BALTIC YEAR OF PAIN SEEN GIVING WAY TO GAIN RIGA, Dec 30 (Reuters)
If 1999 goes down as the year of pain for the
Economies of the Baltics, 2000 should be the year of gain.by Alan Crosby
Hit hard by the 1998 Russian financial crisis, Estonia, Latvia and Lithuania had expected to rebound this year as companies reoriented trade westward.
But recovery from recession, difficult for even the most developed economies, proved nearly impossible. Worse, it exposed that eight years after all regained independence from the Soviet Union, the supposed radical surgery to some industries had been little more than cosmetic.
"A lot of problems caused by the Russian crisis were already there, they had been covered up until then and this forced them into the limelight," said Gunnar Tersman, an analyst at Sweden's Handelsbanken.
SIMILARITIES OVERSHADOW DIFFERENCES
Since breaking free from Moscow's 50-year grasp, all three have taken great pains to cast their own shadow, even at the expense of "Baltic unity," a geographical and not cultural closeness, they argue.
Yet for all the differences, 1999 showed the three were suffering through a lot of similarities.
Second quarter year-on-year GDP in Lithuania was down 4.0 percent, off 1.8 percent in Latvia, and -2.3 percent in Estonia. Unemployment rose, governments in all three changed this year.
Sluggish economies slowed the flow of state revenues and all three were forced to adopt unpopular austerity packages that still could not keep budgets from expecting year-end shortfalls.
Estonia has approved a balanced 2000 state budget though questions remain as to whether it can keep to it after scrapping its 26 percent corporate profit tax.
Latvia meanwhile has approved a budget shortfall of two percent of GDP, while Lithuania is struggling to meet IMFexpectations of a 2.8 percent fiscal gap, risking an $80 million standby agreement and access to key low cost World Bank structural adjustment loans.
"There may be a small fiscal deficit in Estonia in the range of one to two percent of GDP, a change from our previous forecast of zero percent," said Toomas Reisenbuk, an analyst with the Baltic investment bank Trigon Securities.
"Latvia appears on track too but there are structural problems (in Lithuania) and changes to the budget will not fix the outstanding issues and the first quarter will show if the structural problems have been addressed."
CURRENCY DANGER LURKS IN LITHUANIA
If Estonia and Latvia keep their budgets at or very near current targets, analysts said their currencies should not come under much pressure next year.
But, they warned, the same cannot be said for Lithuania.
The litas currency is pegged to the dollar at four-to-one under a currency board system that forces the central bank to back all currency in circulation with reserves.
Though it was considering a change to a dollar/euro basket to reflect the changing face of trade in Europe, the central bank announced in the autumn that it would not make any changes to the system until mid-2001, when a direct shift to a euro peg will be made.
Currency traders and analysts said that while the move may bring short-term stability, it risks longer-term damage if the dollar strengthens, making an already over-valued currency even more of an obstacle to exporters by hindering their competitiveness.
"Keeping in mind the very concrete assurances of the central bank to keep the litas rigidly pegged to the dollar until mid-2001 it is unlikely the central bank will give in to exporter wishes to weaken the litas," said Stanislovas Dzindzelieta, treasurer of Savings Bank.
EU INVITATION BOOSTS OUTLOOK
Despite the turmoil, analysts are optimistic that all three have set in motion the necessary plans to put a poor 1999 behind them and enter the new millennium on the correct path.
All three expect modest GDP growth of between two and four percent in 2000.
Those plans also helped Lithuania and Latvia garner an invitation from the EU in December to join detailed membership talks. Estonia already had its invitation.
Though membership is still a long way off -- 2003 is the earliest forecast date -- the increased status that comes with the EU invitation is expected to boost the region in the eyes of foreign investors, bringing badly-needed funds to cash-starved equity markets and industries looking for sources of capital.
"The Russian crisis is now coming to an end and all three Baltic states are turning around, the fastest being Estonia, as companies adjust to the changes and manage to build further growth in the West," said James Oates, an independent Baltic strategist and president of Adriatic Baltic Group.
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