Given the liberal approach in foreign trade practiced by the Baltic
countries, the devaluation in Russia in August 1998 was in turn one
of the main reasons for the poor performance of the economic
development last year.
Last year also triggered turbulence in general government budgets
because of the notable fiscal burden that started to emerge since the
early days of the prior year. Consequently, contraction and negative
GDP figures will be recorded in Estonia, Latvia and Lithuania in 1999.
In all three countries, new cabinets were formed while the Lithuanian
political scene was especially volatile with two new governments
established last year. Following the latest changes, the political
direction of the economic policy has become more transparent with the
main goal being the development of the free market environment and
the institution of EU regulatory measures and directives.
The Baltic countries continue their economic performance at different
paces. Estonia and Latvia were largely able to restructure their
economies in 1999 when the bottom of the economic recession was
Moreover, most economic indicators have been showing persistent
improvement in Estonia since the challenging first quarter of 1999.
The Latvian economic turnaround is apparent, but still shaky, with no
firm signs of improvement. Lithuania's economic progress has been
lagging, as its share of trade with Russia was the largest, and its
fiscal policy reaction was the slowest. Meanwhile one of the
nation's key companies, Mazeikiu Nafta (comprising around 18 percent
of total industry sales) has experienced repeated shutdowns.
The test was painful but a crucial reminder that the overall
structure of the economy was still weak and partly inefficient to
fully compete with the developed markets in the west.
Thus, the vast amount of foreign direct investments and continuous
consolidation in main industries throughout the year continued to
improve efficiency and competitiveness. Moreover, the outlook for
the future improved with the EU's invitation to Latvia and Lithuania
to commence entry negotiations.
Main source of growth - improved external demand
As all three Baltic countries employ liberal and open market
principles, their economies are highly vulnerable to foreign
development. Hence, the economic well-being of Estonia, Latvia and
Lithuania has always been dependent on foreign demand while further
growth will be attributable to improved efficiency in the Baltic real
sector and growing external demand, especially in EU countries.
After the Russian meltdown, Baltic exporters notably switched to new
markets in the EU in 1999 while its industries struggled for new
markets to cope with the loss in Russian exports. Still, export
growth to the EU was not sufficient to compensate for the lost
markets in the East throughout the Baltics last year.
The external sector is expected to improve in 2000 with anticipation
of accelerated growth in demand in the EU. Furthermore, Russia's
outlook has improved somewhat after the resignation of former
President Boris Yeltsin.
Along with decreasing domestic demand, imports also declined in 1999.
While the share of trade deficit measured to GDP is similar across
the three countries, the share of exports and imports of services is
It is the strongest in Estonia, determining the latter's current
account balance primarily by trends in services export. Latvia is
well balanced in between, as it has a proportionally bigger service
surplus thanks to the Russian oil and exports of other chemical
products through its main ports, Venspils and Riga.
As a result, the current account has shown signs of healthy
performance in Estonia. Along with a strong surplus in the service
account as a result of strong transit flows, increased port activity
and intense incoming tourism during the last summer resulted in a
sustainable level of current account, leading to a surplus in the
Estonian current account in the third quarter of 1999.
Transport sectors promising
The transit and transportation sectors will continue to perform well
in 2000, due mainly to the Baltic's advantageous geographic position
and existing infrastructure. Flexible and convenient transit
procedures and tariffs should help all three countries to position
themselves as a hub for East-West trade.
However, transit strongly depends on the recovery of Russian
purchasing power and on the ability to offer attractive commercial
terms competitive enough to induce Russian use of foreign ports
despite internal political pressure to do otherwise.
On the corporate level, a wave of domestic and cross-border mergers
and acquisitions was recorded in 1999. The trend was fueled mainly
by the depressed operating environment and lost eastern export
markets while the domestic market was being oversupplied.
The process, aimed to improve competitiveness and to attract cheaper
capital should continue in coming years.
In 2000, the communications sector is expected to show dynamic
progress while new breadth will be brought by the development of
e-commerce, Internet banking and other electronic services.
Buoyant opportunities remain within business service markets as well.
Good growth expectations raised high investor interest towards
telecom sector already in 1999 with most significant example being
the highly successful initial public offering and listing of Estonian
Telecom shares in February 1999(the issue was oversubscribed 18
times). The IPO was the largest Baltic equity issue ever at $ 222
The next important issue in this sector, an IPO of Lithuanian Telecom
is scheduled for the summer of 2000 while it is expected to bring
more attention to the underdeveloped Lithuanian capital market.
Private labor sector adjustments have taken place well ahead of
public institutions „ with wage cuts already occurring in late 1998
or the beginning of 1999. During recent months there have been small
indications of private payroll resuming growth. Contrary to that,
public salaries were growing rapidly in the beginning of last year
and only recently have cuts started to appear in the form of
austerity packages and continued low tax collection.
The year 2000 begins with more realistic budgets. Estonia looks to
balance its fiscal budget while Latvia and Lithuania seek to carry
more modest fiscal deficits than in 1999.
Budget formation has been closely monitored and advised by the IMF,
which is expected to enter into renewed or extended stand-by
agreements with all three countries this year.
A number of taxation changes are taking place, including the
Estonian decision to abolish the 26 percentage corporate tax on
reinvested profits and the corporate tax rate being cut from 29
percent to 24 percent in Lithuania.
Some hidden unemployment is now appearing in Lithuania as the result
of the registration of workers sent on unpaid vacation at the Labor
Exchange for heating compensation this winter. However, along with
economic growth the labor market is also expected to stabilize
somewhat in 2000.
The Baltic banking sector will continue its consolidation while the
Scandinavian invasion will be slightly diluted by the entrance of
other foreign banks, the most serious candidate being the German
Nord/LB. However, two Scandinavians - Swedbank and SEB will likely
increase their stakes in acquired banks, further developing the
rivalry between banking groups in the Baltics.
The Scandinavian injection that strengthened the financial ratios of
local institutions and improved the credibility of the financial
system should further increase foreign investment from the
Scandinavian region as well.
Given the aforementioned projections, additional banking sector
growth will depend on prevailing economic conditions. In Lithuania,
the sector's development will be determined by the privatization of
two state-owned banks (Agricultural and Savings) that hold over 44
percent of total banking assets.
The depth and stability of the Baltic capital markets will be further
developed by ongoing pension reform and long-term local institutional
capital. Private pension funds are just starting to operate in
Estonia and Latvia, and a voluntary (3rd pillar) system will be
launched in Lithuania this year.
Veikko Maripuu is the head of sales and research department at the
investment bank Suprema.