See also: External sector statistics definitions

Methodology and sources for compilation of the accounts of the Balance of Payments

The Balance of Payments is compiled using a system that combines three sources of information:

The data are collected through electronic data transmission channels like eAruanne, SWIFT file exchange and X-tee, and are generally processed automatically. The information from the three systems is added to where necessary by modelling or estimates. Statistical outputs are compiled using the calculation algorithms of the information system, and they are validated before publication using arithmetic and qualitative tests and correspondence control for inputs and outputs.

1. Current account

The current account shows exports and imports of goods, services, primary income (labour and investment income, production and import taxes, and subsidiaries) and secondary income (EU Structural Funds and other support, the state contribution to the EU budget, money transfers by private individuals, pensions, donations, labour taxes and benefits, and similar) during a set period.

1.1 Goods account

The goods account is based on the special trade system of official foreign trade statistics, where goods are recorded when they cross the free circulation area. The official foreign trade statistics published by Statistics Estonia are not entirely compatible with the principles used in compiling the goods account in the balance of payments. This is firstly because the official foreign trade statistics reflect not only goods for the free circulation area but also goods exported and imported for manufacturing, even though the goods are not actually bought or sold and the ownership does not change as the manufacturer of the goods does not become the owner. For this reason goods for manufacturing are not included in the goods account of the balance of payments and only the fee received for the manufacturing services is reflected in the services account. Secondly, the official foreign trade statistics for goods imports are in CIF (cost, insurance, freight) prices, meaning they include the value of goods and the cost of insurance and transportation to the customs frontier of the importing country. The balance of payments shows both exports and imports of goods in FOB (free on board) prices. Thirdly, the official foreign trade statistics don't record sales and purchase transactions in foreign countries of goods under merchanting. Given these and other important circumstances, changes and additions are made to the official foreign trade statistics when the balance of payments is compiled, of which the most important are:

The main sources used in compiling the goods account are the official foreign trade statistics from Statistics Estonia, enterprise surveys run by Eesti Pank, and estimates by Statistics Estonia of illicit trade.

1.2 Services account

The main source for compiling the services account is the enterprise survey of foreign trade in services run by Statistics Estonia, which provides information that is added to data from other sources.

The following data sources are used in compiling the statistics for the main service groups:

1.3 Primary income account

Primary income consists of compensation of employees, investment income and other primary income. Other primary income covers taxes and subsidies on products and production.

Compensation of employees is in cash or in kind gross wages and salaries, including social security contributions, income tax and other taxes withheld from wages and salaries, including those that the employer pays directly for the employee to the social insurance system, the Tax Board, or elsewhere. Taxes calculated from compensation of employees (income tax, social contributions, and unemployment insurance tax) are recorded under general government secondary income as a corresponding entry.

The credit side of compensation of employees consists of labour income earned abroad by Estonian residents and labour income paid to residents by foreign companies operating in Estonia. Labour income earned abroad by residents is calculated using an econometric model which uses as inputs the Estonian Labour Force Survey by Statistics Estonia, mobile positioning data on the number of Estonian residents working abroad, aggregated data from individual income declarations, and the median wages in other countries. The labour income paid by foreign companies to residents is calculated from the database of tax declarations made to the Tax and Customs Board. The sources for the debit side of compensation of employees are Public Sector Financial Statements system, which provides information on wages paid to non-residents by Estonian embassies abroad and by other government sector institutions; the database of the Tax and Customs Board, which covers wages paid by Estonian companies to non-residents and their social insurance provisions; and estimates of the wages of non-residents working unofficially in Estonia

Investment income is divided into income from direct, portfolio and other investment and income from reserve assets.

The sources of data used for calculating investment income are enterprise and credit institution surveys, the database of the Estonian Central Securities Depository, the central database for securities of the European System of Central Banks, the tax declarations submitted to the Tax and Customs Board, financial reports of Eesti Pank, the Public Sector Financial Statements system, and estimates of the reinvested income of direct investment companies not included in the survey sample modelled using a model based on the Business Register.

Other primary income is recorded for the general government and for other sectors. The source used for compiling the primary income of the general government is the Public Sector Financial Statements system, which gives information on production and import taxes. The primary income of other sectors also covers European Union subsidies for agriculture. The main sources of data are the Public Sector Financial Statements system, enterprise surveys and information on cross-border payments.

