Pm41 l!st focus

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One of Latvia's unsung heroes in financial journalism is Dorian Ziedonis, The Baltic Times Editor-in-Chief. This time he has taken a look at the coming EUROentry for Latvia and what could be possible scenarios if we look at those countries already having enterred and their experience. The PRIME Match is the main advertising feature and 'bandwagon'/mouth piece for the B2BLiST m a t ch e d networking at events in Latvia. The next - Speakers' CORNER is due May 23. Be there..or be...out-of-the-loop... office@prime.lv +371 29 360 813 GMT + 2 hrs 09:15- 22:00) WELCOME to book tickets or speech time! Henrik Mjoman Project Mgr, mRiga, LATVIA

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Pm41 l!st focus

  1. 1. 4There are high expectations in Latviawith the adoption of the euro,expected Jan. 1, 2014. Latvia hasofficially applied for eurozone membership;the final decision should be made byeurozone finance ministers in July.From the general talk around town,one would expect the euro to delivermiracles: low inflation, high growth, lowunemployment, rising foreign investment,better living standards for all. It can do allthis, but not by itself. The euro will needhelp from a good government, and aninviting investment and business climate.A part of Latvia’s cherished identity – thelats – will disappear Jan. 1, hopefully forever.That means companies need to be preparingtheir accounting systems, pricing, etc. for thechangeover. Latvia will be joining a currencybloc with a combined 9.5 trillion eurosin output last year. What can we expect?For local companies that trade with theeurozone, adopting the euro will eliminatecurrency risks. The same can be said foreurozone companies looking to invest inLatvia – currency fluctuations will not bea consideration, important in long-termplanning.Currency transaction costs will also beeliminated – no need to exchange euros tolats, and pay a commission, when receivingpayment for products sold to eurozonecustomers. And no need to keep forecastingyour currency needs, or hold both currencieson deposit in the bank.Price transparency among euro neighbors– Estonia is our closest – will benefitconsumers. A Latvian living near theEstonian border may see that a refrigerator,for example, in Estonia is priced lower thanat home; this comparison made easier asboth are listed in euros. This should increaseprice competition within the region.Will the euro bring inflation with it? Therewill be a one-time, transitional inflationaryimpact, as companies, in changing pricingfrom lats to euros, will round up, rather thandown, euro prices. The Latvian authoritiessay they will be watching for this, with stiffpenalties for those, say at the retail level,that take advantage of the changeoverconfusion and try to raise prices excessively.Nonetheless, the inflationary impact shouldbe minimal, around 0.2-0.3 percent.Bank deposits, debts will be automaticallyexchanged into euros at the official rate:0.7028 lats/euro +/- 1%. However, thoughthis is the target exchange rate now on thetable, it could change. It will be importantthat the officials get the exchange rateright. Too high and Latvia’s producers arenot competitive; there will then be pricingadjustments. Too low is good for exports, butwe’ll be in for inflation.Joining the eurozone should boostconfidence with non-eurozone investorslooking to build, say manufacturing facilities,in Latvia, as the euro represents stability(despite the current problems) and a largeeconomic community. It can also be seento strengthen a rules-based economy,with a stronger hand in Latvia’s financialmanagement from the European CentralBank and other institutions.Academic Paul De Grauwe agrees thatinvestors, company management wouldprefer certainty to uncertainty, and thatthey, therefore, would prefer to eliminateexchange rate risk. This is because uncertainfuture exchange rates mean uncertain futurecompany sales volumes for an internationalfirm. However, he adds that profits for a firmwill be higher when there is exchange ratetheziedonisfinancialreportLatvia Closes in on the EurozoneBy Dorian Ziedonis, dziedonis01@inbox.lvSourcing of premium construction services and construction materials from Eastern Europe,Russia, Ukraine and the Baltic Countries. www.jlbaltic.lv
