Swedbank Baltic Sea Analysis No. 25


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Swedbank Baltic Sea Analysis No. 25

  1. 1. Swedbank Baltic Sea Analysis No. 25 19 August 2010 Economic Research Department, Swedbank AB (publ), SE-105 34 Stockholm, tel +46 (0)8-5859 7740 e-mail: ek.sekr@swedbank.com Internet: www.swedbank.com Responsible publisher: Cecilia Hermansson +46 (0)8-5859 7720. Magnus Alvesson +46 (0)8-5859 3341, Jörgen Kennemar +46 (0)8-5859 7730 ISSN 1103-4897 Russia Fire, drought, and global softening – The Russian recovery stumbles • The global economic crisis has hit Russia harder than other comparable emerging market economies, and the recovery has been slower. Real GDP growth in the first half of 2010 was 4.2% and mainly driven by consumption and inventory restocking. The drought and wildfires have taken a large hu- man toll and are also leading to economic losses, mainly in the agricultural sector. Food prices have already started to shoot up and commerce has been disrupted as a consequence. • The policy reaction to the deep economic crisis has been forceful and successful in mitigating the negative impact on households and firms. Fiscal policy has been expansive and monetary policy loose. However, inflation pressures could reemerge, and weaknesses remain in the financial sector. Little has been done to reform the Russian economy and enhance its growth potential. There has also been a rapid reaction to this summer’s natural disaster, although the political fall-out could be long lasting. Discontent is spreading concerning the public sectors ability to respond to emergencies. • The economic outlook over the next two years is characterised not only by a rebound from the sharp contraction in 2009, but also by a weakening of the global business cycle. We expect real economic growth in Russia to reach 4.3% in 2010, following a slowing of momentum in the second half of the year. In 2011 and 2012, we forecast modest growth rates of 4.3% and 4.5%, respectively. This is lower than we anticipated in our April forecast. Eco- nomic policies are expected to remain expansive in anticipation of the up- coming elections in late 2011 and early 2012. This will cause inflation to in- crease and reach double digits in 2011. The rate of appreciation of the rouble will slow as oil price increases level off. Transparency in the banking sector is limited, which leads to uncertainties. We would suggest that the Central Bank authorities launch a stress-test exercise along the lines of the US, Europe and now possibly China to strengthen the trust in the banking sector and identify remedies.
  2. 2. 2 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 The Russian economy rebounds – but from a deep trough Russia has seen a much sharper contraction than other emerging economies. While China and India saw a mild weakening of economic activity, natural resource-dependent economies such as Russia and Brazil experienced actual declines. In Russia, the global downturn exposed weaknesses in the financial sector, which led to further de- clines and capital outflows. Despite the very significant base effects in Russia in 2010, the first quarter year-on-year growth of 3% was dwarfed by rates in the other BRIC countries. This suggests that Rus- sia is less poised for a return to a normal economic situation. Real GDP growth in the BRIC countries (Year-on-year growth in %) ‐15 ‐10 ‐5 0 5 10 15 20 2006  Q1 2006  Q3 2007  Q1 2007  Q3 2008  Q1 2008  Q3 2009  Q1 2009  Q3 2010  Q1 China Brazil India Russia Source: Ecowin. It was primarily manufacturing and construction that showed the larg- est declines during the downturn in Russia, while services held up better. However, manufacturing has made a fairly strong comeback, growing in positive numbers since late 2009 and at double-digit levels during most of 2010. However, in July the annual growth rate de- clined to 8%. Activity in the construction sector remains depressed. Only in June 2010 did the sector start to expand in annual terms after contracting for 17 straight months. The economic crisis has hit Russia harder than other emerging markets Manufacturing and construction are the main drag on eco- nomic growth in Rus- sia
