The inverted baltic mountains and innovation

True that. The Balts like to compete - even if its for the fastest drop in economy. Lithuania posted - 22.4% in 2Q. Lat and Est will be soon to follow with their figure, which should be similarily record-making and ground-breaking. Anyways, sexy stuff for the historical statistics lovers. For the rest of us, its already the thing of the past.

As we still hear the sucking sound that is pumping air out of inflated economies, things are starting to look very mid-2000´ish, except the terrible headache and obligations. Looking forward this seems like a new quest for the export growth and innovation is about to begin. This time much more likely though. Why? Since there are so many things one CANT do any longer in baltic economies that involve conventional local real estate, consumer discretionary and credit related activities. It is possible but its no longer a fool`s market out there - no more easy money.

So basically we (as everyone else) are facing ruined demand inside out while in Estonia the external debt (private sector) has increased 56% during 2004-2008. This means that to some extent people will be much more active to develop whatever they need to sell, much more active to find new markets. Its about survival more than ever before. It is clearly visible that EU funds are being used much more agressively to share the sunk costs with export oriented development/marketing. Out of all these trials and errors that take place now, quite a few good things must pop out and it would be a good start.

Most of the technological innovation has taken place during hardest times in history - that includes wars. Its a harsh truth and driven by necessities not by free will of people to come together and do something beautiful. In economic terms baltics has been in trenches for a while already, which gives much better odds for a critical mass of good things brewing underneath all the warm air that is being pumped out of the macro statistics.

If public sector/government would also take more means for improving conditions (!) and motivations for startups, entrepreneurs and grassroot level initative, the outcome in 4-5 years could be even better. Especially now, when unemployed include blue, white and all the other "collars" there are.

forget the CAD...for now

Good news all over, right?
Estonia – Current and capital account in surplus by EEK 1.2bn in May,
Latvia – Current account surplus reaches 2% of GDP during Jan-May,
Lithuania – Current account surplus at 0.4% of projected GDP during Jan-May

Its obviously all bittersweet. In Estonia the main contributor was 90% decline in goods account deficit. The brakes are on and it shows. Exports still decline at lower pace than imports -30% v.s. -40%, which nowdays is something to be proud of. So, yes, for now its mostly about what we dont do anymore.

They have spoken.

Surprisingly enough, in the middle of July, several of the most experieneced fund managers in the emerging markets decided to take a stroll in baltics. We are talking about guys that dubbed "emerging markets" and already were active in days when Europe was still singing "final countdown" but not feeling it. They pack a significant "AUMph" today and when they speak, people (should) listen. Some thoughts that echoed through our talks:

1) Emerging Markets wishlist is mostly seen like this - Asia, LatAm, CIS, CEE...and in the far back corner there is the balt-country. So, definetley nobody expects much - which is a good thing.
2) The views on Latvia and Lithuania are more soggy than on Estonia. Even now, the shape of things that was kept by Estonian government until 2005 continues to impress and the eurozone bet seems plausible even for them.
3) Also there was a statement once that the currency is overvalued. Which to some extent must be true, but it also seemed that most of the perception and analysis was based on some mid-2008 data. Things have changed after that! Nobody knew that Estonian CA is leveling out or that real estate prices have already adjusted at 40% levels from peak, we have wage deflation and unemployment hitting 11%. After that, it mostly seemed that eurozone is a decent idea.
4) Liquidity. Well, here we are living in the final frontier. There is € 5 billion total equity capitalization for stock markets in all of the baltics - which is actually is more like € 1 billion, given our float. Remember the day it was € 16 billion in 2007? Even then it was amost-a-decent-sized-market-but-still-quite-small for most of the bigwigs. So, its still a very small box of chocolate and not particulary tasty one yet - since everything is relative.

Conclusion: There is A LOT of noise out there on baltics, which is getting a bit boring for everyone since its not news any longer. The interest is there and reality looks better than it seems from distance - especially since the economic data referred to is quite old, given how quickly things can change in small economies. Estonia sticks out in a very positive way and eurozone accession can get the country on Mythbusters. But nevertheless, the equity market needs to become broader over time to get the portfolios looking this way and competitiveness has to increase to keep that CA going up. Will the increasing productivity do the trick or past months have been just a blip? We´ll see!