The Latvian EconomyMonthly newsletter from Swedbank’s Economic Research Departmentby Lija Strašuna No. 9 • 8 December 2011Goods exports growth will continue to slow but so will that ofimports • Export growth has been the main driver of the Latvian economic recovery in 2010- 2011. Goods exports contributed the most – in September 2011, nominal goods exports were already 30% higher than in September 2008 – the peak before the global recession. However, future export growth depends on developments in Europe and thus is likely to be hampered by the euro zone’s problems. • Import growth is still mostly driven by the needs of exporting sectors, both for capital and intermediate goods. Import developments have been following exports quite closely. With export growth slowing, that of imports will decelerate as well. Thus, while trade deficits are expected to increase very slowly in the coming years, they should pose no threat to the sustainability of current account deficit financing. • The global economic slowdown can be partly counteracted by continuing to strengthen the competitiveness of Latvian exporters and to use the advantages of a small and flexible economy, for which it is easier to adjust to changes in external demand. In addition, opportunities for exporting to stronger-growing emerging markets should not be missed. At the same time, it should be borne in mind that competition will be tough.Smaller goods’ trade deficits than before Annual growth of goods’ exports and imports (3the boom years month average), %Export growth, which has since spilled over into 60domestic demand sectors, has been the main driverof Latvias economic recovery in 2010-2011. The 40largest contribution to export growth came fromgoods exports. In September 2011, nominal goods 20exports were 30% higher than in September 2008 –the peak before the global recession, while imports 0barely reached the pre-crisis levels of 2008. -20Since mid-2010, imports have followed exports -40quite closely. Export and import growth peaked atthe turn of 2010 and 2011. However, expansion has -60subsequently slowed, not least because of the large 2006 2007 2008 2009 2010 2011base effect. Export and import growth is anticipatedto continue decelerating further as external demand Exports Imports Source: CSBLweakens due to the global slowdown. The gap between goods exports and imports narrowed substantially in 2009 and, although widening somewhat since then, still has been substantially below 2000-2002 levels in 2011 (i.e., before the period of rapid economic growth has started). It should be taken into account that the debt burden has increased notably since 2000; thus, a deficit that is now possible to finance should Economic Research Department. Swedbank AB. SE-105 34 Stockholm. Phone +46 8 5859 1000. E-mail: email@example.com www.swedbank.com Legally responsible publisher: Cecilia Hermansson, +46 8 5859 7720. Mārtiņš Kazāks, +371 6744 5859. Lija Strašuna, +371 6744 5875. Dainis Stikuts, +371 6744 5844.
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 9 • 8 December 2011be smaller as well. At the same time, as surpluses proved to be very flexible, with companies adjustingare observed in services’ trade, those partly rapidly if necessary – finding new (niche) marketscompensate for deficits in goods’ trade. We expect or changing their product mix. Compared with thethat, although trade deficits will increase very slowly collapse in global trade in 2008, Latvian exportersin the coming years as private consumption are now considerably better prepared for thegradually recovers, they will pose no threat to the coming slowdown.sustainability of current account deficit financing. Contribution of main trading partners to annualDeficit in goods’ trade, % of GDP goods export growth, pp -30 40 Other PL 20 -20 Nordics DE 0 -10 RU EE -20 LT 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011f Total -40 growth, % Swedbank GDP forecast for 2011 Source: CSBL 2008 2009 2010 9M 11 Source: CSBL In addition, many opportunities remain to export to emerging markets. Demand in Russia is stillExport growth depends on developments in expected to rise substantially faster than in, e.g.,euro zone eurozone, but there is always much uncertainty with respect to this trading partner. Trade with stronger-Exports to euro zone countries accounted for 35% growing emerging countries farther away has alsoof Latvias goods exports in 2010. However, EU-27 notably increased in 2011, e.g., to India, Turkey,countries are also affected by euro zone problems, China, the United Arab Emirates, the Republic ofparticularly such important trading partners for Korea, and Thailand (together, their share of goodsLatvia as Lithuania, Sweden, Denmark, and Norway exports rose to 3.2% in 9 months of 2011 from 1%(together accounting for almost 30% of Latvias in 2008). There was also