1.4 Secondary income account

The secondary income account is recorded for the general government and for other sectors and records unilateral transfers between those sectors and other countries. Current transfers are usually related to taxes (various taxes on income and property and social benefits and contributions), fines, subsidies, donations, membership fees, insurance premiums and insurance claims. The secondary income account also records private transfers between resident and non-resident households, which include remittances from workers living and working abroad for over one year who have become resident of the country they work in. Foreign employees who have been living and working in a country for less than a year are considered as non-residents of that country and their wages are recorded under labour income in the primary income account.

The main source used for compiling the general government secondary income is the Public Sector Financial Statements system, which is supplemented with data from the Tax and Customs Board on income taxes and social security contributions received by the general government. The source for grants from the European Union Structural Funds to cover the operating costs of the general government and for payments made by Estonia to the European Union budget is also the Public Sector Financial Statements system.

The main sources for data on the secondary income of other sectors are enterprise surveys, information on cross-border payments, and econometric models. Data on grants from the European Union Structural Funds to other sectors come from the Public Sector Financial Statements system.

2. Capital account

Items in the capital account cover the acquisition and disposal of non-produced, non-financial assets and capital transfers. The fees for using non-produced non-financial assets are recorded on the services account.

Non-produced non-financial assets covers natural resources like mineral and energy resources or radio spectra, traded contracts, permits to use natural resources like CO2 emissions quotas, exclusive rights to future goods and services such as patents and copyrights, and goodwill and marketing assets like brand names, trademarks, domains and logos. An exception is the purchase and sale of research-related patents and copyrights, which are treated as produced assets and recorded in the services account under research and development services.

Capital transfers are unilateral, like current transfers under secondary income, but the amounts received or paid have no direct impact on the gross disposable income of residents. The most common capital transfers are related to the use of international structural funds resources, primarily from the EU, as investment support to finance the construction of infrastructure. This entry also includes debt forgiveness, which is mostly intergovernmental, capital payments such as inheritance taxes and duties, and exceptionally large payments in compensation for extensive damage from natural disasters and similar that is not covered by insurance policies, and also gifts, legacies and donations. Capital transfers are recorded for the general government and for other sectors.

The main sources of data for the capital account are enterprise surveys, information on cross-border payments, and the Public Sector Financial Statements system.

3. Financial account

The financial account records the sources of finance for the current and capital accounts as foreign investment classified into four major categories: direct investment; portfolio investment; financial derivatives other than reserve assets, and employee share options; other investment and reserve assets. The financial account shows the net sums for transactions, so assets disposed of are subtracted from assets acquired to calculate the net acquisition of financial assets. Transactions and positions are generally recorded at market value. Positions in non-negotiable instruments like loans, deposits and other receivables or payables are recorded at nominal value, while transactions are recorded at their market value.

3.1 Direct investment

Direct investment is foreign investment made to establish a lasting interest in the economy of another country. A lasting interest means a long-term relationship and significant influence on the management of the enterprise. Under international standards, such a relationship is formed when a direct investor has direct or indirect control of at least 10% of the ordinary or voting shares (or the equivalent) of the direct investment company. In addition to the direct investor’s subsidiaries, sub-subsidiaries and associates, the framework of direct investment relationships also covers fellow enterprises. Once the direct investment is established, all subsequent financial flows between the related entities are recorded as direct investment transactions.

Transactions between companies in direct investment relationships are recorded in the balance of payments under the principle of assets and liabilities and divided into three groups according to the type of relationship between entities and the direction of the investment:

Exceptions:

nvestment by non-residents in real estate in Estonia or by residents in real estate abroad is conventionally recorded as investment in equity. As each investor generally owns more than one tenth of the real estate, most real estate investments are shown as items of direct investment in equity under assets or liabilities. Participation in real estate investment of less than 10% is recorded on the other investment account under other equity.

Although the standard presentation of the balance of payments and the investment position expect direct investment to be recorded using the principle of assets and liabilities, it is important for analysts to have the presentation according to directional principle. Direct investments are divided by direction into investments in Estonia and abroad. Direct investment in Estonia (net is calculated by subtracting assets from liabilities; mainly on the liabilities side in the standard presentation) reflects the assets and liabilities of resident direct investment companies and their non-resident direct investors, and assets and liabilities of fellow enterprises controlled from abroad. Direct investment abroad (net is calculated by subtracting liabilities from assets; mainly on the assets side in the standard presentation) reflects the assets and liabilities of resident direct investors and their non-resident direct investment companies, and assets and liabilities of fellow enterprises controlled from Estonia.

Equity transactions and positions for listed companies are given at market prices. Transactions for unlisted companies are recorded at the actual transaction price and equity positions are recorded as Own Funds at Book Value (OFBV).

