1. Global Economic Environment: Prospects for the Baltics Jekaterina Rojaka DnB NORD Chief Economist October 14 th, 2011 Riga, Latvia

2. 2| Rise in global exports proved to be short-lived Source: WTO

3. 3| The global recession is back? In Sept., sentiments dropped in most of regions, especially in Europe Number of new manufacturing orders stagnate Source: Capital Economics

4. 4| IH 2011: Monetary policy restrictions Source: Reuters Ecowin, DnB NOR FORECAST

5. 5| 2011 IIH: Turnaround in monetary policy Source: Reuters Ecowin, DnB NOR Forecast 2011 Sept.

6. 6| 2011 2 nd half: growth slows down in EU Source: Eurostat

7. 7| Euro zone industy is out of steam Source: Eurostat. Capital economics

8. 8| Most EU countries fail to balance foreign trade Source: Eurostat

9. 9| In recent year most EU countries went deep in debt Source: Eurostat

10. 10| In the Baltics fiscal deficit was moderate, compared to the EU Source: Eurostat, European Commission

11. 11| Investors’ concern over Portugal and Greece is soaring Source: Reuters Ecowin, European commission Sovereign debt servicing costs, 2011 Rise of debt servicing costs in 2011, p.p. of GDP Sovereign debt, % of GDP, 2011

12. 12| Decisions within eurozone stem from its structure Source: Eurostat

13. 13| Solutions of euro crisis to influence Baltics’ economic development Scenario 1Scenario 2 Impact on the BalticsPrinting moneyBudget cuts Inflation  Output, exports  Gross capital formation  Business confidence  Loan portfolio  Not to increase or  General government 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 averageStagnation or recession

14. 14| Capital outflow from Russia during the first nine months of 2011 was larger than one during entire 2010 Despite solid economic growth, stimulated by budget funds, domestic and foreign investors lack faith in countries future. –One time political events (election, reforms, interest rates’ changes) –Investment environment –Asymmetric migration –Russia’s direct investment to foreign countries What happens if oil price falls below $60 / barrel? Source: Central Bank of Russia

15. 15| Ruble depends on oil price and political stability If the euro-zone debt crisis takes a turns into a banking crisis, it may well become problematic for Emerging European economies to roll over their maturing external debt. SEE risks are rising - be careful Source: Capital economics, IMF

16. 16| Emerging Europe is vulnerable Source: Capital economics, IMF If the euro-zone debt crisis turns into a banking crisis, Emerging European economies will face difficulities to roll over their maturing external debt. SEE risks are rising …

17. 17| Focus on the Baltics

18. 18| The Baltics grew at fast pace over last decade Source: Eurostat

19. 19| Baltic countries are among the EU leaders according to GDP growth rates this year Source: Eurostat, national statistics offices

20. 20| Situation in labour markets is improving *Youth unemployment rate – in the age group ≤ 24 years; Source: Eurostat

21. 21| Labour costs start rising, the Baltics yet sustained their competitiveness Source: Eurostat, *DnB NORD Research calculations

22. 22| The Baltics are leading EU in terms of manufacturing growth

23. 23| Exports – the main source of a rapid recovery Source: Eurostat

24. 24| Productive investments, after being put on halt, start rising * 2010 structure Source: Eurostat

25. 25| Foreign investment flows grew to almost pre-crisis level Source: national central banks, Eurostat, national statistics offices

26. 26| Competitive position in the Baltics improved Source: WEF 70 th +6 47 th +3 33 rd = 83 rd -7

27. 27| Business and consumers’ sentiments improve, although at a slower pace Source: European Commission

28. 28| The Baltics undergo deleveraging process Source: national central banks

29. 29| RE market activity has already recorded the lows and starts moving slowly up Source: Centre of Registers, Statistics Estonia, Zemesgrāmata, national statistics offices

30. 30| Global economic outlook: uncertain future EU problems are growing, decisions are being postponed, patience of financial markets participants may soon evaporate. US will have to face tough reforms, that may drastically reduce rate of its economic growth. Russia’s main problem – lack of efficiency. If commodities’ prices fall, country will have to deal with tremendous challenges. Global economy may still surprise in an unpleasant way – the Baltics should get ready in advance. Inkcinct

31. 31| Thank you for your attention! DnB NORD analytical publications are available at: www.dnbnord.lt/publications

32. 32| Foreign investment flows grew to almost pre-crisis level Source: national central banks, Eurostat, national statistics offices

33. 33| Pernai emigracijos statistiką kilstelėjo privalomos įmokos į PSDF, bet ir 2011 m. rodiklis bus įspūdingas Šaltinis: Statistikos departamentas

34. 34| Lietuva: verslo įmonių atsigavimas akivaizdus Šaltinis: Statistikos departamentas