Latvian and Lithuanian economies wait for the right policies

The Baltic Times, TALLINN
Mar 09, 2000
By Kairi Kurm

 The development of Baltic economies in 1999 was based for the most part on the right policies, says a report from Hansabank Markets, an independent investment banking and brokerage division for Hansabank. Thanks to fast and radical changes in economic policies right after the Russian financial crisis, Estonia recovered much faster than the other Baltic countries.

The Estonian economy is flourishing because of the absence of political problems, while the outlooks for Latvia and Lithuania are not so positive, according to the report.

Hansabank Markets rated Latvia’s outlook as “stable+” as an indicator for economic improvement.

“There are some problems in the Latvian economy related to the country’s economic policies,” said Maris Lauri, macro-economics research analyst at Hansabank Markets.

The Lithuanian economy went through big changes last year. The new government put in place much stricter economic policies.

“I am looking forward to strong developments in Lithuania, but at present the situation is weak,” said Lauri. Hansabank Markets rated Lithuania’s current outlook as “negative,” but is ready to increase it to “stable” if the country’s outlook does not deteriorate in the face of the upcoming elections.

The biggest export market for the three countries is the European Union.The outlook for this market is optimistic in Lauri’s opinion. The agriculture and food industries of the three countries are suffering the most because of the decline of exports to CIS countries and lack of access to the EU markets.

Lithuanian companies have suffered the most from the decline of the Russian market, but the growth of exports to the EU markets indicates a shift of markets.

“A lot of Scandinavian companies have bought up Lithuanian companies after the crises. The production costs in Lithuania are low, more favorable to foreign investors than in Estonia or Latvia,” explained Lauri. The decline in Lithuanian imports is related to the decline in its foreign reserves.

Estonian exports and imports are expected to grow next year, said Lauri.

“Exports are the source of the growth of the Estonian economy. A big share of imported products is reproduced and then exported,” said Lauri.

Latvia’s imports are increasing while the country is facing difficulties with exports.

“Latvia is exporting a lot of wood and timber products, most of which is unprocessed. The demand for these products is in decline in Europe,” said Lauri. In terms of imports Latvia has been trying to protect the domestic market with very strict measures.This protectionism annoyed Lithuania, Estonia and the EU, but Lauri hopes Latvia will soon solve the problem.

The Latvian banking system is another sign of improving economic stability.

“The future of the Latvian banking system will be the same after the consolidation as it was in Estonia: There will be some major banks with strong foreign investors and several small, highly specialised banks with domestic capital,” said Lauri.

Lauri said he believes that the change in the income tax law does not have any major impact on foreign direct investments but rather works in favor of domestic investments. Starting from 2000, corporate incomes will not be taxed except in cases where income is distributed outside the company, for example in the term of dividends and wages. The government believes these changes in taxation support the economic growth.

Estonia�s economic growth for 2000 will be supported mainly by external demand, which in its turn is expected to grow in support of investments and household spending. In spite of growing inflation and growing demand for loans, lending rates in Estonia are expected to decline as a result of the improving economy and high liquidity. Hansabank Markets predicts a five percent growth for the Estonian economy and a two times smaller growth for Latvia and Lithuania.

“In Latvia the interest rates should decline, but they can also stay volatile because of political tensions in the country. All kinds of negative news may cause the outflow of foreign investments. Latvia should continue privatizations in order to bring in foreign investments,” said Lauri.

“There are problems with liquidity in Lithuania. A privatisation of a big company would do good for the country. Lending rates in Lithuania depend much on the economic policies. The good news is that Lithuania gets a loan from the World Bank.There are many opportunities out there for this country.”

Source:  http://www.baltictimes.com/news/articles/1626/

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