Latvia behind Baltic neighbors in exports and imports

(NormanEinstein, CC BY-SA)

Figures for 2016 show that Latvia trailed Lithuania and Estonia in import and export volume, while Lithuania has the largest trade deficit.

The Central Statistical Bureau of Latvia (CSB) data, which cover January to November 2016, reveal Lithuanian exports were valued at EUR20.52bn, Estonian at EUR10,89bn and Latvian at EUR9.43bn, the Baltic Course reported. In percentage terms, however, Latvia exported 74 per cent to the EU, equal to Estonia, and Lithuania was third at 61 per cent.

Latvia received 80 per cent of its imports from the EU, Lithuania 70 per cent and Estonia 60 per cent.

The three Baltic states showed a negative foreign trade balance overall , Estonia posting a EUR1,46bn gap, Estonia a EUR1,69bn, and Lithuania a EUR1,79bn

Latvian banks perform relatively well

There is a silver lining, at least for Latvian Banks. The profitability of the banking sector in Latvia is higher than the European average, according to Peteris Putnins, Chairman of the Financial and Capital Markets Commission. Return on equity grew by 14,3 per cent up from 12,5 per cent in 2015.

Last year, banks generated EUR454,37m in aggregate profit, a 9 per cent increase y/y. However, the profits were boosted by selling shares in the Visa Europe payment card company. If this is excluded then there would have been a downturn by 19,5 per cent, to EUR335m y/y, and the return on equity would have been 10,4 per cent; less comparing y/y but still above the EU average.

Latvian Banks and national branches of foreign banks made a profit in 2016, earning a total of EUR466m in aggregate profit.

Baltic region is a Mixed Bag

A wider performance context was provided by the publication of Swedbank’s latest Baltic Sea Report, an annual evaluation of the region’s economic performance. According to the report Latvia has slipped in performance comparing to its neighbors.

The region as a whole still remains at the top quarter of the world’s most competitive countries. Best developed are the regional education, logistical and governance sectors (top 20 per cent in the world).

The report analyses ten countries: Germany, Denmark, Norway, Sweden, Finland, Russia, Estonia, Latvia, Lithuania and Poland. Particular stress is on Sweden and the Baltic countries.

With 9-10 points indicating a top 10 per cent in world ‘best performance’ ranking Latvia (6.8 points) has dropped to lower place than Estonia (7.8) or Lithuania (7.1) but still above Poland (6.6) and Russia (5.1). Top of the list was Sweden (8.9) followed by Norway and Finland at (8.7 points apiece).

Generally the education, labor market and financial markets have worsened. Governance remains at the same level but improvements have been noted in the entrepreneurship, fiscal policy and infrastructure.

The reasons for worse Latvia’s performance is low consumer demand, low EU funds absorption rate, and a construction sector crisis. Reforms have been slow especially leading to a raise of productivity and efficiency, as well as improving the fiscal policy. Latvia’s labor pool is running low, so it cannot rely on cheap labor costs for a competitive edge.

Political impediments to growth

The report expands its findings. Modest growth throughout the region is expected, but the rise of populist governments, though promising fiscal expansion that may boost short term growth, especially if there are protectionist policies (Brexit, US elections, shelving of free trade agreements), will undoubtedly negatively impact the longer term. The report warns against losing sight of the longer-term perspective.

Exports are the key to growth thus structural and fiscal policies are necessary to nurture these. “Export-driven growth is the only model that can support fast and sustainable growth in the Baltics,” authors of the report write.

The GDP of the Baltic region is set to rise by 1.9 per cent, since Russia has exited recession earlier than expected, but it may grow 2.1 per cent excluding Russia (weighted forecast). Poland’s predicted growth rate in 2017 is 3.4 per cent and also 3.4 per cent in 2018. In 2017, GDP of this region is predicted to rise by 1.8 per cent and 1.6 per cent 2018. The report forecasts a global growth of 3.3 per cent for 2017, which it calls “modest but not bad”.

Differences in business cycle create opportunities for businesses

According to the authors of the report “Fiscal policy should become smarter in supporting long-term growth”. In short it means spend less and keep open borders (the opposite to populist agendas). Short-term fiscal policies will be expansionary, temporarily muting long-term negative growth.

Structural problems, such as income equality, digitalization and the threat to jobs, labor skills and ageing populations, still have to be tackled across the Baltic region.

Higher uncertainty and risk of protectionism (closed economies rather than open) will hamper a long term growth and result in lower exports and lower investments.

The verdicts

In Estonia – according to Swedbank’s index, overall business environment stayed at 2015 level – the Baltic Sea region’s average. The recent change of government is seen as an opportunity to accelerate structural reforms. However, too much economic stimulation and the deterioration of public finances could increase potential risks. 

Latvia’s patchy external demand, wary confidence, insufficient investment, subdued credit demand, and structural weaknesses (in education, health care, and the judicial system) have damaged its economic growth in recent years. Growth in 2016 has slowed close to stall speed, but with the EU funds and a rising corporate credit cycle, short-term growth is about to pick up. Long-term growth potential has a low ceiling, but the economy can do much better by unlocking pockets of higher growth – productivity, efficiency, and smart fiscal policy. Its verdict – “a steep mountain to climb”.

The report notes that Lithuania  has a “closing window of opportunity”. This year’s growth was weaker than expected but is likely to pick up somewhat in the coming years. Potential GDP growth is weak and further convergence towards the EU average largely depends on the ability to introduce structural and, in many cases, unpopular changes. The report saw “progress in Lithuania but also risk at a time when a breakthrough is needed”.

The full report.

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