Tiger, tiger, burning (not so) bright…

May 14, 2008
By Mike Collier

VILNIUS -- A worrying verdict has been given on the state of the Baltic economies from one of Europe’s most respected sources, swiftly followed by a leading financial forecaster declaring itself surprised by the scale of the region’s economic downturn.

Investment experts Capital Economics said that hopes for a soft landing in the Baltic had been “blown to pieces” while former Swedish central bank chief Bengt Dennis talked about the Baltic tigers “hiding in the bushes.”

Capital’s assessment came on the back of data released in Estonia showing that the economy contracted by a massive 1.9% in the first quarter of 2008, leaving the annual rate of growth at a paltry 0.4%.

“The news from Latvia and Estonia has been nothing short of disastrous,” Capital says.

“The Latvian economy appears to be shrinking at a similar pace. With inflation set to rise further over the coming months, the region will remain in a tail spin for some time to come,” Capital believes, admitting that even though it has been warning of a painful adjustment for some time, “the scale and the speed of the slowdown has taken even us by surprise.”

A little more than a day before Capital issued its downbeat assessment, former Swedish Central Bank boss Bengt Dennis was calling for a cautious investment strategy for anyone considering a Baltic angle to their portfolio.

Speaking in Vilnius at a summit organized by East Capital, one of Central and Eastern Europe’s leading investment companies, the veteran economist said “I would agree with those saying that we don’t know yet if the [Baltic] economy has bottomed out, as we have had so many false starts.”

Dennis was keen to stress that since independence the Baltics had performed admirably in liberalising their economies but that recently governments had made their first serious “policy lapses” in this regard.

“We are very uncertain about the depth of the correction. The sharp slowdown in Estonia will be followed by a much sharper slowdown in Latvia... a sharp decline is setting in now,” Dennis told an audience of seasoned investors in the region.

Regarded as the doyen of Baltic economiy watchers by many, Dennis’ words are likely to cause severe discomfort to any investors who still think the Baltics are booming and sources of easy profits.

He continued to describe the region’s budgetary deficits as “alarmingly big,” roughly doubling in the last 2 years.

“Investors are uneasy and the currencies may come under renewed pressure, although they are quite quiet at the moment,” Dennis continued. “Foreign traders are getting more cautious as deficits of this size are not sustainable in the long term.”

Dennis’ independent position as East Capital’s main Baltic-watcher has clearly freed him up to say what no Baltic politician or central banker could ever admit to – no matter how obvious it might be.

“I think the euro is many, many years off and the imbalances make the Baltics unnattractive euro members. My own feeling is that the euro is no longer a political priority in any of the Baltic countries,” he added, before concluding with a call for baltic politicians to aim for simple sustainability rather than seeking to return to earlier levels of supercharged growth which helped create the current situation.

“The Baltic tigers will be back, but they need some rest,” Dennis said.

One cause for limited optimism is the relatively better position of Lithuania compared to its northern neighbors, which both Dennis and Capital Economics pointed to.

According to Capital, “activity in Lithuania looks to be holding up pretty well. But the imbalances in the Lithuanian economy were never as severe as elsewhere in the region.”