  2. 2. Spring/Summer 2013 – issue #415theziedonisfinancialreportuncertainty. This is because when the priceis high, the firm will increase production andsell more at a higher profit. When the priceis low, the firm will cut back on production.So, in general, exchange rate uncertaintymay increase the firm’s average profits.Will adopting the euro increase economicgrowth in Latvia? Everyone says ‘Yes.’ Theanswer should be ‘Yes, but only a temporaryincrease, a direct result of a drop in interestrates.’In addition, due to the previous analysis,by eliminating exchange rate uncertainty,expected future profits are also reduced:the expected return on investments madeby firms is lower, so there is less incentive toinvest.Well, that’s the theory. Can Latvia expect alarge foreign investment surge, and strongerGDP growth due to the euro? We may beexpecting too much. After all, billions ofeuros in investment have already beenflowing into Latvia for the past 20 years,from the little candle maker, to all themultinationals, and we didn’t need the eurofor this.With the euro, will Latvia be an attractiveplace to invest? A better question may be:is Europe a good place to invest? Consultingfirm Grant Thornton in a recent report issuedthis warning: companies in Europe since2009 have lost $2 trillion due to the ongoingeuro crisis, as well as costly regulation. Thishas made the eurozone a less favored placeto invest. However, the report adds thatthe Baltics may still be attractive due to itsemerging market status.Experiences from other euroadoptersSlovenia was first to joinSlovenia joined the eurozone in 2007, threeyears after joining the EU. It was the first ex-communist country to join the euro group ofcountries. The mechanics of adoption wentsmoothly, with a “Big Bang” transition periodin which the euro immediately replaced thetolar following an extensive public educationperiod, wrote the Financial Times.Fears that introducing the euro would leadto inflation due to the “rounding-up” effectproved to be unfounded, as has been thecase in other countries joining the euro. Theactual initial level of euro-induced inflationin Slovenia was 0.3 percent, and pricesactually fell in January and February 2007.The larger problem was with Slovenia’sinstitutional readiness, and timing, to jointhe common currency. It went in at the peakof the global economic boom, with GDPgrowth averaging at around 4 percent, butthe country was also weighed down witha generous pension system, a rigid labormarket and a weak corporate environment.That translated into sharply slowing GDPgrowth as the country had a difficult timeremaining competitive. The economy grewby 6.8 percent in 2007, dropping to 3.6percent in 2008 and the crisis year of 2009saw the economy contract by 8 percent.The Financial Times article says that “Thelessons of Slovenia show that underlyingcompetitiveness, institutions, politics andpolicymaking are actually far more importantdeterminants of success than the specifics ofjoining criteria [or the Maastricht criteria].”Latvia won’t have the institutional readinessproblem that Slovenia had. The country hasgone through a restructuring of government,its spending priorities, with the IMF and EU-led assistance, and is in much better positiontoday if the euro-economy deterioratesfurther.15 January 2007 - Celebration ‘A Welcome to theEuro’. Mr. Janez Janša, the Prime Minister of theRepublic of Slovenia. Photo: Primož Lavre/Salomon2000Specialist in ground source heat pump systems, an energy efficient way of heating yourhome. www.divine.lv
  3. 3. 6Bad timing for SlovakiaSlovakia was the next ex-communist countryto join, in 2009, and did so at an exchangerate that was seen as overvalued and muchless favorable than Slovenia’s, the resultof a strong appreciation trend in the finalmonths of the economic boom. But fearsthat Slovakia had made itself uncompetitiveproved to be overblown, thanks to thedeep economic reforms that the countryundertook at the end of the 1990s thatmade it one of the world’s best-performingeconomies.Robert Fico, the left-wing prime ministerwho steered the country into the commoncurrency, ended up calling the euro a“shield” which defended his countryfrom the wild currency swings that hitthe rest of Central Europe in late 2008.Although Slovakia did not get the boostfrom depreciation enjoyed by countrieslike Poland and Hungary, which maintainedfloating currencies, it quickly returnedto growth after suffering a 4.9 percentcontraction in 2009. By 2010, growth wasback at 4.2 percent.When joining the euro, Fico was very carefulabout the prospect of a spike in inflation,even setting up a commission to monitorprices and running a program called: “We’rechanging the currency, not the price.”For several months after adopting theeuro, prices were listed in both euros andkorunas to allow shoppers to make easyprice comparisons, and inflation was not aproblem.After the initial expected rise in inflation,longer term the euro has served to tameinflation. Vladimir Vano, an economist withSlovakia’s Volksbank, points to the inflationbenefits of being in the euro. Ever sincejoining the single currency in 2009, Slovakiahas clocked in lower inflation rates than itsneighbors – Poland, the Czech Republic,and Hungary. “That means Slovaks have notseen deterioration in their buying power,” hesays. “The adoption of the euro has broughtus undeniable benefits. We