Belt-tightening period

has ended – time for

shopping?

Žygimantas Mauricas

2014.10.30

Eurozone will collapse

this year (2012) Euro is an island of

stability (2014)

Greek debt

in 2008: 113% Greek debt

In 2014: 175%

Greece loses

financial independence

(May 2010)

Greece regains

financial independence

(April 2014)

4 years of crisis

"Within our mandate, the ECB is ready to do whatever it takes to preserve the

euro. And believe me, it will be enough,“ (Super Mario Draghi, 2012 July)

The euro was saved - time to save the euro zone?

Double-trouble

1. Euro zone is

lagging behind

the US and

recently –

behind the UK

2. Euro zone is

divided into

North and

South

Euro zone has two problems: Strong euro & low inflation

“Will use all the available instruments

needed to ensure price stability over the

medium term” (M. Draghi, 2014 August)

“The fundamentals for a weaker exchange rate

are today much better than they were two or

three months ago” (M. Draghi, 2014 August)

ECB is ready for quantitative easing (money printing) –

cheap money & higher inflation

“If they say it, they mean it” (Mario Monti, 2014 September)

EURIBOR

FORECASTS (3M)

2014 June 0.21%

2014 Dec 0.2%

2015 June 0.2%

2015 Dec 0.4%

Focus on belt-tightening is diminishing

“The existing flexibility within the fiscal rules could also be “used to better address the weak

recovery and to make room for the cost of needed structural reforms” (M. Draghi, 2014 August)

European North-South divergence is “starting to prepare

to start disappearing” GDP forecasts

2013 2014p 2015p

Euro zone -0.4 0.8 1.1

Germany 0.5 1.6 1.5

France 0.4 0.4 0.7

Italy -1.8 -0.3 0.5

Spain -1.2 1.3 1.7

Baltics 2.8 3.0 2.8

Divergence

Convergence Gro

wth

Re

ce

ss

ion

Belt-tightening period is coming to an end in the Baltics

Budget deficit (2009)

EE: -2.0; LV: -9.2; LT: -9.4

Budget deficit (2014)

EE: -0.2; LV: -1.0; LT: -2.2

“Governments not only acted boldly, but also immediately. They used the momentum of the

crisis to implement the necessary consolidation and thus managed to convince the public of the

need for these measures.” (Mario Draghi, 2014.09.25)

Governments will open their wallets wider

Belt-tightening

Estonia: 2009-2011

Latvia: 2009-2012

Lithuania: 2009-2013

Consumers are also forgetting austerity

Domestic consumption growth

2012 2013 2014f 2015f 2016f

Estonia 4.9 4.2 3.1 3.4 3.4

Latvia 5.8 5.4 4.1 3.5 3.7

Lithuania 3.9 4.7 4.6 3.7 4.0

Lithuanian consumers are afraid of “euro-driven” inflation,

but Latvian and Estonian experience shows that those

fears are largely unjustified

In fact, consumers should better be fearing deflation – not

inflation

Inflation (average annual, %)

2012 2013 2014f 2015f 2016f

Estonia 3.9 2.8 0.4 2.1 2.6

Latvia 2.3 0.0 0.6 1.7 2.0

Lithuania 3.1 1.0 0.3 1.5 2.3

Positive side effect of inflation: Real purchasing power of

households is rising

Wage income and GDP divergence: Share of wages are

posed to increase

Real estate market: Lithuania – increasing transactions,

Estonia – rising prices

-60%

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

40%

2009 2010 2011 2012 2013

Apartment prices (annual change)

Tallinn Riga Vilnius

%

Source: Oberhaus

-60

-40

-20

0

20

40

60

2009 2010 2011 2012 2013

Number of housing transactions (annual change)*

Vilnius Riga Tallinn

%

*3-month moving average Source: National registers

Real estate market: Construction sector confidence

declines in Estonia, stable in Latvia and Lithuania

Demographic “shock”: Birth rates declined & net

international migration turned negative

Independence

(1991-2003)

Total: -11.4%

Migration: -8.2%

The Iron Curtain

(1981-1990)

Total: +7.2%

Migration: +2.7%

EU accession

(2004-2013)

Total: -11.1%

Migration: -7.8%

Baltic States have accumulated “demographic dividend”

during the last decade of the Iron Curtain

Demographic

dividend Demographic

deficit

Demographic situation is 2004 were as good as it can be

Children of war

Baby-boomers

X generation

Children of Socialism

Children of Perestroika

Young age:

24.4%

Old age:

21.4%

Working age:

54.3%

Demographics are still good in 2014

Children of war

Baby-boomers

X generation

Children of Socialism

Children of Perestroika Young age:

20.2%

Old age:

24.6%

Working age:

55.2%

Children of Europe

In 2014 old-age dependency ratio will increase, but there

will be more youth

Baby-boomers

X generation

Children of Socialism

Children of Perestroika

Young age:

20.8%

Old age:

29.9%

Working age:

49.3%

Children of Europe

Children of Migrants

Children of war

Only in 2034 demographic window will close

Baby-boomers

X generation

Children of Socialism

Children of Perestroika

Young age:

19.6%

Old age:

34.6%

Working age:

45.8%

Children of Europe

Children of Migrants

Europeans

Differences among the Baltics are not large

More youth

in Lithuania

More new-borns

in Estonia

Less young professionals

in Lithuania

More baby-boomers

in Lithuania

Women are as powerful as nowhere else

Baltic consumers are diversifying their basket of goods

-1.0

-4.7 -4.8

More fruits, vegetables & milk products

Soft drinks – untapped potential

Clothing & footwear: Cheaper and less

-1.0 -1.6 -0.9

Construction boom fuels sales of furniture

+0.3 -0.8

+0.9

Health-related goods & services have good future

+0.6

+1.5 +1.0

It all depends on continued convergence with the EU

average levels

31 •

Baltic economies will remain in positive growth territory

in spite of Russian economic sanctions

32 •

GDP growth forecasts

2012 2013 2014f 2015f 2016f

Lithuania 3.7 3.3 2.5 2.8 4.3

Latvia 5.2 4.1 3.0 2.9 4.1

Estonia 3.9 0.8 0.6 2.8 3.5

Eurozone -0.6 -0.4 0.8 1.1 1.4

Russian economic sanctions will have somewhat

limited effect on economic growth: Lithuania:

0.8% of GDP; Latvia: 0.45%; Estonia: 0.45%

Source: Nordea forecasts (September, 2014)

Economic growth will slow down, but remain in

positive growth territory both in 2014 and 2015

Baltic States remained among the fastest

growing economies in the EU (2014 Q2) :

Estonia: 2.8%; Latvia: 3.5%; Lithuania: 3.1%

33

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Žygimantas Mauricas

Bankas Nordea

Didžioji g. 18/2,

LT-01128, Vilnius, Lietuva

zygimantas.mauricas@nordea.com

Tel. +370 612 66291

Twitter: @ZygimantasM

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