  3. 3. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 3 Sector growth rates, 2006 – 2009 (Year-on-year real growth in %) ‐30.0 ‐20.0 ‐10.0 0.0 10.0 20.0 30.0 40.0 2006  Q1 2006  Q3 2007  Q1 2007  Q3 2008  Q1 2008  Q3 2009  Q1 2009  Q3 Agriculture and fishing Extraction Manufacturing Construction Private services Public services Source: Ecowin. The widespread droughts and wildfires that have plagued Russia dur- ing this summer have had a devastating human toll, as well as caused significant economic disruptions. More than 50 people have been killed directly by the fires, while the mortality rate in for example Moscow has doubled during the summer months, presumably due to the reduce air quality. Even more have lost their homes and liveli- hoods. Agricultural production has been most severely hit with wheat production down by an estimated 30 %, but commerce is also af- fected. Food prices have shot up reversing, possibly temporarily, the downward trend of inflation. In big population centres reached by the smoke, consumption is likely to decrease, and, due to the export ban on wheat, traders and transporters will see income losses. Other sec- tors are also affected, albeit to a lesser degree. Car plants have had to shut down due to the smoke and consumption will likely decline as many minimize shopping. On the demand side, it was primarily exports and investments that led the decline in early 2009. From mid-2009 onwards, however, the economy started to grow again, on a quarterly basis, mainly on ac- count of inventory restocking, but momentum started to fade in late 2009 and early 2010. Exports are rebounding, but strong growth in imports limit the impact from net exports. Household consumption is now contributing to growth, while investments continue to lag. For the second quarter of 2010, preliminary data suggest that the economic pace began to pick up again and real GDP growth reached 5.2% year-on-year. Overall for the first half of 2010, real growth at 4.2% over the same period last year, is somewhat better than expected, al- though the annual growth rates are largely an effect of the very low levels that prevailed during early 2009 (the so-called base effect). Drought and wildfires have a devastating human impact and cause widespread economic disruptions Private consumption emerges as the most important engine of growth
  4. 4. 4 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 Demand components of economic growth, 2007 - 2010 (Year-on-year growth in %) 8 7.7 9 9.3 7.7 6.6 0 ‐9.4 ‐10.8 ‐7.7 ‐3.8 2.9 5.2 ‐40 ‐30 ‐20 ‐10 0 10 20 30 2007  Q2 2007  Q3 2007  Q4 2008  Q1 2008  Q2 2008  Q3 2008  Q4 2009  Q1 2009  Q2 2009  Q3 2009  Q4 2010  Q1 2010  Q2 GDP Investments Exports Consumption Imports Source: Ecowin. The rebound in consumer demand is driven by improving labour mar- ket conditions and a boost in transfer incomes. The official unem- ployment rate has been falling since early 2010 and reached 6.8% in June, compared with 8.3% the same month last year. The real unem- ployment level is likely to be higher as the official unemployment sta- tistics have a limited coverage. A large portion of the fiscal stimulus program has been devoted to increases in pensions and of the mini- mum wage, and to other public transfer schemes. As household real wages and real disposable income have increased, households are paying off debt. Thus, as the saving rate is increasing, household fi- nances are stabilizing, and consumption is set to be the main engine of growth. Labour market developments, 2005-2010 (In %) ‐10 ‐5 0 5 10 15 20 Real wage (annual  growth) Unemployment rate Source: Ecowin. A stable labour market and public support un- derpin consumption
  5. 5. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 5 Business confidence remains muted despite recent improvements in sentiment. These improvements are not enough to spur investment growth. Quarterly real growth rates in early 2010 remained flat after falling throughout much of 2009. Also, investments by state-owned enterprises failed to take off. Although investments in these sectors-- mainly extraction, electricity, and transport--are under indirect gov- ernment control, the growth rates were below what was anticipated. In particular, Gazprom failed to raise investment rates, while invest- ments in electricity production and railways grew by 25 to 30% annu- ally in the first quarter. This did not, however, compensate for the continued stalemate in the rest of the economy. Business sentiment, 2007 – 2010 (Index) ‐60 ‐40 ‐20 0 20 40 60 80 100 120 2007  Q1 2007  Q3 2008  Q2 2008  Q4 2009  Q2 2009  Q4 2010  Q2 Net balance Construction Finance Services Source: Ecowin. The consumer inflation rate has been falling, while the exchange rate has continued to strengthen. At mid-2010, annual inflation fell to 5.8%, compared with almost twice the rate the year before. Food prices have come down (prior to this summer’s drought and wildfires), and the sharp appreciation of the rouble has lowered the cost of im- ported goods, a major part of the consumer basket. The exchange rate dynamics reversed during the spring as the European debt prob- lems led to falling oil prices and a flight to the US dollar. However, the still-strong rouble erodes the competitiveness of Russian production. Domestic producers find it harder to compete with imports, and ex- porters face an uphill battle to penetrate foreign markets. Thus, the need to diversify Russia’s economy away from dependence on natu- ral resources becomes even more difficult to meet. Despite some improvement in business sentiment, investment lags Inflation rates fall sharply
