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Estonia: Investors Regaining Confidence

Prague, 24 February 1998 (RFE/RL) -- Estonia, the economic star among the three Baltic republics, was badly shaken by the wave of volatility which swept through the world's stock markets in the last quarter of 1997.

Stock values plummeted in Tallinn as investors showed they were unsettled by the collapse of the leading Southeast Asian economies, the so-called Asian tigers. Estonia suffered like most of the emerging markets because investors suddenly developed a new caution and awareness of risk.

With bank shares accounting for much of the stock market capitalization, the Estonian commercial banks suffered heavy losses, and cut back sharply on their loans. But Estonia's banking sector was in a relatively healthy state, having been rebuilt from the crash of 1992 which led to the closure of many smaller and weaker banks. Amid the Asian turmoil, the strong Estonian Central Bank set new capital ratio and liquidity ratio requirements for the local banks. Interest rates rose, and there was no major trouble. Considering that Estonia's market, though only a few years old, is one of the most open in the world, it weathered its first shock waves from the globalized economy with maturity.

Estonia is now set to begin on schedule next month formal negotiations on membership of the European Union -- the first Baltic republic invited to open talks with Brussels, along with Poland, Hungary, the Czech Republic, Cyprus, and Slovenia.

After last year's shakeout, which some financiers consider a healthy dampening of excessive euphoria, the stock market has been recovering slowly. Analysts say the country seems poised to return to its role as the economic engine of the Baltic states. Anvar Samost, senior business analyst with the Baltic News Service, says, however that larger investors appear to be waiting for the latest set of macroeconomic statistics from the government before deciding their next move. Those statistics should be all issued by the beginning of March, and will reveal the full impact of last year's volatility on Estonia's real economy.

One important and positive figure has already been released, showing that in January Estonia's industrial output was up by a full nine percent compared with a year ago. Against this figure, however, must be set the recent announcement by the country's biggest bank, Hansapank, of losses in January. This is in contrast to the healthy figures given by the other two big banks, Hoiupank and Uhispank, and has caused surprise in the financial community, as the big three are usually in step together.

One factor working in Estonia's favor is that it has already become a pivot between Russia and the EU. Since 1994, Estonia and the EU have been linked by an association agreement which has given the Baltic country open access to EU markets. And although some 65 percent of Estonia's total trade is now with the EU countries, Russia is still its largest single export destination. Its main trading partners within the EU are Finland and Sweden. With its low wage costs but well-educated labor force, Estonia has been able to establish itself as a base for assembly and semi-manufacturing of modern high-tech EU goods like mobile telephones. Russia is an important export destination for such goods.

These same factors -- low costs coupled with skilled workforce, and access to the EU markets -- are also attractive to investors from other parts of the world. Estonia has, for instance, been selected by some U.S. and Asian companies as a base for their European operations.