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Do the baltics deserve a second look   peeter piho

Do the baltics deserve a second look peeter piho






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    Do the baltics deserve a second look   peeter piho Do the baltics deserve a second look peeter piho Presentation Transcript

    • Peeter Piho, Swedbank Investment Funds Do the Baltics deserve a second look? Scrutinising the reasons for investor skepticism Insert your Company Logo here May 2010
    • The Baltic states ESTONIA GDP: €16.2bn Pop: 1.34 mln LATVIA GDP: €18.3bn Pop: 2.26mln LITHUANIA GDP: €27.7bn Pop: 3.34mln Insert your Company Logo here
    • Rise of the Baltics: 2000 – 2007 Real GDP Growth Rate (%) Continuous GDP growth at average rates of approximately 8.3% in Estonia, 8.7% in Latvia Estonia Latvia Lithuania EU27 and 7.5% in Lithuania, facilitated by: 15 •stable currency rates based on currency boards 10 in Estonia (since 1992) and Lithuania (1994), fixed exchange rate in Latvia (1994) •strong, compliant and innovative banking system 5 dominated by large Scandinavian banks since 0 late ‘90s 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(f)2010(f) •investor friendly economic policies -5 •simple, advanced taxation principles introduced early (flat income tax in all three countries, no -10 corporate income tax in Estonia)... -15 ... But most importantly by: •Strong FDI inflow Insert your Company •Cheap credit widely available for banks to be Logo here onlent to companies and individuals.
    • Fall of the Baltics 2008-2009: GDP plunged hitting double-digit levels Latvia bailed out by the IMF, Lithuania borrowing in the market to compensate for deficit. Prompt devaluation of currencies was widely expected by foreigners across the winter 2008- 2009. Export opportunities vanished due to the global crisis. Consumer confidence dropped to all-time lowest level After acute lack of labour up to 2007, unemployment skyrocketed within 12-18 months from ca. 4-5% to 14-17% Banks panicked and cut lending to corporate sector; loan portfolio decreasing Whole region generally despised by the investors’ community Insert your Company Logo here
    • Before it all happened, investors had their say In 2008 investors had said: ... and did not invest any more  Your economies are unbalanced and need to Foreign Direct Investment Inflow (% of GDP) 25.0 be delevered 22.5 EXTERNAL DEBT/GDP 1.10.2009 20.0 160% 17.5 140% 15.0 120% 12.5 100% 10.0 80% 7.5 60% 40% 5.0 20% 2.5 0% 0.0 LAT SLK HUN EST SLV BUL LIT ROM POL CZK -2.5  Your currencies are overvalued and currency Mar Jul Nov Mar Jul Nov 05 Estonia, EEK 06 Latvia, LVL Mar Jul Nov Mar 07 Lithuania, LTL Jul 08 Nov Mar Jul 09 Nov 10 pegs will not hold Source: Reuters EcoWin Insert your Company  Your assets are too expensive... Logo here
    • Exploring debt burden Gross external debt (% of GDP, Q3 2009) Nominal debt is high but there are few things to highlight: 160% -Financial sector debt accounts for >50%. It’s all Nordic 140% banks’ loand to their Baltic subsidiaries; 120% -Another big chunk is FDI related 100% -Government’s share negligible even after Latvian IMF 80% package and Lithuanian 2008/2009 bond programs: 80% Government debt 2009 60% 70% 40% 60% 20% 50% 40% 0% 30% Estonia Latvia Lithuania 20% Banks FDI related Government Other 10% 0% Estonia Latvia Lithuania EU 27 Insert your Company Source: Eurostat Logo here Most of the debt not actually collectible – Scandinavian banks not in position to call their loans. The Baltic countries (except Latvia, for fiscal reasons) did not actually face liquidity crisis.
    • Exploring debt burden – financial sector Baltics total (EUR 75.4 bln) Estonia (EUR 20.6 bln) Latvia (EUR 30.0 bln) remaining; remaining; 18% Swedbank; 23% Unicredit; 5% 2% remaining; Parex; 1% Swedbank; 15% Aizkraukles; 0% Danske; 49% Swedbank; 10% Hypoteku; 4% Unicredit; 2% 30% DnB Nord; 2% Unicredit; 4% Nordea; Danske; 5% 13% SEB; 14% Parex; 17% Parex; 7% Nordea; 10% Danske; 1% SEB; 20% DnB Nord; 9% DnB Nord; 9% SEB; 21% Lithuania (EUR 24.8 bln) Source: local banking associations Nordea; 11% and FSAs, centrals’ bank data. Siauliu; 2% remaining; 1% Data as at end 2009 Snoras; 7% Swedbank; 22% Ukio; 5% Unicredit; 1% • Banking sector highly concentrated Parex; 2% Danske; 7% Insert your Company • Scandinavian banks dominate the market Logo here in Estonia totally, in Latvia/Lithuania DnB Nord; 14% minority controlled by locals SEB; 30% Nordea; 10% Five largest banks have over 75% of the market share which is similar to Nordic countries
