Economists of the leading private banks in the region gave their predictions to Alexander Welscher of Baltic Business Quarterly magazine which is published by the German-Baltic Chamber of Commerce (AHK) and is reproduced here with permission from a special COVID-19 edition.
The economists are offered a series of statements about how the crisis might impact the economies of Latvia, Estonia and Lithuania, and they give their responses accordingly. Taking part are:
Mārtiņš Āboliņš
Chief macroeconomic analyst at Citadele Bank for the Baltic region
Dainis Gašpuitis
Chief economist at SEB banka Latvia
Tõnu Palm
Luminor Bank Chief Economist in Estonia
Liva Zorgenfreija
Swedbank Latvia Chief economist
The coronavirus outbreak and its long-term economic impact will be worse for the Baltic States than the 2008 financial crisis
MĀRTIŅŠ ĀBOLIŅŠ: Economic contraction is likely to be severe in the Baltics, but we do not repeat the experience of 2008 financial crisis. At least we do not expect it. In 2008 Baltic states had very large imbalances such as huge trade deficits, credit bubble and overvalued real estate. Currently overall economic situation is much better. Trade is balanced, lending growth moderate and financed by domestic deposits while real estate is relatively adequately priced. At the same time global situation is likely to be worse, so it very much depends on what happens in Europe and elsewhere. That said small and open economies are usually more vulnerable to external shocks so we cannot give any definitive forecast.
DAINIS GAŠPUITIS: The global economic and euro area’s outlook appears worse than during the global financial crisis. However, for the Baltic’s economy, the crisis could be less deep than it was ten years ago, although it may be a weak consolation.
TÕNU PALM: There is no doubt that Covivd-19 will be a major challenge for all economies and Baltic open economies are no different. But when comparing with the previous crisis, we have to keep in mind the recent strong growth years with good fundamentals, including fiscal discipline and surpluses in current accounts during the past years, which have all facilitated strong labour markets. Baltic open economies are well integrated into the euro area and entered the current crisis with sound macro balances and a much stronger banking sector than in 2008. Assuming that euro area countries will be gradually back in business in the second half of 2020, the crisis will be sharp and comparable to 2008, but with less long-term impact than the global crisis which deteriorated balance sheets. EU and national response combined on financial side will be crucial to mitigate the significant damage from virus.
LIVA ZORGENFREIJA: Hopefully not. The 2008 crisis was ignited by a global financial squeeze, but the extent of fire damage was largely of our own making. Imbalances were the key feature of pre-2008 times – booming private debt, real estate bubble, unsustainable current account deficit, high inflation and pro-cyclical fiscal policy. As a result, it took many years (ten for Latvia) to recover and reach pre-crisis GDP levels. This time is worse in terms of severity and abruptness of the global shock. But euro membership and the soundness of Baltic economies suggest we are much better prepared to fight this crisis; therefore, long-term impact should be less pronounced. Though ultimately it depends on how quickly the world gets the virus under control.
The small open economies of the Baltic States will be hit harder by the coronavirus crisis than European economic superpowers such as Germany or France
MĀRTIŅŠ ĀBOLIŅŠ: Not necessarily. So far spread of the virus is less than we feared and lockdown measures less severe than in for example in Spain, Italy or France. It is too early to tell if we can contain the spread of the virus without more severe lockdown measures, but in such case we could be somewhat less affect. But overall I think most exposed countries are those with large tourism and hospitality sector such as Greece or Spain. In the Baltics tourism sector is not large and relatively less sophisticated manufacturing base with large food, wood and metal product sectors could also be more resilient to downturn in demand although more than 60% of our manufacturing is export orientated and dependent on European demand.
DAINIS GAŠPUITIS: In general, the severity of the crisis could be relatively similar across EU countries. The Baltic economies have become more competitive and resilient over the past decade, household savings have risen, and there are no imbalances that were a major cause of severity of the previous crisis. In addition, countries are members of the euro area. This is a very important factor, currency risks are gone and governments are actively taking action, providing support to both businesses and households. Yes, governments have limited power comparing more wealthy partners in EU, but our society could be more resilient to overcome economic difficulties. Therefore, which country will manage more successively the crisis, we will be able to conclude only after the crisis.
TÕNU PALM: Open economies are more dynamic both in the downside and in the upside so the fall in GDP will be larger than in Germany. The past euro debt crisis did not impact the Baltic countries much at all, since there were no structural problems to correct. Covid-19 is a different challenge and headwinds will be substantial since fighting with virus requires shutting down large parts of the economy. Exports fall will hit the Baltic States relatively harder, given the openness to trade. Tourism sector, hotels and catering, but also transport are among the most exposed sectors. While agriculture, food industry and larger ICT sector are in a relatively better position. No one is immune to lock-down. The recovery will be dependent on opening up of foreign markets notable among the key trade partners in EU. The Baltic economies have demonstrated high flexibility in the past to deal with crises.
LIVA ZORGENFREIJA: Yes. Baltics are much more open, which renders the impact of a global shock via the export channel relatively larger. But the virus shock is not just global– it is also internal. In fighting the virus, Baltic advantage can lie in being less densely populated, potentially more nimble in response to crisis due to their size, as well as their being relatively digitalized (especially Estonia). Baltics’ low government debt helps, but trust of financial markets in European superpowers is unlikely to waver even if their debt is higher. European superpowers seem to be in a better position than the Baltics in other aspects: larger healthcare spending, wider existing safety net, as well as more impressive additional fiscal stimulus.
