Trade with associations of countries

Association of Volume (mill EEK) Share (%) Change (% y-o-y) countries Exports Imports Exports Imports Exports Imports 2006 2007 2006 2007 2006 2007 2006 2007 2006 2007 EU 79 223 88 121 124 665 138 980 65.6 70.2 74.4 78.5 11.2 11.5 CIS 12 568 14 346 26 550 23 149 10.4 11.4 15.9 13.1 14.1 -12.8 EFTA 3 861 4 919 1 815 1 756 3.2 3.9 1.1 1.0 27.4 -3.3 NAFTA 8 746 6 357 2 118 2 525 7.2 5.1 1.3 1.4 -27.3 19.3 Total 104 399 113 743 155 148 166 410 86.4 90.6 92.6 93.9 9.0 7.3 Total Estonia 120 784 125 532 167 465 177 139 100.0 100.0 100.0 100.0 3.9 5.8 Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 76 Economic Survey of Estonia 2007

Annex 2. Exports by commodity groups by main target countries in 2007

Commodity group (%) Finland Sweden Latvia Russia Lithuania Germany USA Togo Norway UK Total share Live animals and animal products 11.6 2.7 14.1 15.0 5.7 17.5 0.2 0.0 0.7 0.1 67.4 Vegetable products 13.2 7.1 9.8 12.7 10.9 6.2 0.2 0.0 0.4 1.1 61.6 Animal or vegetable fats and oils 5.5 4.8 36.4 1.4 51.4 0.2 0.0 0.0 0.0 0.0 99.8 Prepared foodstuffs; beverages; tobacco 10.0 2.1 17.8 41.6 14.4 1.1 0.6 0.0 1.1 0.6 89.3 Mineral products 8.8 3.2 6.1 2.6 1.2 1.6 24.2 26.9 0.8 1.6 77.0 Chemical products 4.2 7.7 18.1 24.0 7.6 3.5 6.6 0.3 0.5 3.3 75.8 Plastics and articles thereof, rubber and articles thereof 17.3 16.1 17.1 10.1 13.4 5.7 0.0 0.0 4.3 0.3 84.4 Leather, fur and articles thereof 34.1 2.6 11.9 6.8 3.2 1.3 0.1 0.0 1.3 0.7 61.9 Wood and wood products 19.1 16.1 4.2 0.6 2.2 8.0 0.6 0.0 6.1 10.4 67.3 Pulp of wood and articles thereof 8.3 9.1 4.9 12.6 4.0 8.6 0.2 0.0 3.7 1.9 53.4 Textile and textile articles 26.2 22.7 12.8 8.9 4.8 5.1 0.3 0.0 3.9 2.9 87.6 Footwear; headgear; umbrellas 35.4 12.8 22.3 2.8 11.6 0.8 0.1 0.0 5.8 0.2 91.6 Articles of stone; ceramic products and glass 17.3 4.6 23.7 16.4 12.7 4.9 0.1 0.0 2.8 1.9 84.5 Precious stones, precious metals, jewelry 16.4 8.3 10.4 13.7 2.6 27.1 0.3 0.0 0.3 0.0 79.0 Metals and articles of metal 17.5 9.8 9.7 6.3 6.4 5.4 0.7 0.0 5.5 2.6 63.9 Machinery and equipment 29.6 24.8 7.7 7.8 3.1 3.6 1.2 0.0 1.3 1.3 80.5 Vehicles 8.3 11.9 35.0 11.4 16.8 3.2 0.0 0.0 1.6 0.6 88.9 Measuring instruments and medical apparatuses 20.9 14.3 6.0 6.9 2.5 18.3 7.0 0.0 1.1 5.7 82.6 Arms and ammunition 16.8 0.0 0.0 0.4 0.0 0.0 0.0 0.0 0.0 0.0 17.2 Miscellaneous manufactured articles 23.1 13.0 4.3 2.1 1.4 9.2 3.8 0.0 13.0 5.6 75.5 Works of art, antiques 1.1 14.1 1.5 17.4 0.1 0.0 14.2 0.0 13.6 0.0 61.9 Source: Statistical Office of Estonia

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Annex 3. Imports by commodity groups by countries in 2007