  6. 6. 6 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 Annual inflation rate and the real effective exchange rate, 2005 - 2010 (In %) ‐15 ‐10 ‐5 0 5 10 15 20 Jan‐05 Jun‐05 Nov‐05 Apr‐06 Sep‐06 Feb‐07 Jul‐07 Dec‐07 May‐08 Oct‐08 Mar‐09 Aug‐09 Jan‐10 Jun‐10 Real effective  exchange rate Inflation (eop) Source: Ecowin. Despite increased lending activity, uncertainty prevails in the financial sector. Domestic credit started to increase for the first time since late 2008. However, the default by the International Industrial Bank (IIB) on a 200 million Eurobond indicates that the problems may not be over. Domestically, nonperforming loans remained slightly below 10% in the first quarter of 2010, but the lack of credible information and re- porting systems creates a lack of transparency. It is still unclear how many loans were restructured during the crisis, and it is difficult to as- sess future potential credit losses in the banking system. The spreads between Central Bank policy rates and commercial lending rates re- main high (see chart on next page), at around 4 percentage points in early 2010, suggesting an elevated high risk assessments by the banks. Thus, without growing confidence between lenders and bor- rowers, funding costs for investments will remain high. Domestic credit, 2008 - 2010 ‐10 0 10 20 30 40 50 60 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 Jun‐08 Aug‐08 Oct‐08 Dec‐08 Feb‐09 Apr‐09 Jun‐09 Aug‐09 Oct‐09 Dec‐09 Feb‐10 Apr‐10 Annual percentage change RUB ('000 billions) Bank loans (left scale) Growth rate (right scale) Source: Ecowin.
  7. 7. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 7 The policy response has been forceful – but risks are emerging The Russian government reacted forcefully to counteract the eco- nomic downturn. Fiscal balances were relaxed by a total of almost 9 percentage points of GDP, through discretionary increases in spend- ing and through lower tax collection. Although the fiscal loosening came too late to have an impact on the contraction in early 2009, it continues to support economic recovery, in particular through income support to the population and, thereby, through private consumption. The fiscal stimulus will, however, be difficult to withdraw. Much of the spending increases came in the form of transfers to the population, such as a 45% increase in pensions. Although this is likely to have a direct impact on consumption, it is also likely to be politically costly to reduce these rates, in particular as elections are coming up. Budget indicators, 2007 - 2009 (In % GDP) ‐20 ‐10 0 10 20 30 40 50 2007 2008 2009 Overall balance Non‐oil balance Revenue Expenditure Source: IMF. The large public sector deficit has led to a sharp drop in fiscal re- serves. Since end-2008, the Reserve Fund (which is dedicated to compensate the budget for swings in oil and gas prices) has lost al- most USD 100 billion. If the deficits continue at current rates, and oil and gas prices do not see large upswings, the Russian government will be forced to increase borrowing again, undermining the role of the public sector as a backer of the private. The National Wealth Fund, which serves to guarantee the soundness of the pension system, has maintained steady balances over the crisis. However, as the funding for the Wealth Fund is derived from a surplus in the Reserve Fund (above 10% of GDP), inflows have slowed down since late 2008. As for gross international reserves, also dependent on oil price and for- eign exchange interventions by the Central Bank, the balances have gradually started to increase again after the large decline in late 2008. Currently, they are equivalent to about 20 months of import; signifi- cantly above the 3 months that normally is considered being suffi- cient. Fiscal expansion sup- ports economic activ- ity, but will be difficult to reverse Fiscal reserves have declined over the last year, while interna- tional reserves are substantial
