Euro self-torture in Estonia?

Estonia is back on leader board. This time being the hack & slash master of the public sector expenditures. Obviously for staying inside Maastricht criteria in 2009 and 2010 (fulfilled in 2008- phew)... Is self-torture of a national scale thing to be proud of? In this context I guess it is – although for obvious reasons people have wildly different opinions on this.

It seems that while eurozone target has been there for a long time, the whole idea behind it has changed dramatically over last few years – as has the whole country. In 2007/2008 it was more like a cherry on the top. A nice thing to have after many years of rapid growth just as the inflation is settling down... a testament of success. Also everyone were pretty content with the idea since it really didn´t get in the way of anyone. Now, on the other hand, reality is that a lot has to be actually compromised to achieve this goal and not too many are happy with that. This does not mean that it should be given up on...

Estonia is pretty average in economic terms. If one goes through fresh numbers, comparisons - Its really quite below-average. Especially when I see how 2009 is going to look like...and then try find a year in history when things were on similar level. Think of what really happened during all these now „lost” years in between and I recall a lot of below-average real estate that was piled up and similar quantities of discretionary items that were bought. Would I like the state/government to extend their public hand to prolong the joy and restore the situation? No. Here is what I would like though:

Keeping it clean – The smaller we are, less options we have. For the currency risk to be dismissed, prudent public sector is the only thing we have to show as a guarantee. It’s not the decimal of deficit but the idea and effort that counts.

Fueling the sentiment – people become incredibly productive in bad times. Yes, it is statistically proven that best time for setting up business is during bad times and yes, markets are much more responsive to new ideas. It is perfect time to look outside, build on ideas, find new niches. Multiply this situation with decreased currency risk and we have again increasing odds of brewing something good here and attracting investments to support that.

Asking „What next?” – among other issues we have a high social tax, quite hostile conditions for starting new businesses that require bright (expensive) minds and decreasing competitiveness. Probably everyone reading this has an idea how to make the environment little bit more attractive for the business (idea) they have.

In the end, common sense will prevail– large countries with limited debt (like the one they call the BRIC) will outgrow the ones with lots of debt until the balance shifts again. Inherently most open to risks are small countries with large private and public debt burden. Lets not be that one.

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!