Baltic businesses singing strong - or whistling in the wind?

By bne IntelliNews April 12, 2013

Mike Collier in Riga -

The outlook for businesses in the Baltic states is positive, according to a survey released by KPMG on April 9 titled, "Pulse of Economy" [sic] - and perhaps more significantly sub-titled, "Confidence prevails in the Baltics".

After speaking to 260 business leaders in the region, KPMG says: "The results of the survey indicate ongoing trust in the solid performance of the economies. GDP growth expectations in all three countries fall between two and four percent with 80% of the Estonian, 79% of the Lithuanian and 75% of the Latvian respondents opting for this range, whereas about 9% of the Latvians think the economy could grow even more than 4% in 2013.

Interestingly, respondents in all three countries agreed that Estonia is the most attractive investment destination - an opinion that Lithuanians (87%) hold even more strongly that Latvians and Estonians themselves (both 63%).

Meanwhile, the well-heeled business leaders of Estonia are unsurprisingly "vehemently opposed" to the introduction of private property tax (92%).

There's bad news for the on-again, off-again plans to build a joint Baltic nuclear plant at Visaginas in Lithuania, with businesses firmly backing local supply options. While the Lithuanians themselves are relatively nuclear friendly (31% consider it the preferred energy supply), heavily-forested Latvia prefers biomass (41%), while - surprise surprise - shale-rich Estonia plumps for oil shale (28%). "Biomass is trending upwards, but also becoming more expensive. It seems Baltic business communities do not perceive the nuclear project in Lithuania as a whole region project," says KPMG energy manager Gregory Rubinchik.

Of their own investment plans, during the next three years, 19% of all the Estonian companies polled intend to invest in Latvia, 14% in Lithuania and 9% in Russia. Latvian companies plan to invest most actively in Russia (10%), Lithuania (8%) and Estonia (7%). Lithuanian companies see Estonia and Belarus (8%) as their likely targets followed closely by Latvia (7%). The share of the companies not planning any investments abroad is 50% in Lithuania and 35% in both other countries.

The period of austerity seems to be over with pay rises rather than cuts expected in all three Baltic states. "There are obvious signs of confidence among the top players of Estonian, Latvian and Lithuanian businesses, indicated either by further expectations of a sound GDP growth ranging from two to four percent, or by an intention to raise salaries and hire more staff," concludes KPMG's senior partner in the region, Stephen Young.

Areas of concern

But are such levels of confidence realistic? While the Baltics look set to perform better than most of Europe in the next year or so, there are several worrying factors waiting in the wings, the most important of which is clearly the unending ructions in the Eurozone - which will become even more crucial if, as expected, Latvia next year joins Estonia within the zone (and possibly Lithuania in 2015).

The way things are lining up there is a possibility Latvia may get its membership card just in time to help bail out Italy, which would be a typically Baltic case of success being more costly than failure. Speaking of which, one of the country's biggest businesses, the Liepajas Metalurgs steelworks, looks like it could go bust any day, providing a serious drag on GDP growth.

The unpredictable situation in Belarus will be of concern to Lithuania in particular, which relies heavily on business from Alexander Lukashenko's less-than-cuddly regime for its transit and logistics business - and the relatively new government of PM Butkevicius notable mainly for its ability to avoid anything remotely resembling leadership.

It also looks as if the Baltics' post-crisis rebounds may be drawing to a close, with even bulletproof Estonia affected. GDP growth expected to be only marginally better at 3.3% than last year's level of 3.2% according to Swedbank, which released its own regional roundup on April 10.

"Investments [in Estonia] are slowing considerably, in particular in the public sector. Private sector investments are far from sufficient to compensate," it warns.

Swedbank sees Latvia's economy growing 4.3% (5.6% last year) and Lithuania's by 4.0% (3.6%) and advises that the breathing space the Baltics have earned should not be wasted.

"From a policy perspective, we think there is a historical [sic] opportunity in our part of the

world to use structural measures to address issues such as competitiveness, education, wage formation, and tax systems in the coming years," says the Swedish bank which since the recent announcement that it was ceasing its Ukrainian operations, is at pains to point out that the Baltics form part of its "home market".

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