Commodity group Finland Germany Russia Sweden Latvia Lithuania Poland Netherlands UK Italy Total share Live animals and animal products 16.2 5.3 3.1 1.5 10.1 11.2 8.0 2.5 0.7 0.5 59.3 Vegetable products 16.7 4.7 2.1 4.0 7.7 10.7 4.5 13.7 0.3 2.5 66.9 Animal or vegetable fats and oils 7.6 33.3 1.6 4.0 6.5 6.6 7.3 9.0 0.0 1.7 77.5 Prepared foodstuffs; beverages; tobacco 11.5 6.0 1.6 2.9 13.3 8.5 7.7 3.5 13.3 2.1 70.6 Mineral products 2.6 0.9 42.6 4.5 6.6 21.9 3.5 0.1 0.6 1.0 84.3 Chemical products 12.0 14.9 4.8 5.8 7.0 6.2 7.4 6.5 2.0 1.2 67.8 Plastics and articles thereof, rubber and articles thereof 16.5 16.6 1.1 9.4 7.3 6.8 8.3 4.4 1.3 2.7 74.6 Leather, fur and articles thereof 33.6 5.1 3.6 7.0 2.6 2.8 1.1 1.6 0.9 14.7 73.1 Wood and wood products 8.9 3.6 52.1 4.3 11.5 4.0 2.4 0.5 0.2 0.4 87.9 Pulp of wood and articles thereof 33.4 7.1 6.4 14.7 10.7 3.5 5.2 1.8 2.5 2.1 87.4 Textile and textile articles 12.5 9.0 0.7 6.7 14.0 2.6 2.6 3.3 1.9 6.9 60.2 Footwear; headgear; umbrellas 13.0 11.3 1.6 4.6 4.3 1.4 2.4 7.0 0.8 11.3 57.7 Articles of stone; ceramic products and glass 24.6 12.5 3.9 3.6 6.8 7.9 9.9 1.3 1.1 4.4 76.1 Precious stones, precious metals, jewelry 4.8 6.6 2.4 1.4 3.2 1.0 4.7 0.7 0.8 13.1 38.6 Metals and articles of metal 23.3 9.6 9.1 11.3 6.7 2.3 5.1 1.6 1.8 1.9 72.7 Machinery and equipment 19.7 15.7 0.8 11.7 4.6 3.5 2.3 3.4 3.8 3.3 68.7 Vehicles 12.6 23.6 1.3 18.4 5.0 1.4 2.9 2.5 4.3 2.9 74.8 Measuring instruments and medical apparatuses 18.8 25.1 0.5 9.7 2.9 1.8 0.9 3.6 2.7 2.5 68.4 Arms and ammunition 7.8 51.8 3.1 7.1 0.8 0.1 0.0 0.0 1.9 3.6 76.2 Miscellaneous manufactured articles 22.1 6.6 2.7 4.7 6.2 4.2 9.3 4.4 1.3 7.5 68.8 Works of art, antiques 0.3 0.8 2.1 0.0 1.0 0.0 0.0 1.2 0.0 3.2 8.6 Source: Statistical Office of Estonia

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Annex 4. Sale of goods and services 2006 Change in sales (% y-o-y) Share (%) At constant At current At constant mln EEK prices prices mln EEK prices Total retail sale 71 302 14 19 100 100 Incl. retail sale in retail trade 64 882 15 20 90.5 91.0 enterprises (incl. in enterprises engaged in sale, maintenance and repair of motor vehicles and motorcycles and sale of motor fuel) Retail sale in wholesale enterprises 6 420 8 13 9.5 9.0 Total wholesale 187 671 28 100 100 Incl. wholesale in wholesale 178 925 30 94.4 95.3 enterprises (incl. in enterprises engaged in sale, maintenance and repair of motor vehicles and motorcycles and sale of motor fuel) Wholesale in retail enterprises 8 746 6 5.6 4.7 Total catering services 5 033 12 24 100 100 Incl. in catering establishments 4 205 17 29 80.2 83.5 in accommodation 828 -7 3 19.8 16.5 establishments Accommodation services 1 663 12 12 100 100 3 215 10 28 100 100 Maintenance and repair of motor vehicles Source: Statistical Office of Estonia