  8. 8. 8 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 Reserves, 2008 - 2010 (Q2) (USD billion) Change Reserve Fund 137.1 60.5 39.3 -97.8 National Wealth Fund 88.0 91.6 85.5 -2.5 Gross International Reserves 426.3 439.5 461.2 34.9 20102008 2009 Source: Ecowin. Also, monetary policy has been relaxed significantly over the past 12 months. As inflation rates have come down and the rouble strength- ened, the Central Bank of Russia has lowered the policy rate from 13% at end-2008 to 7.75% in July 2010. Rates for consumer lending are declining similarly, but the spread remains large. The central bank has also increased its intervention in the foreign exchange market to reduce the appreciation pressure on the rouble. Monetary policy indicators, 2005 - 2010 (In %) 0.0 2.0 4.0 6.0 8.0 10.0 12.0 14.0 16.0 18.0 Jan‐05 May‐05 Sep‐05 Jan‐06 May‐06 Sep‐06 Jan‐07 May‐07 Sep‐07 Jan‐08 May‐08 Sep‐08 Jan‐09 May‐09 Sep‐09 Jan‐10 May‐10 Policy rate Consumer lending rate Source: Ecowin. Structural reform initiatives have not been high on the priority list of the government during the financial turmoil. The authorities have, however, indicated that measures to reduce corruption, improve the business climate, and expand investments in the public sector are on the agenda. The government is also relaunching the privatisation process, whereby minority stakes in 10 state-owned companies will be put up for sale in 2011-13. So far, more critical and politically diffi- cult reforms of the civil service and liberalisations of monopolized markets have not been addressed. The political reaction to the drought and wildfires this summer could indicate a concern by the government about discontent spreading through the population. The crisis has exposed the dismantling of crucial emergency institutions such as fire brigades and basic infra- structure that took place in the wake of the fall of the Soviet Union. Both President Medvedev and Prime Minister Putin have been criti- cised, and have reacted by showing a hands-on approach in dealing with the disaster. An export ban on wheat was imposed to pre-empt possible shortages and rapid food price hikes. Direct support to af- Monetary policy is guided mainly by its effect on the exchange rate Much-needed structural reforms have been pushed forward The policy reaction to the wildfires has been rapid suggesting a need to limit public discontent.
  9. 9. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 9 fected regions and farmers has been put in place and it can be ex- pected that more general stimulus measures will be implemented to counteract a possible slowdown in consumption. The urgency with which the policy actions were taken suggests that the government sees a need to enhance the efficiency of the public sector to meet the expectations of the population. Recovery moderates – fiscal resources safe- guards against renewed slump Russia: Key economic forecast indicators (Annual change in %, unless otherwise indicated) 2008 2009 2010 2011 2012 proj. proj. proj. Gross Domestic Product 5.6 -7.8 4.3 4.3 4.5 Of which: Private Consumption 10.8 -7.7 4.2 4.3 3.2 Gross Investments 10.7 -15.9 -0.1 7.7 7.0 Exports 0.2 -4.2 15.5 12.0 7.1 Imports 14.9 -29.8 20.0 18.0 5.3 Inflation (%, ave) 14.1 11.7 6.6 8.9 10.0 Inflation (%, eop) 13.3 8.8 7.5 10.0 10.0 Unemployment rate (% of labour force) 6.4 8.4 7.5 7.0 7.0 Current account (% of GDP) 6.2 4.0 4.0 3.8 3.5 Fiscal deficit (% of GDP) 3.5 -5.9 -6.5 -5.0 -4.0 Government debt (% of GDP) 7.8 10.9 12.0 11.5 11.0 Rouble (basket USD/EUR) 35.4 36.1 32.0 31.0 30.0 Oil prices (USD/b) 97.0 62.0 78.5 82.0 90.0 Sources: Ecowin, IMF and Swedbank projections. While the economic rebound in the first half of 2010 was somewhat stronger than expected, estimated at 4.2% compared with 2009, we now believe that the Russian economy will face a slower pace of ex- pansion in the near future. The first half of the year saw private con- sumption firming up on the back of strong fiscal support, a strength- ening of the labour market, and inventory restocking spurring growth. However, with the combination of a weaker global outlook and the impact of the wildfires and drought, the rebound is set to slow in the second half of the year. For the year, real growth in 2010 is expected to reach 4.3%. Compared with our forecast in April, developments in the first half of the year were better than expected, but the pace of growth for the remainder of the year is set to slow. For 2011, real economic growth will be negatively affected by the global fiscal consolidation but mitigated by the ability of the Russian government to continue its expansionary economic policies. The elec- tions scheduled for late 2011 (parliamentary) and early 2012 (presi- dential) make the likelihood of a fiscal consolidation small. We project that real economic growth will hit 4.3% in 2011 before reaching 4.5% in 2012. Thus, economic output in Russia will return to the 2008 level only in the third quarter of 2011. In the medium term, real economic The economic rebound will slow in the second half of 2010 Fiscal stimulus will limit the negative impact on growth in 2011 and 2012
