12. Estonia
In 2019, Estonian SMEs employed 79% of the workforce and accounted for 79.5% of total value added. 91.9% of all firms were micro-enterprises, i.e. firms with less than 10 employees, employing 33% of the workforce and accounting for 29.2% of total value added in 2019.
Outstanding business loans to SMEs have been decreasing for 3 consecutive years. Even during the COVID-19 crisis, SME outstanding loans declined despite the provision of cheap guarantees and direct loans from the government. This can be explained by the increase in SME interest rates in 2020, as well as the provision of public support through non-debt channels such as employment support and the deferral of taxes and instalments. Furthermore, under the Estonian corporate income tax system all reinvested profits are tax-free. Thus, companies have a strong incentive to re-invest their profits, which may be an explanation for the low demand for loans. Loans under EUR 1 million, which are used as a proxy to describe SME loans, may have become unreliable to depict SME activities. This is because the high inflation rates in recent years may have pushed SMEs to contract larger loans.
The base interest rate on SME loans (up to EUR 1 million) decreased steadily from 4% in 2012 to slightly below 3% in 2016. Since then, interest rates have started increasing again, reaching 3.28% in 2018 and 4.08% in 2020. For larger loans, the interest rate also moved upward to 2.77%. In 2020, the interest rate spread reached a high for the last decade at 1.31%.
Venture and growth capital has been growing steadily in recent years. Estonia has a well-developed start-up community that has good potential for raising venture capital. 2020 was a record year, with companies raising EUR 453 million, a 72% year-on-year growth.
Leasing and hire purchases turnover declined sharply during the COVID-19 crisis, by about one-quarter on a year-on-year basis, due to the general slowdown of economic activity and investment decisions being postponed.
In 2019, only 0.2% of Estonian firms were large enterprises, employing more than 250 people. SMEs employed 79% of the private sector workforce, accounted for 79.5% of total value added and for 84% of total exported goods and services. 17% of SMEs were exporting companys. As many as 92% of all firms were micro-enterprises(i.e. firms with less than 10 employees), employing 33% of the workforce and accounting for 29.2% of total value added in 2019. SMEs thus play an important role in the Estonian economy.
The Estonian GDP contracted less than EU average in 2020. There were many reasons of such behaviour. On the one hand, Estonia had fewer restrictions and kept the economy more open compared to other countries (Oxford, 2021[1]). On the other hand, Estonia has a smaller proportion of tourism as a share of GDP and higher ICT sector share, for which distant working didn’t interrupt the economy at the levels it did in other countries. New SME loans decreased by 11% in 2020 to EUR 2.6 billion, which was relatively higher to new lending to all businesses, which decreased only 9.5%.
Since 2010, the share of SME outstanding loans decreased steadily and reached a low of 20.6% in 2020. One factor here is that, due to quite high inflation in Estonia in recent years, the EUR 1 million proxy may not show accurately the SME finance activity, because SMEs may be using larger loans. As the Estonian economy has a very high share of SMEs, the total amount of loans might be a better indicator, especially considering that large companies are usually foreign and do not use local financing instruments as much. Since 2010 total amount of business lonas have been increased from EUR 6.5 billion to EUR 7.5 billion.
Low interest rates and favourable credit conditions support the use of long-term capital, even for working capital purposes. In 2020, the proportion of long-term SME loans increased slightly from 83% to 87%. Deposits of Estonian non-financial enterprises grew by 24% to 8.7 billion in 2020, which is more than total amount of loans they have. The absence of a corporate income tax on retained and reinvested profits further incentivizes firms to save and reduces their dependence on external working capital.
Despite the COVID-19crisis, credit conditions were favourable in 2020. Alltough interest rates increased slightly to 4.08%, the amount of outstanding SME business loans didn’t change much. One reason was a large government support. SA KredEx started providing direct loans to companies and increased programs for guarantees.
Other indicators demonstrate a similar trend. For example, according to the Estonian Institute for Economic Research, the proportion of manufacturing firms reporting access to finance as a significant hurdle to business growth was 2.8% at the beginning of 2021. This proportion was lower than pre covid crisis average. Another sign of improving corporate sector finances is the consistent increase of corporate sector deposits as a share of value added and GDP. For example, according to the Bank of Estonia, deposits of non-financial companies increased by 24% year-on-year, reaching 32% of GDP in 2020.
According to Bank of Estonia1 Corporate assessments, access to funding at the end of 2020 were at about the same level as in 2019. Access to funding was considered to have deteriorated in the first half of the year. The coronavirus crisis affected, above all, the outlook for companies to earn revenues and so their desire and ability to borrow. Access to financing has worsen in the sectors most affected by COVID-19 pandemic, such as accommodation, food service, and transport. This is the case as the credit capacity of companies operating in these sectors has declined and lenders have become more cautious. As a result, the cost of borrowing has increased for these sectors.
Venture capital investments in a small country like Estonia are very volatile and available data should therefore be treated with caution, since a single investment may have strong influence on annual data. Venture and growth capital have been growing steadily in recent years. Although the Estonian Venture Capital Association has modest money supply, Estonian companies can raise venture capital abroad quite successfully. In total Estonia has 7 Unicorns which is the best result per capita in Europe.
In 2020, Estonian start-up companies attracted around EUR 453 million in investments, which was 72% more than the year before. Estonian investors provided EUR 31 million. Number of deals reached 66, compared to 72 in the previous year. Meanwhile, the average size of a deal grew by 87%. By far the biggest investment was made in Bolt, which amounted to EUR 150 million.
Leasing and factoring are relatively important sources of finance for Estonian firms. Both new and outstanding leasing volumes declined sharply between 2008 and 2009, and slightly recovered in 2011. In 2013 and 2014, however, leasing remained underused compared to the pre-crisis period (although it remained higher compared to the 2008 and 2009 levels). In 2020, amounts on leasing and factoring declined considerably. Leasing and hire purchases were only 75% of the amounts compared to year earlier. This was lowest number in last 5 years which is the result of different supply constraints and uncertainity in the context of the crisis.
According to the Estonian Tax and Customs Board there were 13191 companies with tax debt. At the end of the year this number increased to 15658 and sum of debt rised by 30%. From 1 May 2020 to 31 December 2021, it was possible to apply for an interest rate reduction of up to 100% during postponing of the payment of tax arrears from the date of confirmation of the deferral decision. The purpose of granting an interest rate advantage in excess of the normal rate is to support persons whose solvency problems have occurred due to the emergency situation2.
In 2020, the number of bankrupt companies increased from previous years by 26%, from 271 to 341. The share of companies that have gone bankrupt is still only 0.15 per cent of all registered companies. There were no major changes in the fields of activity during the recent years. The areas with the highest rate of bankruptcy were still accommodation and catering, manufacturing industry and construction. The rate of bankruptcy was above the average also in wholesale and retail.3
Despite the crisis, non performing SME loans maintained on historically low levels at 2.09%. It was even a slightly lower level than the year before. In spring 2020, Estonian banks agreed on common rules for granting payment leave in order to treat customers with short-term financial difficulties equally and to help customers get through the crisis faster. The Financial Supervision Authority also adopted a recommended guide on common rules for payment leave. Companies or groups of companies with a total credit limit of less than EUR 5 million in one bank received payment leave for the main part of loans for up to 6 months. These common rules were in force until 30 september 2020.4
On 4 June 2021, the Commission approved a EUR 4 million scheme to support bus companies in the context of the coronavirus outbreak. Under the state aid Temporary Framework, the public support, in the form of direct grants, aims to mitigate the liquidity shortages faced by the beneficiaries due to the restrictive measures imposed by the government to limit the spread of the virus.
On 27 May 2021, the Commission approved a scheme to support film producers and distributors, as well as cinemas affected by the coronavirus outbreak. Under the state aid Temporary Framework, the support, in the form of direct grants, aims to help film production and distribution companies and cinemas address the liquidity shortages faced due to the coronavirus outbreak and the government-imposed restrictions.
On 12 May 2021, the Commission approved a EUR 44 million scheme to support companies active in the tourism and retail sectors affected by the coronavirus outbreak. Under the state aid Temporary Framework, the support, in the form of direct grants, aims to help the beneficiaries address their liquidity needs and continue their activities during and after the outbreak.
On 10 May 2021, the Commission approved a EUR 8.8 million scheme to support organisers of cultural events in the context of the coronavirus outbreak. Under the state aid Temporary Framework, the support, in the form of direct grants, aims to mitigate the sudden liquidity shortages the beneficiaries are facing due to the coronavirus outbreak.
On 15 April 2021, the Commission approved a EUR 10 million scheme to support research and development in products relevant to the coronavirus outbreak. The aim of the scheme is to support coronavirus-relevant and other antiviral-relevant experimental development projects (vaccines, medicines, medical devices, hospital and medical equipment, disinfectants, protective clothing and equipment, etc.), as well as the development of innovative processes for their efficient production.
On 25 March 2021, the Commission approved an Estonian scheme of EUR 9.9 million to support companies active in the tourism and tourism-related sectors affected by the coronavirus outbreak. Under the state aid Temporary Framework, the aid, in the form of direct grants, aims to help the beneficiaries address their liquidity needs and continue their activities throughout the pandemic.
On 15 March 2021, two Estonian schemes with a total budget of EUR 15.8 million, aimed at supporting farmers affected by the coronavirus outbreak. Under the state aid Temporary Framework, the public support, in the form of direct grants, aims to help the beneficiaries address their liquidity needs and continue their activities during and after the coronavirus outbreak.
On 18 February 2021, a EUR 26.3 million Estonian scheme to support companies in Ida-Viru and Harju Counties whose activities were limited or restricted due to the measures imposed by the government to limit the spread of the coronavirus. The scheme addresses companies, non-profit organizations, foundations and self-employed persons in the accommodation and food service, information and communication, education, health, entertainment, recreation, food service and social work sectors. Under the state aid Temporary Framework, the public support, in the form of direct grants, aims to address the liquidity needs of the beneficiaries and help them continue their activity during and after the outbreak.
On 18 February 2021, EUR 3.2 million Estonian scheme to support organisers of cultural events in Ida-Viru County and Harju County in the context of the coronavirus outbreak. Under the state aid Temporary Framework, the support, in the form of direct grants, aims to mitigate the sudden liquidity shortages that companies are facing due to the coronavirus outbreak.
On 4 December, a EUR 10 million Estonian scheme to support industrial research and experimental development by companies affected by the coronavirus outbreak, as well as coronavirus-related research and development. The scheme, co-financed by the European Regional Development Fund and approved under the state aid Temporary Framework, is made of two sub-measures: aid designed to remedy the economic damage and support those facing liquidity shortages, and aid for coronavirus-relevant research. The public support will take the form of direct grants under both sub-measures. Any result of the research activities will be made available to third parties in the European Economic Area at non-discriminatory market conditions through non-exclusive licences.
On 26 November, a EUR 5.5 million Estonian scheme to support companies active in the tourism sector affected by the coronavirus outbreak. Under the state aid Temporary Framework, the public support, in the form of direct grants, was earmarked for accommodation providers, travel agencies, tourism attraction operators, tourism service providers, international coach service providers, conference organisers and tourist guides. The purpose of the measure is to mitigate the sudden liquidity shortages that these companies are facing due of the restrictive measures imposed by the government to limit the spread of the virus.
On 7 October, the Commission approved a EUR 1.5 million Estonian scheme to support the food processing sector in the context of the coronavirus outbreak. The scheme, approved under the State aid Temporary Framework, will allow for support in the form of direct grants to micro, small and medium-sized companies active in the food processing sector. The purpose of the scheme is to help the beneficiaries address their liquidity needs and to help them continue their activities during and after the coronavirus outbreak;
On 11 August 2020, a EUR 30 million Estonian measure to provide a share capital increase and a subsidised interest loan to the state-owned aviation company “Nordica Aviation Group AS” (“Nordica”). Estonia notified to the Commission a share capital increase of EUR 22 million, as well as a subsidised interest loan of €8 million to the company. Nordica has established business partnerships with major airlines in Northern and Eastern Europe and therefore plays a key role in Estonia's connectivity. Nordica has suffered significant losses due to the severe disruption of air passenger transport caused by the emergency measures necessary to limit the spread of the coronavirus. This had an adverse impact on the company's financial position and, as a result, Nordica is facing severe liquidity issues, as well as the risk of insolvency by the end of the year.