Annex 5. Structure of trade turnover and change in sales 2007 Change in sales (% y-o-y) Share (%) At constant At current mill EEK prices prices 2006 2007 Retail sale of goods by retail 64 882 15 20 100.0 100.0 companies (incl. in enterprises engaged in sale of motor vehicles and their parts and sale of motor fuel) Foodstuffs 22 915 7 15 36.8 35.3 Foodstuffs 16 775 5 14 27.1 25.9 Alcohol and tobacco products 6 140 13 17 9.7 9.5 Industrial goods 41 967 21 22 63.2 64.7 Wearing apparel, footwear, fabrics 6 713 30 32 9.4 10.3 Motor vehicles, motor fuel 10 126 18 19 15.7 15.6 Other goods 25 128 19 22 38.1 38.7 Source: Statistical Office of Estonia

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Annex 6. Number and investments of retail companies* 2006 2007*** Change (%)

+,- %

Total number of enterprises** 5 095 5 330 +235 4.6 Enterprises with fewer than 50 4 955 5 179 +224 4.5 employees Enterprises with over 50 140 151 +11 7.9 employees Investments, million kroons 2 947.8 4 053.8 +1 106 49.1 *Including enterprises engaged in sale and maintenance of motor vehicles and sale of motor fuel **annual average ***preliminary statistics Source: Statistical Office of Estonia

Annex 7. Retail sale of goods by fields of activity of enterprises 2006 2006 Change, % y-o-y Share (%)

mill EEK mill EEK At At current 2006 2007 constant prices prices TOTAL* 54 200 64 882 15 20 100 100 Retail sale of enterprises engaged 9 584 11 317 16 18 17.7 17.4 in sale, maintenance and repair of motor vehicles and sale of motor fuel* Sale, maintenance and repair of 3 304 3 934 18 19 6.1 6.1 motor vehicles and their parts* Retail sale of motor fuel 6 280 7 383 15 18 11.6 11.4 Retail sale in retail companies 44 616 53 565 14 20 82.3 82.6 Retail sale in food stores 22 640 26 497 9 17 41.8 40.8 Retail sale in unspecialised industrial 3 270 3 722 10 14 6.0 5.7 goods outlets Retail sale of pharmacy and cosmetic 2 689 3 084 9 15 5.0 4.8 products Retail sale of textiles, clothes and 2 430 3 352 33 38 4.5 5.2 footwear Retail sale of home furnishings, 7 259 8 812 17 21 13.4 13.6 home appliances, ironware, building materials Other retail sale 6 326 8 108 25 28 11.7 12.5 * Sale without car leasing Source: Statistical Office of Estonia

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Annex 8. Net sales and revenues of vehicle selling companies 2006 2007 Change, Share (%)

% y-o-y mill EEK mill EEK At 2006 2007

current prices TOTAL number of enterprises engaged in 41 426 51 994 26 100 100 sale, maintenance and repair of motor vehicles and sale of motor fuel* Sale, repair and maintenance of motor 31 404 41 352 32 75.8 79.5 vehicles and their parts * Sale of motor vehicles and their parts * 29 956 38 685 29 72.3 74.4 Maintenance and repair of motor vehicles 1 448 2 667 84 3.5 5.1 Retail sale of motor fuel 10 022 10 642 6 24.2 20.5 * With leasing of cars Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 Economic Survey of Estonia 2007 81