a dramatic pickup ingoods exports in 2010), which are very open and exports to Afghanistan (to 1.4% of exports in 9export-dependent economies. Developments in the months of 2011 from nearly zero levels), most likelyeuro zone will thus definitely have an effect on related to the transit of nonmilitary goods to thisLatvias exports as well. In 2011, the majority of country through Latvia.3 However, all theseannual export growth in 2011 has been contributed countries still contribute relatively little to totalby the other Baltic countries,1 the Nordics, and export growth.Germany.Therefore, a forecast slowdown in European Metal and machinery related industriescountries2 will also inevitably influence Latvian have become the main export growth driverexports. Of course, Latvias competitiveness hasimproved substantially over the last couple of years, In line with our expectations, the main driver forthus enabling its exporters to successfully compete export growth has changed from woodfor market shares. The Latvian economy has also manufacturing to metal and machinery related industries. Another product group that has added considerably to 2011 export growth is mineral1 Part of these exports might have actually ended up in another products. Petroleum oils and gases, whichcountry, and Estonia/Lithuania might have been just a starting constitute most of this category, obviously are notpoint in the logistical network. It is not always possible tofigure out the final destination of exported goods, as in cases 3when goods are first transported to warehouses in, e.g., Recently, CNN claimed that the transit of NATO freightLithuania and only then distributed further. through Latvia might increase even more, since the other route2 See Swedbanks Baltic Sea Report, October 2011, for our through Pakistan to Afghanistan has been abandoned. Thelatest global outlook and forecasts. actual outcome remains to be seen. 2 (5)
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 9 • 8 December 2011produced in Latvia; however, if, e.g., the imported Latvian exporters highly dependent onpetroleum mix is somewhat changed and then re- manufacturing developments in Europe. The latestexported, it counts as goods exports (not transit, purchasing managers’ index (PMI) data forwhich is reflected in services exports). About 30% Sweden, the UK, and the euro zone (Germany inof the exported petroleum oils in the first nine particular) point to a broad slowdown inmonths of 2011 were brought to Afghanistan. manufacturing sectors in these countries, which will also affect Latvias goods exports.Overall, goods exports growth in 2011 has so farbeen quite robust and diversified across different Contribution of main types of goods to annual goodsmanufacturing industries. Moreover, there are many export growth, ppcompanies in the main industries, making these 45somewhat more resilient to external shocks – totalexport growth is not dependent on just a couple of 30big players.4 15Contribution of main product groups to annualgoods export growth, pp 0 40 Other -15 Minerals -30 20 Chemicals, non- -45 minerals, plastics 1Q 09 1Q 10 1Q 11 0 Machinery, Capital g. Intermediate g. transport Consumer g. Other g. Car vehicles Auto fuel Metals Total, % Source: CSBL -20 Wood, furniture, paper Food -40 Import growth still driven mostly by needs of exporting sectors 9M 11 2006 2007 2008 2009 2010 Total, % As mentioned above, import growth has followedIn coming years, the structure of export growth is that of exports quite closely in 2010 and 2011, as alikely to remain similar. The contribution of metal large part of imported goods is used for exports’and machinery related industries might be needs. This is true of both intermediate and capitalsomewhat undermined by falling global metal goods imports. The contribution of capital goods tocommodity prices;5 however, these industries could import growth was particularly strong in the secondbe supported by big investment projects, like the half of 2010.7 Consumer goods and car vehicles stillTEC2 power plant reconstruction. The contribution add relatively little to total import growth; however, aof wood manufacturing is likely to remain subdued part of imported intermediate goods ends up indue to resource and capacity constraints.6 consumption as well.The majority of exports remains intermediategoods, i.e., subcontracts to bigger, mostlyEuropean, producers. Intermediate goods haveadded most to export growth in 2011. This makes4 Still, in some smaller industries, concentration isconsiderable, e.g., pharmaceuticals and base metals.5 See Swedbank Energy & Commodities newsletters for moredetails.6 Logging volumes of the state-owned company will continueto decrease, although those of private forest owners are likelyto rise if price developments are favourable. There is stilluncertainty with respect to raw timber imports from Russia(although it is supposed to join WTO in early 2012, there is still 7talk of its replacing the current export tariffs with export A large part of this is likely to be related to the leasing ofquotas.) airplanes for the state-owned air carrier AirBaltic. 3 (5)
