OUTLOOK 2013: Baltic states - A good year

By bne IntelliNews December 4, 2012

Mike Collier in Riga -

The Baltic states had a good 2012 - on paper, at least. They had the three fastest growing economies in the EU: Latvia is expected to grow 5% for the year as a whole, and Estonia and Lithuania 3%, against a backdrop of the Eurozone omnishambles as they completed reforms enacted during the three biggest recessions in the 27-member bloc.

Opinion is divided on whether 2013 will see the pace of growth slow. Capital Economics expects Estonia to lead the way in 2013 with 2.5% GDP growth, and Latvia and Lithuania on 2%. But Riga-based chief economist with Nordea bank, Andris Strazds, is much more optimistic for the Baltics: "I would say that anything below 3% growth next year looks overly pessimistic and could happen only if something really bad happens globally - for example, a major war in the Persian Gulf region results in the oil price going through the roof."

While the three Baltics should continue to marginally outperform other EU members, that's far less than other emerging markets and political risk appears to be on the rise.

The first example already appeared in Lithuania when the government of Andrius Kubilius was kicked out of office despite making good on its promise to pull the country out of crisis. "The defeat of Andrius Kubilius's conservative austerity economy and the election of Algirdas Butkevicius's more populist ticket seem to have broken the political and economic continuity that we have otherwise experienced during past elections in the Baltic States," says Hans Brask, director of the Baltic Development Forum.

But Latvia's new PM finds himself in an immediate bind: elected to loosen the purse strings, any real moves by Butkevicius to do so could endanger the country's finances that have been so skilfully managed by former finance minister Ingrida Simonyte.

Perhaps even more ominously, a coalition also headed by Russian-born gherkin magnate and former fugitive Victor Uspaskich, plus impeached former president and stunt pilot Rolandas Paksas should not be short of drama, particularly with current President Dalia Grybauskaite making no secret of her disgust at having to deal with such a troika.


If not yet at Lithuanian levels, political risk is on the rise in the other two Baltic states, too. In Latvia, tensions are increasing between the centre-right Unity party of Prime Minister Valdis Dombrovskis and the more liberal Reform Party, partly because Reform's cadre of smart young ministers seem to be stealing all the headlines, but also because of concerns that too much of the cost of Latvia's economic turnaround is being paid for by the poorest sections of society.

Pressure is building for a referendum on the government's dream of euro adoption in 2014. With the European Commission and European Central Bank due by July to deliver a final verdict on Latvia's readiness to be admitted to the Eurozone, the first half of the year could see opposition parties attempt to embarrass the government by challenging it in the constitutional court. "Regarding Latvia in the Eurozone - I think that the probability [of admission] is very high. A good public finance position, moderate inflation and relatively high growth outlook will positively affect the Commission's opinion. I think that the [Commission] needs a 'success story' in such a still uncertain environment in the euro area and Latvia at least is really a success story," says Danske Bank's Baltic specialist, Violeta Klyviene.

In Estonia too, the formerly watertight government of Andrus Ansip is starting to spring a few leaks. A funding scandal in his Reform Party and the abject failure of government-approved measures to stop national airline Estonian Air losing money (which markedly increased losses) has taken some shine off Ansip's reputation as a safe pair of financial hands, and a general perception that the government elite is increasingly distant from the lives of ordinary Estonians will increase pressure, particularly in the run-up to local elections.

According to Swedbank's Martins Kazaks, the success or otherwise of the Baltics in 2013 will depend on their readiness to continue and refocus their reform efforts. "The post-recession rebound is by and large over," Kazaks tells bne. "To keep growing, the countries must create an environment that is increasingly favourable for productivity growth. This means continuing structural reforms. Many EU economies are sliding deeper into recession, which means that they will do exactly the same tricks that the Baltics did a few years back. For instance, they will cut wages. It is no longer possible to do so in the Baltics, so more difficult steps must be taken - and while companies can indeed do much themselves, it will not be sufficent if the government does not take an active part. And this again means deep reforms across the board: education, tax policy, regional development, etc."

Few people expect significant progress in 2013 on any of the high-profile joint projects that are supposed to be underway. From the Visaginas nuclear power station - roundly rejected by a non-binding plebiscite in Lithuania - to a regional liquefied natural gas (LNG) terminal and a high-speed rail link, the Baltics will continue to talk unity while hedging their bets and concentrating on domestic issues. "About the realisation of any cross-border megaprojects such as Visaginas in the Baltics I'm pessimistic... The Baltic states don't have any track record of having completed any major cross-border projects during the two decades since regaining independence - unless you view joining the EU and Nato as such 'projects'," says Nordea's Strazds.

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