1 Different crisis solutions and common future challenges for the Baltic Economies Jekaterina Rojaka DNB Chief Economist | Baltics November 24, 2011 Economic Crossroads: From Recovery to Sustainable Growth in the Baltics and EU

2 Last decade the Baltic economies grew at a solid pace Source: Eurostat

3 The Baltics are again among the EU leaders according to economic growth rates Source: Eurostat

4 While EU old-timers are out of steam Source : Eurostat, Latvi’as statistics, Russia’s national statistics

5 Manufacturing indexes change direction Šaltinis: Eurostat

6 Entering an outlook downgrading cycle again… Source: European Commission, OECD, World Bank

7 Stock market faces high volatility Source: Eurostat

8 Overall confidence drops Source: Eurostat, Bloomberg

9 Germany’s confidence is close to 2008 level Šaltinis: Reuters Ecowin

10 Economic sentiments - base for short term forecasts… Source: Capital Economics

11 And prospects are not bright Source: European Commission, Eurostat, DNB

12 Where roots of pessimism are coming from? What to expect?

13 Fiscal prudence in EU deteriorated, Latvia and Lithuania stand among average performance Source: Eurostat, European Commission

14 General government debt in most of EU swelled in several years Source: Eurostat

15 Financial markets full of fears Source: Reuters EcoWin

16 Debt service becomes a heavy burden for some countries Source: Eurostat

17 Possible solutions of the EU crisis Expansive monetary policy Possible QE starting dates Inflation Redistributing income Fiscal tightening Strict fiscal policy Deflation Stagnation / prolonged recession Discontent electorate High probability Distributing debt burden Distributing debt amongst euro zone members Recession Deflation Anemic growth / stagnation Break down of euro zone No political consensus Flight from EZ Going bankrupt Restoring national currencies Improving competitiveness Low probability

18 Eurobond – panacea, or placebo? Put all national bonds in one melting pot, i.e. all euro-zone government debt issued and fully guaranteed by all 17 member states. Euro bonds cover up to a debt ceiling (perhaps 60% of GDP), and national bonds – above that. National governments offered euro bonds up to a threshold, with limited guarantee from other euro-zone governments.c Timing? Scope? Effect? Source: Bloombergm Capital Economics, DNB

19 Solutions of euro crisis to influence economic development in the Baltics Scenario 1Scenario 2 Impact on the BalticsQuantitative easingBudget cuts Inflation  Output, exports  Gross capital formation  Business confidence  Loan portfolio  Not to increase or  General gov. debt  Unchanged or to increase Interest expense on debt  Relative increase Unemployment rateGradual decreaseTo remain high Real income , Savings to melt Unchanged GDP growthStronger than EU’s average Stagnation or recession

20 Significant correlation between the Baltic and EU exports Source: Eurostat

21 Global foreign trade growth has been put on halt Source: WTO

22 In Lithuania and Latvia current transfers are substantial Source: Eurostat

23 Lithuania’s and Latvia’s FDI indicators still petty *Gyventojų skaičius 2010 m. sausio 1 d. Šaltinis: Eurostat

24 Unemployment melts down, while still high Source: Eurostat

25 WARNING: Emigration emergency *The ratio of the net migration during the year to the average population in that year. The crude rate of net migration is equal to the difference between the crude rate of change and the crude rate of natural change Source: Eurostat

26 Latvia and Estonia still highly leveraged Šaltinis: Europos Centrinis Bankas, Eurostat

27 There are still room for improvement in business climate and competitiveness ratings Source: WEF,

28 Rising competitiveness and flexibility – key preconditions for sustainable long term growth in the Baltics Fostering competitiveness and innovation in production, work organization, production processes, marketing - the key to success. Currently, both business and governments should avoid overly ambitious projects with long term repayment Actively search for new markets. 28

29 Thank you for your attention! DNB bank research products are available: