1. Yes, the long term outlook is good, but… - Outlook for the Estonian economy Lars Christensen Senior Analyst, Head of New Europe Research + 45 45 12 85 30 (direct) + 45 40 74 49 51 (mobile) larch@danskebank.dk Danske Research, Danske Bank www.danskebank.com/danskeresearch Investment Research January 2008

2. 2 Agenda A look at the good stories Some key long term challenges – the short version Outlook for growth in the coming years Macro prudential indicators – a “traffic light analysis”

3. 3 Richer – impressive Estonian growth performance

4. 4 Freedom is wonderful

5. 5 Less corrupt

6. 6 Living longer

7. 7 Less child mortality, but still some way to go

8. 8 More high-tech than anybody

9. 9 Some key long term challenges – the short version Two key challenges: Negative demographics Don’t become “too Scandinavian”

10. 10 Fewer hands to pay for the fun in the future

11. 11 Where are all the men?

12. 12 Don’t become “too Scandinavian” Estonia’s free market policies have served the country well, but there is a risk that Estonia (and especially Estonian politicians) is learning a bit too much from Scandinavia and increasingly is focusing on expanding the ”welfare state” This could hamper long term growth

13. 13 Promises, promises… President Toomas Hendrik Ilves: “Moreover, we wish and need to pay our employees better, and ensure our elderly with a better pension.”

14. 14 Outlook for growth in the coming years Growth will slowdown further because of: A need to address imbalances in the economy Negative shocks

15. 15 Huge imbalances and rising inflation Spurred by favourable external conditions – buoyant global growth, easy monetary conditions and a lot of risk appetite – there are signs that the Baltic economies have been growing too quickly Following the prolonged economic boom, there are now mounting imbalances in the Baltic economies This is visible in the acceleration of C/A deficits and rising inflationary pressures

16. 16 Bottlenecks are mounting in factor markets

17. 17 History tells us that growth will slow What happens to growth when the current account worsens by 5% of GDP in two years? A minor event- study of OECD- countries 14 examples

18. 18 The negative shocks Growth has been buoyant but four factors are set to slow growth – potentially significantly – in the coming year: Inflation has spiked dramatically Credit conditions have been tightened Asset prices have peaked Global slowdown

19. 19 The nasty cocktail – higher inflation and tighter credit conditions

20. 20 Asset prices are moving south

21. 21 A Traffic Light analysis for EU8+2 We have taken a look at 10 macro prudential indicators for the EU8+2 The indicators are: Unsustainable GDP growth Inflation Current account situation % GDP Credit to GDP ratio Credit growth FX reserves to import ratio Exports to imports ratio Short-term debt/FX reserves Real interest rates Public finances Source: “A Warning not to be ignored II”, December 14 2007

22. 22 More red than ever Czech Rep. Poland SloveniaHungary Slovakia Lithuania Bulgaria Latvia Romania Estonia Sustain- able zone Reason for concern Danger Zone

23. 23 Estonian growth slows dramatically

24. 24 Inflation – take a look at this!

25. 25 Current account – Its getting worse

26. 26 Credit growth – a few improvements visible

27. 27 The market impact of imbalances

28. 28 This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.