Swedbank Economic Outlook, 2010, April 22

Swedbank Analyses the Swedish and Baltic Economies April 22, 2010

April 22, 2010 1

Swedbank Economic OutlookGlimmers of light in the tunnel

Global development• Worldwidestimulusmeasuresandfinancialsectorsupporthaveboosted

confidence,andglobalgrowthstrengthens.However,thereboundisnotconvincingyetinmanyoftheindustrializedeconomies.

• Weraiseourglobalgrowthoutlookto3.9%in2010and3.6%in2011.Theunwindingofthestimuluspackageswillbefeltprimarilyin2011.Inparticular, Europe will lag behind, while the emerging markets will be the mainengineofgrowthintheworld.

Sweden• Economicactivityunexpectedlyfellbackinthelastquarterof2009,but

stronglabourmarketdevelopmentsandpublicfinancessuggestthattheeconomyhasreachedfirmerground.

• Welowerourrealgrowthforecaststo1.8%in2010and2.4%in2011.Despiteresilienthouseholdconsumption,externaldemandandinvestmentsareexpectedtolagbehind.Theeconomicpolicystancewillremainexpansive,howevernotsufficiently,withthereporatereaching1.75%atend-2011.

Estonia• Positivequarterlygrowthratesattheendof2009suggestthatthe

bottomofthedownturnhaspassed.Furthermore,dataindicatethattheMaastricht-criteriaforeuroadoptionhavebeenmet,andthatimprovestheprospectsofEstoniabecomingthe17thmemberofEMU.

• Weexpectpositivegrowthratesof1.5%and4.5%in2010and2011,respectively.Exportswillinitiallydrivetherecovery,withdomesticdemand, boosted by increased foreign investments, taking over toward theendoftheforecastperiod.

Latvia• Theeconomicslowdownabatedattheendof2009,whiledomestic

costadjustmentcontinuedatfullspeed.Springof2010broughtsignsofstabilisationinthelabourmarket.

• The recession is likely to be over in early 2010 driven by export growth, buttherecoverywillbebumpyandgrowthfragile.Weexpecttheeconomytocontractby2.5%in2010duetonegativecarry-overeffectsbeforeincreasingby4%in2011. Fiscalconsolidationcontinuesasplanned, but “window of opportunities” to carry out structural reforms mustbeusedmoreintensively.

Lithuania• ThedeeprecessioninLithuaniawasmitigatedattheendof2009by

strongerthanexpectedexportperformance.Unemployment,however,continuedtoincreaseandwagesfell,dampeningdomesticdemand.

• GDPisexpectedtofalloverallby2%in2010,withsteadyrecoverystartinginthesecondhalfoftheyear.In2011,weexpectrealgrowthtoreach3%.Exportswillrecover,whileprivateconsumptionwillimproveonlymodestly.Thefiscalsituationhasstabilizedbutremainschallenging.

Table of Content:

Introduction:Fromcrisisto recovery – conditions for growth slowly improve 2

Global:Globalgrowth-butEuropeislaggingbehind 4

Sweden:Exportmarketsfalter-yethousholddemandpicksup 6 Estonia:Economicprospectsimprove 11

Latvia:Recessiontobeoverearlierthanexpected 16

Lithuania:Fiscalconsolidationis rewarded 21

2 April 22, 2010

Swedbank Economic Outlook

environment.Thedirectionoftradeisshiftingtowardsfaster-growingemerging markets, but it takes time to change the geographical structure ofexports.Commongoalsforcompanies in our region to enhance competitiveness are increased productivity, lower costs, a product structure in demand, and higher value added in production through investmentsinR&D.

Sweden’seconomyisalsocharac-terized by polarization as exports falteranddomesticdemandpicksup.Comparedwithlastyear’sfall,theeconomyisnowrecovering.Contraryto what normally drives the economy in an upturn, households are the main growth engine, supported by a slow recovery in the labour market and stimulusmeasures.Astheeconomyunexpectedly shrank in the last quarter of2009,negativecarry-overeffectswillcauseGDPduring2010togrowslowerthan previously foreseen, and reach 1.8%incalendar-adjustedterms.Netexports will contribute marginally to growth, and support will instead come from private consumption and from companiesstartingtorestock.Asindustrialcapacityisstilllow,invest-ment growth will remain negative this year, but then slowly turn positive during2011.Netexportswillthencontribute negatively to growth as importsincreasefasterthanexports.DomesticdemandwillpickupevenfurtherandGDPisexpectedtogrowby2.4%.Inflationpressuresarelikelytobesubdued,andtheRiksbankcanincrease the policy rate slower than previouslyforeseen.Attheendof2011,itwillhavereached1.75%.Also,eventhoughfiscalpolicywillremainexpansive, the general government budgetdeficitwillnotexceed2%ofGDP.