  10. 10. 10 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 growth in Russia will remain below potential unless wide-ranging structural reforms are implemented. Real GDP level, 2008 - 2012 (2008=100) 90 92 94 96 98 100 102 104 106 2008 2009 2010 2011 2012 Sources: Ecowin and Swedbank projection. External developments will have a mixed impact on Russia’s econ- omy. While the world market price for oil has increased steadily since early 2009, we have lowered our forecast of the rate of increase due to weakening overall global demand. We expect, however, that export earnings will continue to provide the authorities with resources to support the domestic economy. Sagging overall growth in the largest developed economies will reduce demand for Russian exports other than oil and will, thus, work against a much-needed diversification of the production structure. In addition, the volatility of international capi- tal flows could create problems for the Russian banking sector and affect credit to households and companies. The value of oil production and the oil price, 200-2012 0 20 40 60 80 100 120 0 1000 2000 3000 4000 5000 6000 7000 8000 2000 2002 2004 2006 2008 2010 2012 Value of oil production (mRUB) Oil price (US$/b, LHS) Sources: Ecowin and Swedbank projection. The economic impact on a national level from the drought and wild- fires is mainly short term, and government actions are likely to miti- gate most of the negative effects. Some regions will, however, be more affected, and the food price increases could raise inflation ex- pectations. The most long-lasting impact could be a growing mistrust in public services in general and in the political representatives in par- ticular. It will remain a challenge for Russian politicians to reverse this trend. The Russian economy is dependent on exter- nal developments, in particular the world market oil price and capital flows Government action is likely to mitigate most negative effects of the natural disaster, but could face increasing mistrust.
  11. 11. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 11 Russian consumers have suffered during the recession, but we ex- pect that government support, a thawing of the credit markets, and a strengthened labour market will provide a firm basis for private con- sumption over the next year. The election cycle will limit the govern- ment’s willingness to embark on much-needed fiscal consolidation. This means that the significant increases of public pensions and spending support for the regions will remain in place. The labour mar- ket will continue its gradual improvement on the back of a resumption of confidence in the business sector and with continued public policy support, and we expect the unemployment rate to drop to 7½% by end-2010 and 7% by end-2011. The stimulus will safeguard recent gains made in real wage developments and disposable income, which further underpin a robust consumption growth. Demand composition of real GDP, 2005-2012 (In constant 2003 rouble) 0 5000 10000 15000 20000 25000 2005 2006 2007 2008 2009 2010  proj. 2011  proj. 2012  proj. Household  Consumption  Investments Exports Imports GDP Sources: Ecowin and Swedbank’s projections. We expect investments will continue to lag in the recovery as the pre- crisis investment boom has created a significant overcapacity. In par- ticular, the construction sector showed strong growth rates in the years leading up to the crisis, and it will take some time before de- mand again will meet existing supply. Low capacity utilisation rates, combined with high risk aversion in the banking sector, will push back many large investment decisions. In addition, foreign direct invest- ment is likely to be constrained by the slowdown in the major econo- mies. For the long term, i.e., beyond 2012, it will be crucial for the Russian economy to stimulate more investments, both domestic and foreign. Russia’s share of investment in GDP has been lower than in most other emerging countries, and, to raise the long-term sustain- able economic growth rate, investment needs to expand. Not least will public investments in infrastructure be important to lure private business to grow their production in Russia. The financial sector remains strained despite a resumption of credit to the private sector. Even though the IIB recently defaulted on its exter- nal obligations, the banking system looks stable and able to service outstanding debt obligations. In fact, the financial sector is liquid as monetary policy is loose, capital inflows continue, and lending is con- strained. However, the level of uncertainty in the banking sector is Private consumption is supported by fiscal policy and stable labour market Investments will grow slowly, well below what is need to raise long- term growth A stabilising financial sector is still plagued by lack of credible information
