Data source Ministru of Finance of Republic of Lithuania

GDP Prognosis of Lithuania for 2009-2012

Lithuanian GDP projection for 2009-2012

Baltic states, budget deficit, economy, Prognosis of Lithuanian GDP, Projection for 2009-2012 Hide

Recently the topic about economical vulnerability of three Baltic states regained everyone’s attention. Although the IMF says recovery of the global economy may come earlier already in the first half of 2010, some Baltic states have big struggle ahead. This is about the time when governments plan their budgets for the 2010. For two states out of three affirmation of the budget will be very though decision to make.

All three countries will have double digit slump of GDP this year (2009) and expect further smaller decrease in 2010, but not all are equally ready for this. It is so clear when we look to government finances. For example Estonia government financial position is one of the strongest in EU, government sector will have loan burden of just around 8% of the GDP this year.  This factor let Estonia to leave government spending in 2010 in the same level as in 2009. This mean same pensions, same defense spending, even more money for education and more importantly it means more social as well as economical stability when the demand falls and private businesses try to refocus their activities in new environment.

In the same time government finances in Latvia is different story. Government debt in Latvia had been rising dramatically in last three years from 9% of GDP in 2007 to predicted 41,5% of GDP at the end of 2009 (Data from Latvian statistics office).  Without help from outside Latvia had been doomed to follow bankruptcy  scenario of Iceland (see article in BusinessWeek- Iceland goes bankrupt), as it also had to nationalise local owned bank Parex and the government itself was near the financial collapse, while EU and IMF loan helped Latvia to stay afloat. But the struggle is not over yet. Latvia is need to reform it public sector but it takes time, so it also need to simply cut more public spending. It means less pensions, less salary for doctors, teachers and public servants, more sadly it means less domestic demand for businesses. The tension is rising not only in public it also rising among international lenders. The IMF entails that Latvia’s state budget for 2010 must be cut by 705 million euros, while government agreed to cut merely half of that sum. It get a lot of critics for that by IMF, EU, Swedish officials (some biggest Swedish banks are severely exposed to Baltic property markets as they had lent lump sum during recent housing bum). Those cuts and tension means Latvia still fight for survival and still can not concentrate on going back to growth.

Lithuania is in better shape then it’s neighbour Latvia, experts predicts that public debt will grow to 28% of GDP at the end of 2009. Moreover it has more stable political situation, determination to reform and cut public spending and tax increase help to stabilize public finances without help from IMF or EU. Recently Lithuania had successfully issued bonds of  1,5 billions dollars. It means the country still have trust of financial institutions and can live without IMF or EU loans.

But the risk is still high here, Latvia can get worse that could mean devaluation risk of pegged to euro national currencies of three Baltic countries. Estonia is near to eliminate this risk, it almost fit the Mastricht criteria and most likely will adopt euro from beginning of 2011, the prime minister of Estonia says they will maintain the current currency exchange rate up to that date. While Lithuania and Latvia is suffering from high budget deficit and have little possibilities to adopt euro until 2014 as earliest date.

To conclude I must say Estonia is the least vulnerable of that might happen in 2010 while Latvia has the biggest challenge to avoid financial disaster as Hong Kong did in Asian crisis during mid 1990.

Baltic states, budget deficit, economy Hide