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 9 • 8 December 2011Contribution of main types of goods to annual goods Contribution of main trading partners to annualimport growth, pp goods import growth, pp 45 40 Other 30 BY 15 20 EE 0 Nordics 0 PL -15 RU -30 -20 DE -45 LT 1Q 09 1Q 10 1Q 11 Capital g. Intermediate g. -40 Total growth, % Consumer g. Other g. Car vehicles Auto fuel Source: CSBL Source: CSBL 2008 2009 2010 9M 11 Total, % As export growth is set to slow next year, so willIn 2011, mineral products have contributed notably import growth. Increased uncertainty locally andto import growth. The largest component of these globally is likely to slow investments and, thus,is, of course, petroleum oils and gases. However, imports of capital goods. A slower growth in exportnot all of these products are consumed in Latvia. volumes will require fewer inputs as well.The share of re-exported imports of fuel oils Household consumption growth is also forecast toincreased from 21% in 2010 to 36% in nine months be weak, and imports of consumer goods and carof 2011. Partly, this can be attributed to larger vehicles are likely to remain subdued.exports to Afghanistan. The contribution of otherproduct groups has stayed by and large similar tolast year. What are the risks and how can they be counteracted?Contribution of main product groups to annual With the debt crisis spreading from the periphery togoods import growth, pp the core euro zone countries, the risk of recession 40 in the region has recently increased8. Currently, Other however, it seems that Germany, which is the most Chemic., plastics, important trading partner for Latvia among the large 20 non-minerals euro zone countries, can still avoid recession. Transport Despite worsening PMI figures (including new 0 Machinery orders) for many of Latvias trading partners, local manufacturing confidence has remained stable. Metals Until November, Latvian producers did not seem to -20 Minerals worry about demand for their goods.9 Of course, there is a certain inertia arising from, e.g., already Food signed contracts. Nevertheless, Latvian exporters -40 should be ready for tougher times ahead. It should Total, % 9M 11 2006 2007 2008 2009 2010 be borne in mind that exports are a natural way for Source: CSBL most countries to grow out of the downturn – competition thus will be harsh. As fuel is mostly imported from Lithuania and, to alesser extent, from Belarus, the contribution of The global economic slowdown can be partlythese two countries to import growth has increased counteracted by continuing to strengthen thein 2011 as well. competitiveness of Latvian exporters. Much has 8 See latest Swedbank monthly letter “The Global Economy: The debt crisis in the euro zone - from periphery to core” for more details. 9 It should be noted that industry confidence has been by and large stable already since 2010, i.e. also during times when demand was growing. 4 (5)
The Latvian Economy Monthly newsletter from Swedbank’s Economic Research Department, continued No. 9 • 8 December 2011been done already, but this should be a “never- The advantages of a small and flexible economyending story”. Besides such things as improving the could then be used. Although tailor-made nichebusiness environment, productivity gains are also products are in less demand during a slowdown,vital. Labour market mismatches should be there should always be a place for the relativelyaddressed to diminish the risks of wages again small volumes of Latvian exported products – if theygrowing faster than productivity. are competitive and proper marketing is done. In addition, opportunities for exporting to stronger- growing emerging markets should not be missed. Lija StrašunaSwedbankEconomic Research DepartmentSwedbank AB. SE-105 34 Stockholm. Swedbank’s monthly newsletter is published as a service to our customers. We believe that we have used reliable sources and methods in the preparation of the analyses reported inLegally responsible publisher this publication. However, we cannot guarantee the accuracy or completeness of the reportCecilia Hermansson, +46 8 5859 7720 and cannot be held responsible for any error or omission in the underlying material or its use. Readers are encouraged to base any (investment) decisions on other material as well. Neither Swedbank nor its employees may be held responsible for losses or damages,Martiņš Kazāks, +371 6744 5859 direct or indirect, owing to any errors or omissions in Swedbank’s monthly newsletter.Dainis Stikuts, +371 6744 5844Lija Strašuna, +371 6744 5875 5 (5)