The coronavirus crisis will ultimately change the way of doing business and working conditions
MĀRTIŅŠ ĀBOLIŅŠ: Some changes will definitely happen. More remote working and maybe less traveling but I think it is too early to tell. This is a natural disaster and life usually return to normal after recovery. Although this is very big and there could be political consequences. I think the big question is to what extent current events lead to big shifts in global economy such as realignment of supply chains and maybe less globalization. Politics could favour such situation and it would probably mean some re-shoring from Asia. In that situation Eastern Europe could be in good position to compete. But it is probably too soon to say anything definitive about that.
DAINIS GAŠPUITIS: The transition to digitalisation will only accelerate and the process is already underway. And, given the developed infrastructure, the Baltic States could be in a good position in the digitization process. Shared service exports and start-ups could be some of the Baltic success stories. However, the environment still needs to be strengthened to make its positive impact on the economy more significant.
TÕNU PALM: Covid-19 is indeed likely to speed up digitalisation process of the European economies and perhaps also shortening and simplifying of the supply chains, bringing them closer to the customer. The EU could produce more goods and services of their own, relying less on China. SMEs in particular will realise the importance of going more digital. Remote working and studying are great examples of dealing with the current challenges. Meanwhile, online learning can be further improved with new technology, so in the future virtual reality will allow to host conferences in a new format. That will save some mileages from flying.
LIVA ZORGENFREIJA: Yes, if we learn from the experience. First, crisis urgency brings out the very best of human ingenuity. Myriad ways are discovered to fight the pandemic and keep the economy going – and the discoveries made today can improve our lives in the longer term. Second, this is an unplanned test of digital capabilities of all economic actors. It is the time to either reap benefits from previous investments in technology, or to realize that a lot more investment is needed. It can therefore provide a boost to the many economies suffering from low rates of productivity growth. Finally, the global nature of the crisis requires international cooperation, which, if maintained, can help in addressing other global crises – like climate change.
The economic measures and stimulus packages of the governments in Tallinn, Riga and Vilnius to tackle to coronavirus crisis are too little and too late
MĀRTIŅŠ ĀBOLIŅŠ: Current measures are probably sufficient if situation with the virus could be resolved quickly but are unlikely to be enough if economic downturn is severe and protracted. At the same time budget resources in the Baltics are limited and we have to consider budgetary constrains. Deficits are likely to increase due to automatic stabilizers and it is important to maintain access to financial markets. In 2008 Latvia had A- credit rating and government debt was less than 10% of GDP but we were locked out financial markets and had to turn to IMF and EC for rescue package. Now we are in euro area and it helps, but in general I think for the Baltics it would be good to have more support measures at the euro area level.
DAINIS GAŠPUITIS: Governments have responded in a timely and proactive manner. Volumes relative to GDP are solid enough comparing to developed countries. However, aid volumes are likely to be increased and conditions fine-tuned to minimize negative economic and social consequences. However, it must be taken into account that the longer the crisis, the less power to support economy.
TÕNU PALM: The first response of the governments has indeed been rather prompt and also focused, but there will likely be a need for more liquidity and wage support as the transition from quarantine period will be challenging in Europe. In European terms, the 7-8% of GDP initial package is a good start. The composition and implementation of the measures varies for each country, but the core need today is to provide the bridge loans, credit guarantees and financial support to the most vulnerable. There are risks of overstimulation during next years when growth is well founded. There is less need to stimulate next year’s growth and more is required to keep the labour market as resilient as possible to offset the adverse effects of Covid-19. The difference from 2008 is that the banks have indicated willingness to be part of the solution.
LIVA ZORGENFREIJA: The stimulus packages of Baltic governments will likely need scaling up. The speed of the virus spread and the magnitude of economic shock that the restrictive measures imply, have been hard to comprehend. Therefore, what was regarded as a prompt and impressive fiscal boost just a couple of weeks ago, now seems insufficient to sustain the economy. Governments everywhere are fine-tuning existing measures and adding new ones as they go along. The mantra these days seems to be “do whatever it takes”.
The Baltic States with their digital nations and lively start-up scenes are more resilient than other countries to live up to the economic consequences of the coronavirus pandemic
MĀRTIŅŠ ĀBOLIŅŠ: It is very hard to answer to this. Funding for start-up scene in Latvia was limited already before the current crisis and it is likely to decrease significantly. It very much depends on what is going to happen globally.
DAINIS GAŠPUITIS: Baltics resilience will be tested for sure, and I am confident that we will use opportunities successfully. Though we are still in a very low as a digital society positions. But I assume that crises will boost efforts from businesses and government to get breakthrough.
TÕNU PALM: Digitalization has clearly helped businesses and private individuals to transact using the digital ecosystem and the benefits are obvious. Subscriptions for medication can be received electronically and there is no need for face-to-face contacts with merchants or even with doctors in case of simpler medical cases. Possibility for the businesses to communicate with the state in a secure manner is absolutely crucial, where we greatly benefit. Digitalization in the world will get an extra boost. The world after coronavirus will look different, as we need to be prepared for similar events in the future.
LIVA ZORGENFREIJA: Being digitalized and creative certainly helps. Both in this crisis and in general. But are the Baltics digital enough? Digital Economy and Society index ranks the Baltics highly on digital public services, but there are several areas where their performance is actually below EU average (especially for Latvia and Lithuania). So digitalization needs to be enhanced and, as previously stated, the crisis can be a good catalyst for that. The vibrant start-up scene in Lithuania and Estonia can be an asset – there is an ecosystem in place for new crisis-fighting ideas to flourish. Latvia is unfortunately running behind in these matters.
You can read more about the German-Baltic Chamber of Commerce in Estonia, Latvia and Lithuania at the official website and find out more about the Baltic Business Quarterly magazine here: https://www.ahk-balt.org/lv/publikacijas/zurnals.
