UPDATE 1-Estonia faces GDP fall, bad loans rising-c.bank
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TALLINN, Aug 27 (Reuters) - Estonia's economy faces contraction this year and bad debt is on the rise, though the bank system is so far safe, the central bank said on Wednesday.
It also called on the government to consider postponing election promises of tax cuts in order to pursue a balanced budget next year. Estonia's top banks are all Nordic-owned and include Swedbank (SWEDa.ST), SEB (SEBa.ST) and Nordea (NDA.ST).
The central bank said in a statement that the economy was following a path of a speedy decline in domestic demand, especially in investment growth.
"Therefore it is possible that real growth will be negative this year," said the bank. Estonia's GDP grew 7 percent in 2007. The Finance Ministry has forecast a 1 percent fall in GDP this year. New central bank forecasts are due on Oct. 22.
"We are expecting economic growth to recover in 2009," the central bank added. It noted the decline in economic activity had led to a fall in lending growth and a rise in bad debt.
"The quality of household loans started to deteriorate in the second half of last year (at first owing to the deteriorating quality of consumer credit)," the bank said.
"The share of overdue household loans started to grow faster in May 2008, but the quality of housing loans is not so poor yet as to pose a threat to financial stability," it added.
The bank also said slowing growth would lead to a lower rate of inflation and a lower current account deficit.
It said it backed the government's plans to have a balanced 2009 budget, though it said the government should be prepared for poorer-than-expected revenue collection.
Fiscal balance was more important than tax cut promises.
"Keeping income and expenditure in balance is a reasonable compromise against the backdrop of the uncertain global economic outlook and provides a good basis for passing over to a sustainable expenditure growth pace, still leaving enough space for dealing with unexpected events," the bank said. (Reporting by David Mardiste, writing by Patrick Lannin; Editing by Victoria Main)
