Insightegy Consultants

An economic slowdown in the Baltic States is likely to lead to recession.

For the best part of ten years, the Baltic States have been the fastest growing economies in Europe. Cheap labor, high productivity and low tax regimes coupled with generous EU subsidies brought about the much vaunted "Baltic Tiger" Economies. However these economies' confident growth is seemingly drawing to an end; Inflation is nearing 10% in all three states and current account deficits to GDP range from 14% in Estonia to a startling 23% in Latvia. The poor macroeconomic management in these countries is typified by Estonia's external debt to GDP reaching 130% in 2007. Entry to the Euro zone would appear to be a pipe dream in the short term and devaluation of currencies in all three states is a realistic possibility. Might there be parallels to be drawn with the 1998 Russian financial crisis:

  • If a financial crisis were to occur in these economies, its affects would be felt overnight in the business community

  • Average disposable incomes fall leading to fewer consumer purchases and reduced sales turnovers across all companies. In such a scenario, companies offset difficulties by quickly rethinking pricing strategies to suit the prevailing economic conditions and customer demands

  • Larger investments are postponed in the short term as companies reassess their standing

  • Efficiency improvement takes precedent over market share growth

  • The stronger firms in each sector benefit from increased market share in the long run as weaker firms fall by

  • Companies undergo radical devaluations: a vital insight to both strategic and portfolio investors

These issues will be addressed in more detail at a workshop entitled How To Avoid Erratic Growth in Emerging Markets.

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