  12. 12. 12 Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 substantial. There is a need for strengthened banking supervision to push for increased transparency, reduce connected lending, and im- prove loan classification and provisioning systems. There is a risk that bad loans are rolled over (so-called evergreening, or “extend and pre- tend”) and that they will resurface at a later stage, thereby extending the slow comeback of credit. A “stress-test” of banks based on inter- national experiences could serve to reassure markets and provide guidelines for further actions to strengthen the financial sector in Rus- sia. Despite falling inflation rates since early 2009, the expansive fiscal policy will put upward pressure on prices, and monetary policy is unlikely to be aggressive enough to push back. Rapidly increasing food prices due to the drought and wildfires will lead to a jump in the inflation rate in 2010 and, possibly, increased inflation expectations. However, the somewhat weaker momentum in the economic recovery in 2010 and an expected continued strengthening of the rouble will limit the inflation to around 8% at end-2010. For 2011 and 2012, we expect inflation rates to reach double digits. Exchange rate and oil price projections, 2009-2012 25 27 29 31 33 35 370 10 20 30 40 50 60 70 80 90 100 2009 2010 proj. 2011 proj. 2012 proj. RUB vs USD/EUR (reversed) USD/b Oil prices  Rouble basket (right scale) We do not expect any significant policy reversals over the forecast period. The overarching goal of Russian policymakers is likely to be to stabilize the economy while boosting domestic purchasing power in the run-up to the elections in late 2011 and early 2012. It will be key to support labour market developments and, thereby, sustain positive wage developments. The primary tool will be a continued expansive fiscal policy. Despite the large and successful fiscal stimulus undertaken to mitigate the impact of the global fi- nancial crisis, the government is unlikely to embark on any major consolidation. It is also unlikely that monetary policy will address the increasing inflation rates. Limiting inflation will not be the primary goal, al- though the Central Bank of Russia is discussing and preparing for the introduction of an inflation-targeting regime instead of the cur- rent policy of a managed exchange rate float. Instead, monetary policy rates will be kept low not only to prevent market rates from increasing and thus denting growth prospects, but also to limit ap- Inflations rates are likely to start rising and hit double digits in 2011, while the rouble will remain stable The policy response is likely to continue to be expansive due to up- coming elections and despite rising inflation Monetary policy rates to stay low
  13. 13. Swedbank Baltic Sea Analysis No. 25 • 19 August 2010 13 preciation pressures on the rouble, which would make Russian companies less competitive. We also do not expect any significant reform initiatives. Even the recent renewal of the privatisation process can be expected to have a limited impact, as majority control in most cases will be maintained by the government. The authorities are, moreover, unlikely to undertake reforms that could cause political controver- sies. The most urgent of such reforms would be to make the public sector and civil service more efficient, and to increase competition in sectors that in many regions now are shielded. Both the upside and downside risks to this scenario derive mainly externally, and we consider them to be evenly balanced. However, due to the still weak and largely unknown situation in the Russian banking sector, the impact from negative developments, such as renewed capital outflows, could be substantial. Domestically, the largest risk is a rapidly increasing inflation rate. Once higher infla- tion rates become entrenched, they will entail significant losses and require contractionary policies to reverse, which, in turn, will hurt growth and income levels over the medium term. Magnus Alvesson Economic Research Department SE-105 34 Stockholm Telephone +46-08-5859 7740 ek.sekr@swedbank.se www.swedbank.se Legally responsible publisher Cecilia Hermansson, +46-8-5859 7720. Magnus Alvesson, +46-8-5859 3341 Jörgen Kennemar, +46-8-5859 7730 ISSN 1103-4897 Swedbank Baltic Sea Analysis 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 in this publication. However, we cannot guarantee the accuracy or completeness of the report 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, direct or indirect, owing to any errors or omissions in Swedbank Baltic Sea Analysis. Significant structural reforms are unlikely before the elections Risks are evenly balanced, but the impact from a negative shock could be more severe