Double-dip recession fears overtake Lithuanian exporters

  • 2011-09-14
  • By Linas Jegelevicius

READY TO POP: Vytautas Zukauskas says the recent recovery, based on stimulus measures, won’t last.

KLAIPEDA - With the 2008 recession relentlessly gnawing at domestic trade, many Lithuanian companies hurried to switch gears towards restructuring in attempts to find their berth in the global markets. However, after dizzy globe-trotting, the abrupt export slowdown puts the recovery in question, and makes the export-oriented businesses fret.
Statistics show that, in January 2010, export growth was 60 percent, compared to the same period last year, but in July the number dropped to 27 percent, signaling a gloomier future.

“Export growth came to a halt a while ago. The mind-blowing export growth numbers cannot be trusted very much, as they are compared to the stagnant 2010. If we were to compare them with 2008, we would see an insignificant growth, or none at all. Also, [looking at] the past 4 or 5 months, it would be clear that exports stand still,” Rimantas Rudzkis, DnB Nord Bank chief analyst, says.

A survey of export prospects, conducted among major Lithuanian exporters, has revealed streaming optimism in 2010’s second quarter - 69 percent of executives said they believe the export future is bright. With the uneasy export data flowing in, however, the optimism is vanishing as today less then 40 percent of the respondents are still upbeat. The export slowdown is particularly painful to Lithuania, which heavily relies on the EU export markets.

“Amid the new difficulties in the Western economies, demand for Lithuanian products has been declining. The slump is nothing out of the extraordinary, as Lithuania is very intertwined with the export markets. In addition, all countries, including the world superpowers, like China, the United States and Germany, keep announcing bleak reports on their production and consumption, a tell-tale sign of a looming double-dip recession. In fact, I would rather say we are dealing with the continuation of it, as it has not gone away yet,” Vytautas Zukauskas, senior expert of Lithuania’s Free Market Institute (LFMI), said to The Baltic Times.

In 2010’s first half-year, Lithuanian exports saw an overall 41.2 percent growth, year-on-year. In the list of top export markets, Russia is first, with 15.9 percent of all export, with Latvia as runner-up with 9.5 percent of the export total, and Germany clinches third spot, at 9.1 percent of the exports.

When it comes to the largest national exporters, Orlen Lietuva, a Polish oil refinery, has contributed most to the overall expert growth, fetching 8 billion litas ( 2.2 billion euros), up 49 percent in the half-year, compared to 2010.
Achema, a fertilizer producer, has taken advantage of favorable fluctuations in the global markets and reaped 989.7 million litas in sales, a three-fold surge from 2010’s first half-year.

“With fertilizer prices soaring globally, we have ramped up production, raising our sales internationally. However, the costs due to costlier natural gas, electricity and especially ammonia, have increased as well,” Jonas Sirvydis, the Achema director general, said to the business daily Verslo Zinios.

The third giant contributor to the overall Lithuanian export growth is car dealers, who have increased second-hand car exports or re-exports to the major markets in Kazakhstan, Russia and Belarus, by over 90 percent, in the first half-year. The rise is, however, due to the new stringent customs rules, significantly constraining the trade for Lithuanian car dealers. Therefore, it is expected that car export volumes will go down substantially in the second half-year.

In anticipation of the double-dip recession, these Lithuanian export whales are readying to temporarily give up their plans in foreign markets and take measures alleviating the possible double-dip. However, Klaipeda Seaport Authority, a big player in the export market, calls the fears “too exaggerated.”
Rudzkis notices that many Lithuanian exporters complain of short-term trade agreements that start to prevail, a sign of possibly worse times ahead. The expert warns that, in a longer perspectives, labor shortages and too little investment may start crippling Lithuanian exports.

The bank expert reckons that exports will continue to grow in 2011’s second half-year, however, at a much slower pace.
The LFMI expert, Zukauskas, asserts that the industrial world has started too early in believing that the crisis is over. “Basically, the temporary improvement of the economic outlook, which has been heralded as an end of the crisis, was due to very unnatural factors – illusory fiscal means that hiked demand for the short term, and which later translated into the European debt crisis. In addition, due to fictitious monetary politics, Europe is on the brink of a monetary crisis, e.g. the interest rates that were set deliberately very low by the European Central Bank (ECB) to boost consumption, with ECB signals now showing a need to raise rates because of fears of rising inflation. Western policy-makers are not eager to restrain the low interest-boosted borrowing, though. In short, the supposed recovery has been a bubble that is soon to explode,” Zukauskas maintained.

He says it is “hard to predict” how deep the world may slip back in the economic downturn.
The Belarusian crisis, the expert says, has also considerably contributed to the slowdown.
Following devaluation of the Belarusian ruble, the Belarus-bound Lithuanian exporters began to struggle in the Belarusian market. In addition, due to the devaluation, Belarusian goods started flowing into the Russian market, increasing competition there.

“Lithuanian exports will not be, for many years, as large and rapid as before the Belarusian crisis. Some financial analysts already warn of a second devaluation of the Belarusian ruble. If this happens, Lithuanian exports to Belarus will continue slowing,” says Aleksandras Izgorodinas, an analyst at the Economics and Finance Department at Lithuania’s Industrialist Confederation.

EU-bound Lithuanian exports make up 61 percent of the export total, while the rest goes to the CIS, the Commonwealth of Independent States.
“The situation in Russia is extremely unstable today. The country’s economy largely lies upon Russian oil prices. If they go down, Russia may encounter some very serious difficulties. Therefore, Lithuania, in order to avoid a Russian crisis like the one in 1998, has to look for new developing markets and take advantage of them,” Izgorodinas said.
What are these possible new markets? Some Lithuanian industrialists suggest turning to Arab countries, or exploring the much-promising Kazakh markets.

However, with the unrest ravaging some Arab countries, Lithuanian businessmen are wary. Paulius Lukauskas, Versli Lietuva director general, says he is not “surprised” at the slowdown of Lithuanian exports. “As we are a small and open-economy country, all those fluctuations on the world market do impact us. Now we all have to closely monitor the situation in Germany, which is one of the most important Lithuanian export partners. The situation in Russia has to be carefully observed as well. In order to fend off possible setbacks due to the situation in these markets, Lithuania has to increase its competitiveness,” Lukauskas said to Valstieciu laikrastis.

Asked about the possible adverse effects of decreasing exports, Rudzkis said they are going to be “substantial.”
“The slowdown will slow the recovering investment, and will likely trigger putting off investment plans which, in turn, will ill-effect the construction sector and the mood at banks. With fewer loans granted, domestic consumption will decrease and businesses will hire fewer people and no pay increases could be expected,” Rudzkis predicted.