Estonia, Lithuania dismiss overheating anxiety spread by Latvia

  • 2007-03-21
  • By Gary Peach
RIGA - Latvia's economic overheating anxiety and its attendant fears of an imminent currency devaluation spread to neighboring states last week, though Estonian and Lithuanian officials were quick to dismiss the speculation and point out differences between the Baltic economies.

The Bank of Estonia stressed that any devaluation of the kroon would create more problems than it would solve and under no circumstances was an option.
"Speculations concerning the exchange rate of the kroon arise from a lack of competence," the bank said in a March 13 statement, adding that such allegations have been made continually since the kroon was introduced in 1992.
The bank stated Estonia should continue pursuing economic development through transparency, a fixed exchange rate and a fiscal surplus.

"I wouldn't over-dramatize the situation," Economic Affairs Minister Edgar Savisaar was quoted as saying. "Estonia's financial situation is better than Latvia's."
In Lithuania, Finance Minister Zigmantas Balcytis said that talk of an overheating economy was without basis. "The balanced fiscal policy, which is being implemented coherently, ensures that Lithuania will manage to avoid any negative processes in the future," he said in a statement on March 14.
Still, the government approved an inflation-fighting plan on March 15 in order to meet Maastricht criteria and introduce the euro by 2010. The plan 's dubbed the National Euro Adoption Plan 's calls for tighter fiscal discipline, restricting increases in administered prices, and limiting wage and salary raises not backed by commensurate increases in productivity.
Economists were tepid about the plan. Guoda Steponaviciene of the Lithuanian Free Market Institute, a Vilnius-based think-tank, told the Verslo Zinios daily that the government needed first and foremost to put the budget in surplus.

"Our economy is on the rise, there are no crises and inflation is not very high. Not to have a budget surplus in a year like this is sheer carelessness," Stepona-viciene said.
Since the start of the year the Baltic economies 's the fastest growing in the European Union 's have been the focus of intense scrutiny in international media and financial institutions, most of whom agree that there are a number of "red flags" pointing to overheating, which would precipitate a so-called "hard landing" with economic growth slowing to nearly zero.
In the seminal work on the subject dated Feb. 23, Danske Bank showed that the three Baltic states are in an economic "danger zone." Of 11 vulnerability indicators used by the bank's analysts to gauge a possible overheating, Estonia and Latvia scored seven "red lights," while Lithuania had five.

Danske Bank and other banks have compared Latvia's economy to that of Portugal in the late 1990's and Iceland's in 2006.
Latvia's economy grew 11.9 percent last year, while Estonia's 11.4 percent 's the best results in the EU27. Inflation is also high in both countries, reaching 7.3 percent year-on-year in Latvia by the end of February, and 5.1 percent in Estonia last year.
Lithuania's GDP increased 7.4 percent in 2006. Inflation was 3.8 percent.
Meanwhile, the Bank of Latvia decided to raise the refinancing rate by 0.5 percentage point to 5.5 percent as part of its ongoing battle to shore up cheap money. Bank Chairman Ilmars Rimsevics said the move was dictated by the need to support the government's efforts to reign in inflation, which he said were not a "magic wand" but could succeed if "consistently implemented."
"The economic imbalances have continued to worsen as suggested by the key macroeconomic indicators 's persistently high inflation, a large current account deficit and rapidly growing external debt," the bank said in a statement.

"Growth of the gross domestic product reached an all-time-high last year… mainly on account of sectors relying on the domestic demand and unable to support sustainable long-term development on their own," the bank said.
Rimsevics said Latvia's current account deficit reached 21 percent in 2006, the highest in the EU, and an astonishing increase on the 2005 result of 12.4 percent.

Danske Bank welcomed the rate hike, but said that economic risks are still "considerable" and the bank might have to do more of the same if the lat, which last week was forced to the top of its trading band, continues to weaken.
"It is quite obvious that urgent policy action is needed to address the major imbalances in the Latvian economy," wrote Danske Bank in a March 15 research note.