have had nocurrency weakening, [we have] low inflationand lower transaction costs.”Leading up to euro adoption, analystsgenerally were in agreement that the eurowould be beneficial to Slovak citizens as wellas businesses. Eliminated were transactionand administration costs on trades estimatedat 0.36 percent of GDP, according to theNational Bank of Slovakia.When looking at manufacturing for Slovakia,the Czech Republic and Hungary, Slovakiatracked the other countries fairly closelyduring the 2009 downturn, but then actuallydid better in the 2010 recovery. As the firstwave of the crisis receded, the advantages ofbeing in the euro grew for Slovakia, primarilybecause foreign investors faced no currencyrisk when putting their money into thecountry. Other CEE countries have seen theircurrencies sag against the euro, but swingsin the forint, zloty and koruna have beenquite wild, adding an element of uncertaintyto investment decisions.Andreas Tostmann, then head ofVolkswagen’s operations in Slovakia, saidthat the country’s status as a eurozonemember was one of the key factors indeciding to increase investment in thecompany’s factory there.Slovakia has seen a sharp increase in foreigndirect investment, which rose from 123million euros in 2010 to 518 million euroslast year. Not all of this can be attributedto the euro, but the euro is in the decision-making process.Smooth transition for EstoniaEstonia joined the euro on Jan. 1, 2011, aftersuccessfully retaining its fixed currency pegagainst the euro. During the crisis, manyeconomists advised Estonia, as well as Latviaand Lithuania, to drop their pegs as a wayof regaining competitiveness – essentiallyto devalue the currency. Instead, all threecountries undertook very painful internaltheziedonisfinancialreportUnveiling the Slovak Euro coin design.Photo: European Commission.Leader of providing economising systems of continious power supply and power energy andmaintainance in the Baltic States. www.energolukss.lv
  4. 4. Spring/Summer 2013 – issue #417theziedonisfinancialreportdevaluations, slashing wages and boostingcompetitiveness, and the programs worked.Estonia undertook a fiscal consolidationtotaling about 14 per cent of GDP and sawa contraction of 14.3 per cent in 2009, butwas back to growth by 2010. In 2011, its firstyear in the eurozone, the economy grew by7.6 percent.For Estonia, there was little reason to hangon to the kroon because its currency boardsystem meant that it had no independentmonetary policy anyway, and the country didnot want to devalue. It’s the same for Latvia.Again, fears of an inflationary spike provedto be exaggerated, with short-term pricevariations of only about 0.2 percent duringthe changeover. Estonia also saw somebenefits from joining, such as a drop ininterest rates.For Estonia, which still has fresh memoriesof being a Soviet colony, the main imperativeof being in the euro is not economic butstrategic – cementing itself fully into WestEuropean institutions to prevent the dangerof Russian revanchism. “The euro is a long-term strategic project. It is not just a deviceto steer our macroeconomic policies,” saidMarten Ross, former deputy governor ofthe Estonian Central Bank, in the FinancialTimes.Estonia kept its budget in order; it is the onlyeurozone country with a budget surplus,wrote Globalpost in a recent review of thecountry’s economic performance. Nationaldebt is just 6 percent of GDP, compared to81 percent in Germany, or 165 percent inGreece. Cutting-edge tech firms complainthey can’t find people to fill their jobvacancies.The country continued with three years ofpainful government belt-tightening afterthe crisis, says Peeter Koppel, investmentstrategist at SEB. As well as slashing publicsector wages, the government responded tothe 2008 crisis by raising the pension age,making it harder to claim health benefits andreducing job protection.It still has its share of economic problems.The average monthly take-home pay of 697euros is among the lowest in the eurozoneand unemployment at 11.7 percent is stillabove the bloc’s average. The jobless rate isfalling however, thanks in part to a thrivingtech sector.Estonia has also paid close attention to thefundamentals of establishing a favorablebusiness environment: reducing andsimplifying taxes, and making it easy andcheap to build companies. Its location —with quick access to Nordic, German andRussian markets — has also helped. Overall,the euro transition has gone well for Estonia,with public support in the ascendency.About DorianZiedonisCurrent position:Editor-in-Chief at the weeklynewspaper ‘The Baltic Times’Education: New York University - Leonard N. SternSchool of BusinessExperienced and appreciated partner in fields such as infrastructure development, rural development, water supplyand education. www.hifab.se

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