How deep and how long for Latvia and Estonia?

The Baltic Times

Kate McIntosh

2009. gada 8. janvāris.


It seems likely that Lithuania will be in for a long, painful economic crisis. But the question remains, how will the other two Baltic states - which have so far been hit hard by the crisis - hold up? Here, we speak with two leading experts from Latvia and Estonia to find out their views on the crisis and try to get a picture of what lies ahead.


The Estonian perspective


Ulo Kaasik is head of the Economics Department at the Bank of Estonia. Here, he gives his predictions and forecasts for the coming year.


How long and how deep do you anticipate the current economic crisis to impact on Estonia?


The current forecast of GDP is for a decrease at just under 5 percent and we also expect a substantial increase in unemployment. But from the bright side we have seen very fast economic correction in the past quarter. This gives us quite excellent hope that we will meet our targets by the beginning of 2010 and enter the eurozone by 2011.


How will Estonia pull itself out from the crisis?


It depends very much on what"s happening abroad. Our thinking right now is that it will be an exportlead recovery.


If the world economy starts to grow again, then I think the Estonian economy is in quite good shape to recover.


How is the current crisis impacting on ordinary Estonians?


Up until the third quarter of last year what we saw was this sort of normal adjustment in the economy. If you look at the statistics we have not seen a huge impact on ordinary Estonians up until recent months.


I"m afraid that is going to change. Right now there are many more firings happening and some companies are decreasing wages, so it is changing and the problems are going to be felt much more severely in the labor market and in ordinary households in 2009.


What sectors have been hardest hit by the economic downturn?


Mainly those dealing with the real estate sector. Up until a few months ago there were too many construction workers, for example. Exporters also face tough times because there just isn"t the demand worldwide.


What is the country facing in terms of unemployment?


Unemployment is currently at around 10 percent and this year it could rise further. Wage decreases and a huge amount of bankruptcies are still ahead of us, but from the other side the shock is already here, now we just wait for the aftermath.


What do you see as the longterm effect of recession on Estonia?


I"m pretty optimistic that the structures are in place that if problems are cyclical then Estonia can continue economic growth rates.


I think this bubble we"ve seen in the real estate market will fade away and demand for our goods and services will continue, so in that way Estonia is quite well situated to make a strong recovery. Adopting the euro, which is currently the number one economic priority can only have a positive impact and deliver more certainty in the economy.


What"s the best advice you can offer to financially struggling Estonians?


I think the best solution is not to panic. They should make their own calculations and plans and try to stick to these. But the main thing is not to panic.


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The view from Latvia


Andris Vilks is the chief economist for SEB Latvija, one of the largest banks in the country. Here, he makes some predictions about the current economic crisis and gives his views on the recent IMF loan.


How do you see Latvia recovering from the current economic crisis?


The cycle is still going and all indicators are that we haven"t reached bottom. The sharpest decline is still to come. I would expect it to worsen [in the next] two to three quarters at least before we see any improvement. How the economy grows out of this point very much depends on domestic and external market forces.


What benefits can Latvia expect to glean from the recent 7.5 billion euro loan from international lenders?


This is money that will be spent on warming up the economy. There is now huge pressure from the major banks, so in terms of real policy we should see quicker implementation.


It is a huge amount and although we have increased our debt, there really is no other way for us, especially in view of Parex [the Latvian government"s bailout package to the ailing bank currently stands at 673.92 lats]. It"s really important to society and is going to bring some good possibilities.


What sectors of society do you expect to be most affected by the current economic climate?


Huge sectors of the economy are now facing a tough period. Commercial services, domestic trade, service industries – all those businesses that were part of this bubble of economy – companies that imported a lot of goods and now have no market to sell or opportunity to expand.


What impact is the crisis having on ordinary Latvian people?


People are very worried in the labor market. We"re seeing a lot of bankruptcies, an increase in unemployment. Young people in their 20s perhaps don"t have the experience to survive through the crisis and many have taken on unaffordable loans.


Potentially we may start to see the next wave of people moving out of Latvia. Not to the U.K. and Ireland this time, but to the Scandinavian countries.


People over 50 are also more sensitive. If they lose their jobs then finding a new one could be a real challenge.


People in the countryside in particular are vulnerable – where we are seeing more bankruptcies with much more dramatic consequences. Here in Riga it is possible to survive, but in the countryside the opportunity to find something else does not exist at the same level.


Latvia is generally seen as the hardest hit of the Baltic countries. Do you expect this to continue?


Estonia is in a better fiscal situation, which should help. But in real economies they are all suffering. Lithuania is just going into trouble and who knows, potentially it could go deeper. Lithuania deals heavily in sales in Latvia and Estonia and with the situation currently like it is this could have a huge impact on Lithuanian markets.


Can you predict a timeframe when things might start turning around for Latvia?


It might not show in actual figures, but by late summer, early autumn we should at least see some improvement. If we can manage through that period the next stage would be the first or second quarter of 2010.