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Estonia: Experts See Potential For Currency Crisis

  • Robert Lyle

Hong Kong, 23 September 1997 (RFE/RL) - The international financial community is concentrating on the currency crisis in Thailand and southeast Asia, but experts say they are also watching Estonia as another potential trouble spot.

A leading private analyst, Kenneth Courtis of Deutsche Bank Japan, says Estonia, Poland and Ukraine are among a number of nations which he believes have various sorts of imbalances that warrant keeping a watchful eye.

The World Bank's top official dealing with East and Central Europe and Central Asia, Vice President Johannes Linn disagrees about Poland and Ukraine, but says there are "danger signals" on Estonia.

"We've discussed the issue with Estonia," Linn told our economics correspondent in Hong Kong, "and my impression is that Estonia is well aware of the problem and is dealing with it in this current situation."

The danger signal Linn focused on is Estonia's current account deficit which ballooned to nearly $450 million in 1996. The deficit was running at around $160 million in the first three months of 1997.

A current account deficit by itself is not always all bad, but Linn says there are serious problems for small economies like Estonia's, which try to keep their economies and capital markets open, but which are exposed to major capital inflows -- foreign direct investment.

If those inward flows of capital are not properly managed, he says, to make sure they are not just financing a spurt of popular consumption, or, as was the case in Thailand, paying for real estate speculation, then, these small countries can suddenly find themselves swamped and in serious trouble.

Estonia's foreign direct investment in 1996 actually declined from the year before, but current International Monetary Fund (IMF) figures indicate that investment money has been pouring into Estonia in recent months. Linn says the money seems to be going into solid investment -- in a sense, he says, making it a problem of Estonia's attractiveness as a country in which to invest.

For the nations in transition, especially those in Central Europe which are well ahead of the pack, this popularity with international investors leads to problems. Linn says that in an environment where the banking sector is still quite weak, capital markets are not fully developed, and corporate governance is still being worked out in relation to the banking sector -- as in the case of the Czech Republic last year -- heavy inflows of capital in effect swamp the country and require skilled handling.

Linn says the bank has been talking over the situation with Estonia and has reviewed what is necessary for them to do.

"So far, we see no cause for panic or real risk for Estonia," he says. "But prudence requires everyone to remain alert."

Linn says he disagrees that Ukraine faces any particular problem with its currency, because Ukraine is not very far along in the transition process, and is only now beginnning to get access to international capital markets. Kyiv is not part of the open capital markets, he says.

"There are challenges which Ukraine faces, but they are somewhat different altogether from the Thailands, the Czech Republics and the Estonias, which are basically further along in market reform in Eastern Europe and now face a third generation issue of how to manage where the public sector is largely in balance," Linn said.

Linn calls it an "interesting situation" because this third generation problem is hitting countries which do have their federal budgets in balance, but now must learn how to manage private demand that may, in turn, be driven by too strong foreign capital flows.

They must, he says, guard against too much of their own success.