The Baltic states’ improving growth prospects are under pressure due to the eurozone’s frailties and their close trade and investment links to Sweden and Russia.
Latvia, Lithuania and Estonia succumbed to increased risk in Q3, according to Euromoney’s Country Risk Survey, in spite of their previously favourable score trends.Various factors might account for the increased risk in the Baltics, including the continued weakness of the eurozone, but the Swedish and Russian economies are undoubtedly substantial contributors, given the two countries’ strong trade, investment and banking sector links with the Baltic states.
ECR Baltic expert Tonu Mertsina, chief economist at Swedbank, says: “We have substantially revised down Russia’s economic growth forecast for 2013-2015 and Russia is Estonia’s third-largest export partner.”
Estonia’s economic outlook has been downgraded, too, because of reduced EU structural funds and wages rising faster than productivity growth. Slower GDP growth of 1.5% this year, rising to 2.5% in 2014, is predicted by the IMF in the latest biannual World Economic Outlook released this month.
Lithuania, within the third of ECR’s five tiered groups, has slipped two places to 47th on the back of a 0.5 point drop in its score to 56.3. The sovereign had been on a rising score trend due to robust economic growth.
Several of Latvia and Lithuania’s risk factors still fail to make the grade, including government finances and the employment/unemployment situation.
Both countries are seeing their unemployment rates decline, but only to around 11% next year, according to the IMF. This is a burden on government transfers and tax receipts, making their reasonably favourable fiscal dynamics vulnerable.
Latvia has the added problems of an unstable minority government and weak capital market access – both factored into the country’s risk score – making it the more susceptible to external creditor assistance. It has the weakest political risk assessment, according to ECR experts, trailing Estonia’s by almost 12 points – notably for corruption, the regulatory and policy environment and government stability. Its economic assessment score is also the worst of the three Baltic states.
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