Nordea Survey “Baltic Rim Outlook”: Baltic Economies on the Way to Recovery

The complete video of the “Baltic Rim Outlook” press conference is available under www.nordea.lv/nordealive

On 8th of June the senior economist of Nordea Andris Strazds presented the conclusions of the latest Nordea economic survey “Baltic Rim Outlook”. Nordea economists outline that the national economies of the Baltic sea region – Estonia, Latvia, Lithuania, Poland and Russia have been fairly isolated from the sovereign debt crisis in the European Monetary Union (EMU). The reason is that public finances are in much better shape in the Baltic Rim than in Southern Europe. Moreover, Estonia’s bid to join EMU, even if decided before this latest crisis, shows that the convergence process is still alive.

Nordea senior economist Andris Strazds: „The Greek debt crisis should not leave materially adverse impact upon Baltic economies, because the Greek economy is rather small in terms of size and its gross domestic product is only slightly above 2% of the total euro-zone GDP. Whereas the financial condition of the governments of the large South European countries – Spain and Italy is comparatively better than that of Greece and the required reductions are not that dramatic. Besides, the total direct export of the Baltic Rim to South European countries is rather insignificant – Italy, Spain, Portugal and Greece account for less than 5% from the total export of the Baltic countries.

To compare, the export markets that are more important to Latvia – Nordic countries, Germany and Russia recover from the economic downturn experienced last year comparatively rapidly. Therefore, we stick to the forecasts made previously that Latvia’s export will materially increase in 2010 as compared to 2009 and will be the main short-term driving force of economic development. Simultaneously, there are several indicators evidencing that currently the decline of domestic demand has stopped, what could already account for slight increase of economic development rate in the successive quarters.

The overall debt level in Eastern Europe and also in Baltic countries is considerably below that of the Southern Europe, though to prevent further increase of governmental debt, it will be required to reduce the budget deficit of almost all European countries. There are only a couple of Member States of the European Union that do not require further budget consolidation – the Nordic countries, Estonia and Bulgaria. It is especially important to balance governmental finances in countries facing current account deficit alongside with the budget deficit, because it means that the governments of these countries have to borrow finances abroad.

The planned budget deficit of Latvia this year will still be around 8% from GDP. By considering that around one third of all income are redistributed via the budget, it means that every forth lat on the side of budgetary expenses is still not covered by budgetary income. Consequently one of the main tasks of the economic policy in near future will be further increase of budget deficit.

The current debt amount of the government of Latvia is still considerably low – at the beginning of the year it was only 25% from GDP, if we reduce the gross debt by the share of the international loan deposited with the Bank of Latvia. It is easy to estimate that, if the budget deficit will remain in the current level, the amount of governmental debt would double already end 2012 by reaching around 50% from GDP. To be considered is also the fact that not always Latvia will have the opportunity to borrow for interest rates considerably below the rates of the financial market and also that the market rates will increase at some point of time in the future. It means that also the governmental debt in the amount of 50% from GDP will be a material burden to the budget in the form of interest and will reduce the amount of funds available for other expenses. Therefore the task of the government for the next couple of years is to first hinder increase of governmental debt by reducing it to the extent possible afterwards.

By reducing the budget deficit, Latvia would regain attractiveness for investors, because they would understand that no further increase of the tax burden is to be expected. Inflow of investments, on its turn, would mean increase of the value of various assets, what would allow the state sell the shares of separate state-owned companies for a good price and use the proceeds for reduction of the governmental debt accumulated in the course of the crisis.”

More detailed information about Nordea survey „Baltic Rim Outlook” is available under www.nordea.com