Macroeconomic news makes markets nervous

Last week, the Baltics were anxiously awaiting news on the macroeconomic situation in the three republics, which no doubt influenced their stock markets. The international press and rating agencies also had a hand in influencing the markets. In particular, the usually responsible reporting of the Financial Times was absent in an article about the possible devaluation of the Latvian lat and Lithuanian litas. Instead, it was more in line with the style employed by the British tabloids. The report was based on anonymous sources and pinned the reason for devaluation on the business interests of Latvian Prime Minister Andris Skele.

The Wall Street Journal's Central European Economic Review also quoted research that earnings of Latvian companies will tumble by 25 percent this year to the lowest levels in Central Europe. The international press also mentioned Latvia in connection with the money laundering scandal allegedly involving employees of the Bank of New York. In several stories it was mentioned that Lucy Edwards, who was responsible for the bank's Eastern European operations, worked with Latvian and Russian banks. Latvian bankers were no doubt also discomforted by the statements of a top central bank official that the Bank of Latvia expects there to remain just five to seven banks within a couple of years.

Little wonder that the Latvian securities market is stagnating, with average daily turnover of around $50,000. The P/E ratio of Unibanka, Latvia's top stock, is just 3.5, which is not only incredibly low by world standards but by Central European standards as well. This means that despite the bank's sizable profit, investors are still wary of the country's economic and political future and of sinking their money into either Unibanka or Latvia.

In Estonia investors were in a state of nervous expectation all week. The announcement of a drop in GDP by 2.4 percent was positively received by the market, though, which had expected a worse result. The stock market could rebound next week as investors have more time to react to this news.

In Lithuania stock prices continued to rise, but there was a small correction at the end of the week. The Central European Economic Review quoted research that Lithuanian companies would increase their profitability this year, but this is difficult to believe given that many exporters have been suffering from the unfavorable dollar/euro exchange rate.