Reach the world with the help of LHV

Taking into consideration the small size of Estonia’s domestic market, it is understandable that export forms the foundation of our economy. What, where and how much is sold outside of Estonia?

Estonia’s economy has been boosted recently by the improvement in the economic situation of our primary trade partners. The pace of economic growth in partner countries that are important to Estonia has picked up due to domestic demand, in particular the strength of household consumption. The economies of our Nordic neighbours have also received a boost from the construction sector. At the end of last year a notable increase occurred in the foreign trade activity of the majority of Estonia’s partner countries, which improved the growth potential of Estonia’s exporting companies. During the first months of 2017, the volume of the export of goods increased at a steady pace, with which the expansion of market share on foreign markets continued – which proves the competitiveness of the production of Estonian companies.

Spectacular growth

The total volume of Estonian exports during the period following the restoration of independence has flourished. In 1995, Estonia exported EUR 1.2 billion worth of goods, with the figure reaching EUR 11.9 billion in 2016. Over a period of 21 years, growth has been approximately ten fold, with exports alone having increased by two and a half times over the past ten years.

Who are Estonia’s main trade partners and what is it that Estonian companies are exporting to them? In terms of countries, in February 2017 Estonia exported the most to Finland (16 per cent of total exports), Sweden (14 per cent), Latvia (8 per cent), Russia (6 per cent) and Lithuania (6 per cent). A total of 73 per cent of exports (to the extent of nearly EUR 710 million) were transported to European Union Member States and 23 per cent (valued at EUR 266 million) were transported outside of the Union. In comparison with the same period last year (February 2016), exports to Holland grew the most (EUR 27 million, i.e. doubling), mainly in the form of mineral products. Exports of mechanical machines to Russia grew (growth of EUR 17 million) and electrical devices to China (growth of EUR 12 million).

In Q1 2017, electrical goods were the most exported goods (16 per cent of total exports, i.e. EUR 161 million), followed by timber and timber products (12 per cent, i.e. EUR 114 million), and mineral products (11 per cent, i.e. EUR 110 million). The increase in exports in comparison with February of last year has affected the growth of mineral products (+EUR 32 million), growth of mechanical machinery (+EUR 27 million) and the growth of the chemical industry’s raw materials and products (+EUR 14 million).

With minor exceptions, Estonia’s top five export partners have remained relatively stable over the past decade. In addition to the stable top five countries of Finland, Sweden, Latvia, Lithuania and Russia, Germany (fifth place in 2005, and fourth place in 2009) and the United States (fifth place in 2006 and 2010-2011) have also temporarily reached the top five.

Over the past decade the changes that have taken place in the nomenclature of exported goods have, for the most part, remained relatively stable, as is the case with trade partners. Over the years the top five has been dominated by machinery and equipment, timber and timber products, mineral products (oil shale and its products), metal and metal products and other industrial products. Exports of weapons and ammunition have increased the most over the years: by a total of 35 times when comparing the period between 2004 and 2015. A large jump was also made during the same period in the export of pearls and semiprecious and precious stones, which has grown 17 times. At the same time there has been a decline in the export of works of art, textiles and products manufactured from leather.

In 2016, the proportion of goods originating from Estonia accounted for 72 per cent of all exports, with mineral products, timber and timber products, and electrical equipment having increased the most. In 2016, Estonia was the biggest manufacturer of timber and log houses in the European Union, with the majority of output being exported. However, exports of Estonian origin agricultural produce and food products have declined significantly. Grain exports are, first and foremost, associated with the yield of fields. 2014 and especially 2015 were generous to grain producers, with total yield reaching over 1.22 and 1.53 million tonnes, respectively. According to initial data from 2016, the 930,000 tonnes collected from fields is comparable to the yields from 2012 and 2013, when total yields fell between 970,000 and 990,000 tonnes.

Exports of raw milk (+EUR 11 million), dried fruit and nut mixes (+EUR 5.9 million), and dried peas (+EUR 4.9 million) increased the most last year. In terms of countries of destination, exports grew substantially to Latvia (+EUR 6.6 million), where the share of raw milk increased the most among goods transported. The pace of exports also picked up noticeably to Tunisia (+EUR 3.8 million) and Great Britain (+EUR 3.4 million), where larger volumes of barley and wheat were sent than last year.

Risk of default must be lowered

Alongside strong exports and the growing of export volumes, undertakings must focus on lowering the risk of default. The risk of default includes the solvency of the buyer as well as political risk in the buyer’s country, which is relevant, above all, in the case of countries located outside of the European Union and exotic destinations. The risk of default is the ability of the buyer to pay for the goods that have been purchased, and in terms of political risk it is the political situation in the buyer’s country and the risks arising from that, for example, the handling of foreign currency. There are countries where sanctions apply to settlements using certain currencies or there is a danger that trading in currencies may be abruptly shut off. In that case the seller is alone with their problem, and quite often such outstanding invoices are painfully written off. Growth in export is the foundation for everything, but it doesn’t pay to let oneself be guided solely by the volume of a transaction. To protect against such situations banks offer a series of products to mitigate risks involving payment as well as political risks, the use of which the undertaking should definitely consider.

Above all, the exporter should first assess the ability of the counterparty to the transaction to pay cash for the goods. If there are any doubts, it pays to consult the bank concerning their risk mitigating banking products.

Letter of credit for export

One of the most secure means for mitigating payment risk in a cross-border sales transaction is a letter of credit for export, i.e. the buyer’s bank undertakes to pay the seller after the seller has sent the ordered goods and submitted documents to their own bank regarding the fulfilment of the conditions of the letter of credit. In the case of a letter of credit for export, the buyer’s bank, not the buyer, will be responsible for making payment. This provides the exporter with payment assurance. For their part the seller must fulfil all of the terms and conditions for a letter of credit. In order to mitigate political risks or risks involving banks that are unknown to the exporter, LHV Pank offers its clients a letter of credit for export service, in the case of which LHV Pank will purchase, under suitable terms and conditions from the seller (i.e. recipient of the letter of credit), the credit and country risk from the bank at which the party opened the letter of credit. In that case, the payment obligation before the exporter rests with their home bank, for example LHV, with whom it is much simpler to discuss matters than some distant bank in a foreign country.

Within the borders of the European Union the question of whether to request a bank guarantee from unknown or financially weak counterparties in order to ensure a transaction may also be weighed. In that case the buyer’s bank pays for the delivered goods in the event that the buyer is unable to fulfil their payment obligation by the deadline specified.

When mitigating the buyer’s payment risk, the insuring of the buyer’s credit risk via a credit insurance undertaking could be considered as an alternative. This year, LHV Pank will also begin offering export factoring with credit risk insurance to its clients.

Consult with the bank

In order for export transaction volumes to increase and the undertaking to receive money for their effort, it would pay to already consult with your bank about possible risks at an early stage in the transaction. The bank’s specialists have the expertise and experience necessary to identify the risks inherent in the transaction and offer products to mitigate those risks. LHV Pank’s Trade Finance Department helps in using all traditional payment methods and also offers clients adapted transaction based solutions.

Enn Leet
Head of Trade Finance at LHV Pank

Financial services are offered by LHV Pank. Examine the terms and conditions at www.lhv.ee.
The article was published in Investeeri magazine 2/2017