Looking ahead: what’s next for the Baltics in 2023

  • 2023-01-31
  • Tomas Kairys, Head of Baltic States, European Bank for Reconstruction and Development (EBRD)

A global pandemic, supply-chain disruptions, war in Europe, high inflation, and the twin climate and energy crises – the list of challenges facing the world is long and arduous. 

The Baltic States are unfortunately not immune from these headwinds. While the region registered a strong post-pandemic recovery fuelled by high levels of accumulated savings and spending on services in 2021 and beginning of 2022, it is being severely impacted by the economic fallout of the war on Ukraine. The region is currently seeing a reduction in economic activity, dragged down by historically high inflation, especially in energy and food prices, weakening currencies, waning external demand and a strained geopolitical situation.

As a result, the EBRD estimates that growth in the Baltic States will be modest at best over the next year. In Estonia, we expect a 1.5 percent GDP growth this year, and a 1.0 percent growth in 2023. Lithuania is expected to show a 2.0 percent and 1.5 percent in 2022 and 2023, while Latvia will see the smallest growth of 0.8 percent in 2023.   

Looking ahead 

The Baltic region has seen the highest inflation of all EU economies, with Lithuania and Estonia experiencing a 22.5 percent and 24.1 percent increase in prices respectively. 

Inflation is likely to decelerate to single digits only around the second half of 2023. It is, after all, mostly driven by higher energy costs, which might have not peaked yet. Record low unemployment across the region, and an expected increase in the minimum wage (10.8 percent in Estonia, 24 percent in Latvia, and 15 percent in Lithuania) are also likely to add to inflationary pressures. 

The European Central Bank has responded aggressively to tackle the rampant inflation, increasing interest rates, which is likely to impact the corporate sector and lead to decreasing real wages and increasing unemployment rates. This will also be compounded by the effects of the economic slowdown and refugee inflows, which are yet to materialise and are expected to lead to a temporary easing of labour market shortages from this year.

What happens around the region is also of vital economic importance. While a warmer-than-usual winter in Europe, and China’s reopening provoke optimism amongst forecasters, economic activity in Europe is still subdued. Particularly in larger EU economies, and the region’s main trading partner Germany, inflation remains above targets, and economic recovery is expected to  materialise only in the second half of 2023. This is likely to negatively affect exports from the Baltic states. Estonia and Latvia are already seeing lower exports due to weaker demand from the EU. Lithuania’s growth is also impacted by reduced exports to Belarus, Russia and Ukraine.  

Once inflation decreases, and fresh funds under the EU’s Recovery and Resilience Facility become available for the region in 2023, the subdued corporate investments in 2022 are likely to rebound. This should support economic growth.

EBRD in the Baltics  

It’s clear that the year ahead will continue to be challenging, and the EBRD expresses its solidarity with the Baltic countries and stands ready to support the region to safeguard livelihoods and foster economic growth. 

EBRD, as an international financial institution with strong private sector focus, works across public and private sector not only by providing various forms of finance, but also by deploying a toolkit of policy, technical assistance and capacity building to also further mobilise private capital. Given our deep experience, our high standards, our robust governance, and our links to shareholders as donors, EBRD is well placed to mobilise investment and financing to accelerate the energy transition and achieve sustainable infrastructure. 

With the region’s dependence on imported energy –  one of the leading factors of historically high inflation - it’s vital to develop domestic energy production and support the transition to green energy. It’s encouraging to see that renewable energy and green transition are high on the agenda in all three Baltic states, and the Bank stands ready to support further energy integration and interconnectivity across the region. 

At the same time, the health of the banking sector is of utmost importance. It is encouraging to see that there have been limited capital outflows from the three states following the war, and that the corporate sector remains robust –  banks are well capitalised and businesses maintain substantial cash reserves. Strengthening the capital markets in the region remains a priority for the Bank, and we will continue to work with the authorities to strengthen and integrate the three national markets into a pan-Baltic capital market, to attract investors and give rise to a larger pool of liquidity.  

The EBRD is planning on increasing its investment in the Baltic countries in 2023 to support energy and resource efficiency including renewables and logistics, promote acceleration of digitalisation in the corporate sector as well as continue participating in equity funds and, importantly, debt and equity capital market investments at the time of uncertainty created by the war. EBRD invested more than 350 million euros last year in the Baltics, and plans on continuing to be active and do more in 2023.