Deutsche Prescribes The Focus On Fiscal Performance For Baltics

Busy economists at Deutsche Bank finally had the chance to make a quick look at the economic affairs in Baltics last week. In their weekly "Focus Europe" their take was rather straight forward:

The Baltic economies are showing some tentative signs of stabilization. Base money has stabilized as currency pressure has eased while demand for FX deposits appears to have peaked, at least for now. The data flow on economic activity is no
longer uniformly negative and at least in Estonia and Latvia 2010 should produce some modestly positive QoQ GDP growth rates.

Click on chart to enlarge, courtesy of Deutsche Bank.

All three governments have taken extensive measures to contain their budget deficits. But only in Estonia has fiscal management been sufficient to maintain the deficit within 3% of GDP. This may be sufficient to win the country EMU entry next January.

In Latvia and Lithuania sizeable fiscal hurdle sremain ahead. Deficits in both countries remain well in excess of the criterion in Maastricht while Latvia’s October general election could weaken political support for further reform. In the near term better than expected fiscal performance in Latvia has boosted the sovereign’s liquidity position while access to Eurobond markets is crucial for Lithuania if it is to avoid an IMF programme.

Click on table to enlarge, courtesy of Deutsche Bank.

Interestingly, has Deutsche noticed some demand for "Italian-style" lipstick cosmetics in Estonia?

Encouragingly Estonia may receive an upbeat recommendation from the European Commission in May on its bid to adopt the Euro in January of next year. But even though we should learn in April that it met the fiscal target last year and that inflation should remain below the required threshold, risks remain. For example could the Riksbank’s provision of a swap line to the Estonian central bank represent a violation of the ERM II criterion? The ECB also recently warned against some elements of a piece of proposed government legislation on national statistics. ‘Several provisions of the draft law indicate that the Ministry of Finance has extensive powers to interfere in the production of national statistics.’