The second-quarter balance of payments published today refers to a continuous deterioration of the external balance. Current account deficit formed 11.3 per cent of the last four quarters' expected GDP, amounting to more than 12 per cent of the second-quarter expected GDP.

"In other words, the second-quarter economic growth relied more on domestic demand year-on-year. This is most clearly demonstrated by the deficit in the goods and services account, which increased from 6.5 per cent in the second quarter of 2005 to more than 8 per cent in the second quarter of this year," commented Andres Saarniit, Adviser to the Economics Department of Eesti Pank.

Direct investment outflow surpassed inflow in the second quarter, which, however, does not mean Estonia has become less attractive to foreign investors. Certain major transactions in the banking sector have played the key role in the last quarters' direct investment. This year's second quarter was no exception. This time it was not about a vast inflow of foreign capital, but about the raising of subsidiaries’ share capital abroad.

According to Saarniit, direct investment inflow in Estonia continued simultaneously. Although reinvested earnings prevailed, the level of direct investment inflow remained slightly below the long-term average.

The deficit on portfolio investment was unusual. The country's rapid economic expansion has been accompanied by an increase in saving and Estonian investors wish to spread risks. At the same time, investment in Estonia by foreign investors has remained practically unchanged, as the number of listed companies has not grown and there occurred no remarkable bond issues in the second quarter.

All in all, the saving-investment gap was covered by an inflow of funds through banks, where deposits of parent banks constituted the major part. The inflow of funds from the EU budget through the capital account, which constituted already around 2.5 of the quarterly GDP in the second quarter of 2006, will deserve more attention in future evaluations of Estonia's economic situation.