On 10 July 2020, under EU State aid rules, a EUR 20 million Estonian scheme to compensate four international passenger ferry operators active on the routes connecting Estonia with Finland and with Sweden for damages suffered due to the coronavirus outbreak. Since mid-March, the Estonian authorities have put in place travel restriction measures necessary to limit the spread of the virus. These restrictions resulted in a sharp decline in passenger numbers and severely affected the revenues of the ferry operators. Under the scheme, these four operators will be entitled to compensation for damages incurred while travel restrictions were in place, in the form of direct grants. The Commission found that the scheme is in line with Article 107(2)(b) of the Treaty on the Functioning of the European Union (TFEU), which enables the Commission to approve State aid measures granted by Member States to compensate specific companies or specific sectors for the damages directly caused by exceptional occurrences, such as the coronavirus outbreak.
On 29 May 2020, a EUR 4 million Estonian scheme to support businesses renting premises in shopping centres, in the context of the coronavirus outbreak. The public support, which will take the form of direct grants, is intended to cover part of the rent due by businesses located in shopping centres. The amount of public support to which businesses will be entitled under the scheme will match, up to a maximum amount of 25% of the rent, the discounts that each lessor may decide to apply on the rents in view of the current crisis situation. This aims at incentivising the private sector to contribute towards the objective of mitigating the impact of the coronavirus outbreak. The purpose of the scheme is to mitigate the sudden liquidity shortages that non-essential businesses in shopping centres are facing due to the closure imposed by the Estonian State between 27 March and 11 May to limit the spread of the coronavirus.
Following the approval of two Estonian aid schemes on 30 March 2020, the Commission has approved two additional Estonian State aid schemes to support companies affected by the coronavirus outbreak. The schemes were approved under the State aid Temporary Framework adopted by the Commission on 19 March 2020, as amended on 3 April 2020. The new schemes complement the previously approved schemes with measures which were introduced and made possible by the amendment to the Temporary Framework approved by the Commission on 3 April 2020. The two schemes, which will share and be financed with the EUR 1.75 billion budget estimated for the previously approved schemes, will consist in: A first support scheme, which will be implemented and administered by the public Foundation KredEx. Under this scheme support will be granted in the form of public guarantees, loans and subsidised interest rates for loans. A second support scheme, which will be implemented and administered by the public Estonian Rural Development Foundation. It will focus on providing liquidity through public guarantees and loans to companies active in the agriculture, fishery and food processing sectors, as well as to companies in rural areas.
On 21 April 2020, eight Estonian State aid schemes in the form of direct grants and payment advantages to provide liquidity to companies affected by the coronavirus outbreak. The Estonian support measures Estonia notified to the Commission under the Temporary Framework eight support schemes, with a total estimated budget of EUR 75.5 million, to support companies affected by the coronavirus outbreak. Under the schemes, public support will be provided as follows: direct grants for: (i) small companies that seek to transform their products, services, processes and business model in order to support their viability; (ii) companies that invest in development projects to support their viability; companies in the tourism sector (iii) that seek to restructure their activities, to develop new products and/or services, or to change their business model as a result of the outbreak; and (iv) to mitigate coronavirus related damage; (v) direct grants to companies and organisations active in the culture and sports sectors affected by the coronavirus; and three measures related to the City of Tallinn: (vi) payment advantages to companies supplying products or services; (vii) a waiver of penalties to companies that failed to fulfil orders in due time; and (viii) reduced rent leases and usage fees to lessees of municipal property.
On 31 March 2020, two Estonian State aid schemes to support the economy in the context of the coronavirus outbreak. The first scheme will be implemented and administered by the public Foundation KredEx, and the second one, implemented by the public Estonian Rural Development Foundation.
Source: See Table 12.3
References
Eesti Pank, database, June 2021, available at: www.eestipank.ee
Estonian Institute of Economic Research database, June 2021, available at: www.ki.ee
Statistics Estonia, June 2021, online database, available at: www.stat.ee
Krediidiinfo AS, Bankrupcies in Estonia 2018, available at: http://www.krediidiinfo.ee/files/pankrotid2018.pdf
Notes
← 1. https://www.eestipank.ee/en/press/growth-economy-not-hindered-access-funding-03032021
← 2. https://www.emta.ee/eng/business-client/taxation-payment-taxes/payment-tax-liabilities-instalments
← 3. https://www.creditinfo.ee/en/the-first-rise-since-the-previous-crisis-the-number-of-bankruptcies-grew-by-26-in-a-year/
← 4. https://pangaliit.ee/uudised-ja-teated/pankade-uhise-maksepuhkuste-korra-kehtivusaeg-loppes