Danske delivers Baltic triple whammy

By bne IntelliNews August 4, 2008

Mike Collier in Riga -

Danske Bank issued a trio of macroeconomic reports on July 31 that deliver a simple message despite their weight of detail: the Baltic states are in big trouble.

According to Danske's "North Eastern Recap" report, "a hard landing scenario has become a reality for Estonia," while Lithuania too "could experience quite a hard landing." As for Latvia, the situation looks worst of all and Danske goes so far as to predict that GDP growth will all but disappear until 2012-13.

Until recently, many Baltic economy watchers have seemed blissfully unconcerned by the region's economic troubles, trotting out a line that though inflation is steepling and the property market is going backwards, everything will probably start to get back on track in the third or fourth quarter of 2008. But Danske's latest assessment (and Danske has historically been a lot more sceptical than indigenous institutions) blows all that away, swapping the ecocnomic blip of the optimists for a real and protracted recession.

The three terrors

Estonia, once the darling of Baltic investors, looks to have fallen harder and faster than many would have thought possible. Consumer confidence has evaporated thanks to a combination of high inflation and tighter credit conditions. And consumers who took advantage of previously loose credit conditions are starting to worry about keeping up their repayments.

Estonian GDP growth was a barely-visible 0.1% in the first quarter, and Danske expects it to go negative in upcoming quarters creating "a high probability of a negative result for the whole of 2008." Growth will then remain "very subdued" deep into 2009 with real recovery delayed until 2010 when it predicts GDP growth will get back to its long-term trend of 4%.

One consolation is that the seriously overheated Estonia labour market is starting to cool down thanks to increased competition and new legislation aimed at promoting greater flexibility, which Danske describes as "an important step forward."

If Estonia's hard landing has happened, Lithuania's still seems to be circling the airport, while Latvia's landing is more of the Qantas emergency variety.

Lithuanian GDP growth slowed to 5.5% in the second quarter from 7% in the previous quarter and the trend looks set to continue. Danske's best guess is that annual growth will amount to 4.4% for 2008 and 2.6% in 2009, provided export levels to Russia can be maintained - not a done deal by any means in view of Lithuania's eagerness to host American missile bases and worsening relations. "We believe it is the most pro-cyclical of the Baltic states, and looking ahead we fear that we will see further slippage in fiscal policy as the economy slows significantly," says Danske. Add an energy crisis provoked by the closure of the Ignalina nuclear power plant at the end of 2009 and it looks like Lithuania could fend off one recession just long enough to plunge straight into another one.

Finally, the Danish bank turns its beady eye on Latvia, and it doesn't like what it sees. Latvia notoriously possesses the EU's highest inflation level at 17.7% and it's likely to keep that dubious distinction with forecast average annual inflation for 2008 of 17.3% and no meaningful reduction until the second half of 2009.

But at least inflation will play its part in helping to divest Latvia of another unwanted table-topping statistic, namely its yawning current account deficit (12.4% of GDP, actually just overtaken by Iceland's 16.5%). Even though export growth will weaken, imports are set to weaken even more quickly with consumers expressing all the confidence of a first-time pilot being talked down by air traffic control.


Send comments to The Editor


Danske delivers Baltic triple whammy

Related Articles

Latvia’s Citadele Bank pulls IPO

bne IntelliNews - Latvia's Citadele Bank has postponed its initial public offering (IPO), citing “ongoing unfavourable market conditions”, the bank announced on November 11. The postponement ... more

BOOK REVIEW: “Europe’s Orphan” – how the euro became a scapegoat for policy ills

Kit Gillet in Bucharest - The euro, conceived as part of a grand and unifying vision for Europe, has, over the last few years, become tainted and often even blamed for the calamities that have ... more

Mystery Latvian linked to Scottish shell companies denies role in $1bn Moldova bank fraud

Graham Stack in Berlin - A Latvian financier linked to the mass production of Scottish shell companies has denied to bne IntelliNews any involvement in the $1bn Moldovan bank fraud that has caused ... more

Register here to continue reading this article and 2 more for free or purchase 12 months full website access including the bne Magazine for just $119/year.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

To continue viewing our content you need to complete the registration process.

Please look for an email that was sent to with the subject line "Confirmation bne IntelliNews access". This email will have instructions on how to complete registration process. Please check in your "Junk" folder in case this communication was misdirected in your email system.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

If you have any questions please contact us at sales@intellinews.com

Subscribe to bne IntelliNews website and magazine

Subscribe to bne IntelliNews website and monthly magazine, the leading source of business, economic and financial news and commentary in emerging markets.

Your subscription includes:
  • Full access to the bne content daily news and features on the website
  • Newsletters direct to your mailbox
  • Print and digital subscription to the monthly bne magazine
  • Digital subscription to the weekly bne newspaper

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

bne IntelliNews
$119 per year

All prices are in US dollars net of applicable taxes.

If you have any questions please contact us at sales@intellinews.com

Register for free to read bne IntelliNews Magazine. You'll receive a free digital subscription.

Already a subscriber or registered - click here to recover access.

If you a IntelliNews Pro user - click here to login.

Thank you. Please complete your registration by confirming your email address.
A confirmation email has been sent to the email address you provided.

IntelliNews Pro offers daily news updates delivered to your inbox and in-depth data reports.
Get the emerging markets newswire that financial professionals trust.

"No day starts for my team without IntelliNews Pro" — UBS

Thank-you for requesting an IntelliNews Pro trial. Our team will be in contact with you shortly.

Dismiss