Annex 9. Accommodation of tourists at Estonian accommodation establishments

Number of accommodated people Number of overnight stays

2007 Change Share, % 2007 Change Share, % y-o-y, % y-o-y, % Total 2 343 044 3.7% 100.0% 4 674 501 2.9% 100.0% Estonia 962 721 15.8% 41.1% 1 759 045 15.5% 37.6% Finland 707 124 -5.6% 30.2% 1 425 926 -5.0% 30.5% Sweden 90 221 -14.8% 3.9% 195 748 -17.4% 4.2% Germany 87 109 -3.3% 3.7% 177 355 -4.4% 3.8% Latvia 74 667 13.9% 3.2% 119 429 17.9% 2.6% Russia 56 407 -16.1% 2.4% 149 663 -15.4% 3.2% UK 56 113 -8.6% 2.4% 140 230 -9.9% 3.0% Norway 55 999 14.6% 2.4% 148 254 10.0% 3.2% Lithuania 35 561 19.0% 1.5% 61 207 17.3% 1.3% Italy 24 901 -6.9% 1.1% 60 393 -1.6% 1.3% USA 22 169 11.6% 0.9% 53 599 8.4% 1.1% Poland 18 555 30.3% 0.8% 38 274 20.4% 0.8% France 17 813 7.9% 0.8% 37 791 5.5% 0.8% Spain 17 454 15.2% 0.7% 35 442 20.7% 0.8% Denmark 14 053 -13.3% 0.6% 30 946 -9.9% 0.7% Netherlands 12 229 -10.7% 0.5% 26 873 -7.8% 0.6% Japan 6 799 -16.0% 0.3% 12 246 -21.1% 0.3% Belgium 6 094 3.5% 0.3% 11 839 -11.0% 0.3% Austria 6 085 -36.3% 0.3% 14 034 -36.6% 0.3% Czech Republic 5 465 16.4% 0.2% 10 859 19.8% 0.2% Switzerland 5 364 3.1% 0.2% 11 019 -0.4% 0.2% Australia 4 799 19.9% 0.2% 10 713 16.4% 0.2% Ireland 3 699 -11.5% 0.2% 10 339 -9.3% 0.2% Canada 3 677 25.5% 0.2% 8 982 18.8% 0.2% Ukraine 3 648 14.3% 0.2% 10 079 34.7% 0.2% Hungary 3 638 9.5% 0.2% 15 442 74.6% 0.3% Portugal 2 763 2.4% 0.1% 6 201 10.0% 0.1% Greece 2 712 56.7% 0.1% 6 451 48.4% 0.1% Iceland 2 159 23.9% 0.1% 6 347 27.8% 0.1% Slovenia 1 171 -46.9% 0.0% 2 634 -25.2% 0.1% Romania 1 033 45.9% 0.0% 2 955 24.2% 0.1% China 1 020 -11.5% 0.0% 3 776 -16.5% 0.1% Turkey 980 69.3% 0.0% 2 779 45.4% 0.1% Croatia 944 64.7% 0.0% 2 067 23.8% 0.0% Slovakia 909 9.5% 0.0% 2 461 6.1% 0.1% Bulgaria 847 -7.2% 0.0% 2 272 -32.5% 0.0% Brasilia 842 93.6% 0.0% 1 713 88.2% 0.0% Republic of Korea 762 2.1% 0.0% 1 557 -3.6% 0.0% Luxembourg 590 1.0% 0.0% 1 257 -15.0% 0.0% Cyprus 549 118.7% 0.0% 1 448 116.8% 0.0% Republic of South-Africa 266 68.4% 0.0% 832 99.5% 0.0% Malta 118 -7.1% 0.0% 312 -1.6% 0.0% Albania 113 22.8% 0.0% 315 32.4% 0.0% Other countries 22 902 11.5% 1.0% 53 397 10.2% 1.1% Source: Statistical Office of Estonia

Ministry of Economic Affairs and Communications • Ministry of Finance 2008 82 Economic Survey of Estonia 2007

The survey was compiled by

Editor-in-chief Mario Lambing 625 6387 [email protected] Macroeconomic situation Irina Bõtškova (Ministry of Finance) 611 3432 [email protected] Madis Aben (Ministry of Finance) 611 3506 [email protected] Kristjan Pungas (Ministry of Finance) 611 3284 [email protected] Liis Elmik (Ministry of Finance) 611 3047 [email protected] Pille Mihkelson (Ministry of Finance) 611 3503 [email protected] Labour market Pille Mihkelson (Ministry of Finance) 611 3503 [email protected] Foreign trade Merike Riipinen 625 6401 [email protected] Manufacturing industry Food industry Textile industry Wearing apparel industry Wood industry Paper industry Furniture industry Karel Lember 625 6402 [email protected]

Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Metal and metal products industry Manufacture of machinery and equipment Manufacture of transport equipment Tourism Mario Lambing 625 6387 [email protected]

Manufacture of electrical appliances and optical instruments Merike Riipinen 625 6401 [email protected]

Construction Real estate Kristiina Sipelgas 625 6477 [email protected]

Domestic trade Viive Metsis 625 6415 [email protected]

Transport Heldur Vaher 639 7634 [email protected]

Support measures Piret Loomets 656 6341 [email protected]

Interviewer Gea Otsa 625 6429 [email protected]

Ministry of Economic Affairs and Communications • Ministry of Finance 2008