EASY, TIGER: Lean times look to be ahead
VILNIUS -- A worrying verdict has been given on the state of the Baltic economies from one ofEurope's most respected sources, swiftly followed by a leading financialforecaster declaring itself surprised by the scale of the region's economicdownturn.
Investment experts Capital Economics said that hopes for asoft landing in the Baltic had been "blown to pieces" while former Swedishcentral bank chief Bengt Dennis talked about the Baltic tigers "hiding in thebushes."
Capital's assessment came on the back of data released inEstonia showing that the economy contracted by a massive 1.9% in the firstquarter of 2008, leaving the annual rate of growth at a paltry 0.4%.
"The news from Latvia and Estonia has been nothing short ofdisastrous," Capital says.
"The Latvian economy appears to be shrinking at a similarpace. With inflation set to rise further over the coming months, the regionwill remain in a tail spin for some time to come," Capital believes, admittingthat 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, formerSwedish Central Bank boss Bengt Dennis was calling for a cautious investmentstrategy 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 veteraneconomist 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 theBaltics had performed admirably in liberalising their economies but thatrecently governments had made their first serious "policy lapses" in thisregard.
"We are very uncertain about the depth of the correction.The sharp slowdown in Estonia will be followed by a much sharper slowdown inLatvia... a sharp decline is setting in now," Dennis told an audience ofseasoned 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 stillthink the Baltics are booming and sources of easy profits.
He continued to describe the region's budgetary deficits as "alarminglybig," roughly doubling in the last 2 years.
"Investors are uneasy and the currencies may come underrenewed pressure, although they are quite quiet at the moment," Denniscontinued. "Foreign traders are getting more cautious as deficits of this sizeare not sustainable in the long term."
Dennis' independent position as East Capital's mainBaltic-watcher has clearly freed him up to say what no Baltic politician orcentral banker could ever admit to 's no matter how obvious it might be.
"I think the euro is many, many years off and the imbalancesmake the Baltics unnattractive euro members. My own feeling is that the euro isno longer a political priority in any of the Baltic countries," he added,before concluding with a call for baltic politicians to aim for simplesustainability rather than seeking to return to earlier levels of superchargedgrowth 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 betterposition of Lithuania compared to its northern neighbors, which both Dennis andCapital Economics pointed to.
According to Capital, "activity in Lithuania looks to beholding up pretty well. But the imbalances in the Lithuanian economy were neveras severe as elsewhere in the region."