Data on the share prices of listed companies come from the Estonian Central Securities Depository and the Centralised Securities Database of the European System of Central Banks. The main sources for the equity of unlisted companies are the enterprise and credit institution surveys, the business register, the Land Board and the real estate register. Information on debt assets and liabilities comes mainly from the enterprise survey and is supplemented with information on cross-border payments. Data on dividends distributed come from enterprise and credit institution surveys, the Estonian Central Securities Depository and the Tax and Customs Board and are supplemented with information on cross-border payments.

3.2 Portfolio investment

The portfolio investment account shows cross-border investment in securities that are negotiable. This covers debt securities, investment fund shares and equity securities that do not provide a significant degree of influence by remaining below 10% of the equity capital of a company. The negotiability in securities allows them to be exchanged between investors for as long as they are still valid and it allows investors to disperse their securities portfolios and to exit easily from their existing portfolios. Although financial derivatives are also negotiable, they do not come under portfolio investment because they are recorded in a separate functional category (see Financial derivatives).

Transactions and positions in portfolio investment are generally recorded at market value. If it is not possible to establish clearly what the market value is, their nominal value is used for recording them, or failing that the acquisition cost.

The main sources for compiling portfolio transactions and positions are the Centralised Securities Database of the European System of Central Banks, the Estonian Central Securities Depository, reporting by the Financial Supervision Authority and credit institutions, financial reporting by Eesti Pank, the system of accounts of the general government, and the enterprise survey.

3.3 Financial derivatives (other than reserves) and employee stock options

Financial derivatives in the form of options, forwards, swaps and others are used for various purposes including risk management, financial leverage, speculation and employee compensation. They allow parties to transactions to hedge financial risks such as interest rate risk, foreign exchange risk, price risk and credit risk without the underlying asset being traded. Unlike other functional categories, no primary income accrues on financial derivatives. Any unrealised gains/losses accruing under the contract are classified as revaluations.

Transactions and positions in financial derivatives are treated separately from the values of any underlying items to which they are linked. Transactions with derivatives are recorded when positions are realised or when there is ongoing servicing such as interest rate swaps, revenues to marginal accounts for futures and nonrepayable margin payments. The option premium is also recorded as a transaction for options. Repayable margin payments consist of cash or other collateral deposited to protect counterparty against default risk. They are classified as deposits under other investment (if the debtor’s liabilities are included in broad money) or in other accounts receivable/payable. Non-repayable margin payments (also known as variation margin) reduce the financial liability created through a derivative; therefore they are classified as transactions in financial derivatives.

The value of derivatives is marked at the market price, which is calculated from the difference between the contract price and the market price of the underlying asset. Changes in the price of derivatives are recorded as profit or loss for the position, as a revaluation caused by the change in price.

Employee stock options are agreements made on a given date under which an employee has the right to purchase a given number of shares of the employer’s stock at a stated price either at a stated time or within a period of time immediately following the vesting date.

Data on financial derivatives and employee stock options come from enterprise and credit institution surveys, financial reporting by Eesti Pank and the accounts of the general government.

3.4 Other investment

The other investment account shows all financial assets and liabilities that do not meet the criteria for direct investment, portfolio investment or reserve assets. An exception is intra-group loans in the financial sector, which are recorded under other investment. Other investment is divided between:

Other equity shows participation in international organisations, including the European Central Bank, and in notional units created by the acquisition of real estate, where participation is less than 10%.

Allocations of Special Drawing Rights (SDR) are granted to members of the IMF in relation to their quota. If a country uses the SDRs that have been allocated to it, its SDR assets position becomes smaller than its original SDR liabilities position, and it has to pay interest on that. As interest is to be paid on both assets and liabilities, the balance of payments shows SDRs on the assets side and SDR allocations on the liabilities side.

Transactions under other investment are shown at the actual transaction price together with accrued interest. Positions are generally shown at nominal value adjusted for exchange rate movements, and include interest that has been calculated but not paid out.

The data sources for other investment are enterprise surveys, reporting by credit institutions and the Financial Supervision Authority, the Public Sector Financial Statements system, the real estate register, and cross-border payments.

3.5 Reserve assets

In the euro area, the official reserve assets include the central bank’s claims on non-euro area residents denominated in foreign currency. After Estonia adopted the euro on 1 January 2011, the external assets denominated in euros or external assets issued by euro-area countries stopped being recorded under the gold and foreign exchange reserves of Eesti Pank. They are recorded under either portfolio or other investment, depending on the type of asset. Reserve assets are valued at market prices.

Reserve assets are entered as:

The data source for reserve assets is the financial reporting of Eesti Pank.