    • Lending before and after September 2008 • Combination of abundance of cheap international credit and small size of the Baltic markets pushed banks to fuel the loan growth for years. • Lehman crisis triggered a panic and banks pulled the breaks. By Feb 2010 they have taken out over EUR 2 billion purely from corporate clients. • Some of that reduction was prudent, some clearly an over-reaction, and some needs to be substituted by more appropriate capital. • Deleverage represents ca 7% of the portfolio in 2008 and ca 6% of pre-crisis GDP. • The key question is what will the banks do next Insert your Company Logo here
    • Exploring exchange rate risk Currency pegs in place: In 2008/2009 the market believed that devaluation  Estonia (kroon, EEK) is underway, starting from Latvia Interbank Rates, 6 Month Currency board since 20 20.06.1992 (initially fixed 27% 18 vs.DEM)  16 Latvia (lats, LVL) 01.01.2005 pegged to the €, +/-1% range. 14 1994-2004 was pegged to 12 SDR basket of 4 currencies; 10  Lithuania (litas, LTL) 8 Currency board; 02.02.2002 6 at a fixed exchange rate against EUR. 1994-2002 fixed 4 vs.USD 2 0 04 05 06 07 08 09 10 TALIBOR RIGIBOR VILIBOR EURIBOR Insert your Company Logo here
    • Devaluation unlikely from the beginning  Symbolic status of the pegs – overlooked by foreigners  It would not have resolved problems due to open nature of the economies  Substantially all bank loans in the Baltics have been nominated in euros, correct. But collection in € when currencies devalued Loan exposure in the Baltics - Would have triggered credit losses for leading 200 Loan exposure in the Baltics Shareholders' equity banks in the magnitude jeopardizing their 180 172 capital base (see chart); 160 162 - Would have hit private individuals – 140 borrowers; that would have been politically 120 bn SEK unacceptable; 100 95.4 89.9 80  60 All relevant parties against devaluation: 40 • Government 20 • Banks 0 • Entrepreneurs • People (=mortgage borrowers) Insert your Company Logo here
    • Response 1 Internal devaluation instead of nominal exchange rate adjustment Insert your Company Countries opted for adjustment via domestic labour market and fiscal tightening. Logo here Massive wage and employment cuts have proven the flexibility of real economy and labour market.
    • Labour market flexibility has supported internal adjustment Insert your Company Source: Carley Logo here
    • Response 2 Fiscal tightening Governments cutting costs heavily:  Estonia and Lithuania voluntarily;  Latvia under IMF programme;  Estonia with it’s budget position at -1,7% one of 5 EU countries that met Maastricht criterion in 2009. Insert your Company Logo here
    • Consequences 1 Loss of external competitiveness has now been stopped Insert your Company Logo here Internal devaluation takes generally longer time to have a meaningful effect. First positive signs in export performance started to emerge at the end of 2009.
    • Consequences 2 Economic grounds for devaluation have effectively been removed Inflation (HICP) growth (%) Balance of payments, current account (EUR mln) Estonia Latvia Lithuania EU Average Estonia Latvia Lithuania 800 18 600 16 14 400 12 200 10 0 8 -200 6 -400 4 -600 2 -800 0 -1000 -2 -1200 -4 -6 -1400 Source: Eurostat Source: Eurostat Insert your Company Logo here 15
    • Estonia’s euro accession Maastricht criteria as of end 2009 Criterion Target value Estonia Inflation 1,5% 0,2% Government debt 60,0% 7,2% Budget balance -3,0% -1,7% Interest rates 6,1% N/A Latvia and Lithuiania targeting to join in 2014 12 May publication of Estonia’s convergence report June recommendation of euro-area Member States 8 June ECOFIN meeting, discussion of Estonia's compliance 18 June the European Council discusses Estonia's readiness to join the euro area 13 July ECOFIN's final decision about Estonia’s accession 1 Jan 2011 Eurozone entry
    • 2010 - 2011 Time to enter for daring investors From macroeconomic point of view:  Acute recession is over. Export is a key to set the pace for recovery.  Estonian eurozone entry will add stability to entire region. Devaluation currently off the table, internal adjustment instead of exchange rate.  Painful cost-cutting done, competitiveness improved. In the market, almost no PE backed deals over the last two years. It will change since:  Availability of financing still restrained, fundamentally healthy companies seeking replacement capital.  Extensive, diverse pipeline across the region and sectors.  Valuation gap narrowed down.  Revival of private equity (and property) investors’ interest visible. Insert your Company Logo here  Strategic investors already buying (2 major delistings)
    • Thank you! Peeter.piho@swedbank.ee +372 613 1582 +372 503 0130 Insert your Company Logo here