The Baltic countries have also reached a phase of recovery after shrinking bysome15-25%in2008-2009.Theoverall sentiment towards the region

highlevels.GlobalGDPisthereforeforeseen as growing slower in 2011, by3.6%.

The polarization between industrial countries and emerging markets regarding growth, is mirrored equally inthedifferentprospectsforinflation.Capacityutilisationwillstaylowinmostindustrialcountries,andinflationpressuresremainweak.Asfiscalpolicy also becomes more restrictive, central banks are expected to move theirpolicyratesupwardsonlyslowly.Intheemergingmarkets,meanwhile,capacity is becoming more constrained and price pressures are building up, including the effects from rising commodity prices and large capital inflows. ForEurope–Sweden’sandtheBaltic countries’ most important export markets – there is a need toimprovethefiscalsituationwhileavoiding anaemic growth and strains intheeurozonecooperation.TheEuropean export market remain crucial to Swedish and Baltic companies in volume terms, and therefore it is important not to lose market share in this prevailing weak economic

Worldwide stimulus measures and financialsectorsupporthaveboostedconfidenceamonghouseholds,companies,andfinancialmarkets.Asglobal growth strengthens, a recovery in Sweden and the Baltic countries is takinghold.Theconditionsforgrowthhave improved, but many challenges remain,bothintheshort-andlong-termperspective.

The global economic environment has become brighter, and during this year globalGDPissettogrowby3.9%dueto inventory adjustments, improved confidence,andlargestimulusmeasures from central banks and governments.Whilemanyemergingmarkets are growing strongly, industrial countries – especially the European ones-arelaggingbehind.Theneedto deleverage in the private and financialsectors,aswellasmountingdebts in the public sector with an accompanying risk of increasing financialturbulence,isposinggreatchallenges.Alreadybynextyearanumber of countries will have raised taxes and lowered public expenditures, thusweakeningdomesticdemand.Labour markets will improve, but unemployment will still remain at

Introduction

Fromcrisistorecovery–conditionsforgrowthslowly improve

Macro economic indicators, 2008- 20112008 2009 2010f 2011f

RealGDPgrowth,annualchangein%Sweden (calender adjusted) -0.5 -4.7 1.8 2.4Estonia -3.6 -14.1 1.5 4.5Latvia -4.6 -18.0 -2.5 4.0Lithuania 2.8 -15.0 -2.0 3.0

Unemploymentrate,%oflabourforceSweden 6.2 8.3 9.3 9.2Estonia 5.5 13.8 14.0 11.5Latvia 7.5 16.9 21.5 19.5Lithuania 5.8 13.7 16.0 15.5

Consumerpriceindex,annualchangein%Sweden 3.4 -0.3 1.4 2.2Estonia 10.4 -0.1 0.5 1.8Latvia 15.4 3.5 -3.0 0.0Lithuania 10.9 4.5 1.0 1.0

Currentandcapitalaccountbalance,%ofGDPSweden (current account) 9.6 7.2 6.2 6.5Estonia -8.4 7.4 8.5 8.0Latvia -11.5 11.8 12.4 9.7Lithuania -10.1 7.2 4.2 3.0

Sources:NationalstatisticsauthoritiesandSwedbank

April 22, 2010 3

Swedbank Economic OutlookIntroduction

fromfinancialmarkets,internationalorganisations, and rating institutes has improved.Thepoliticalenvironmentin each country has supported the process of budget consolidation anddeleveraging.Theprospectsof maintaining the exchange rates fixedtotheeurohavestrengthened,and Estonia is expected to join the eurozonein2011.Theobjectivesof Latvia and Lithuania are to follow suitin2014.Withaglobalrecoveryand these countries’ adherence to fiscalconsolidationandreforms,the prospects for achieving these objectiveswillimprove.

Estonia’s economy is expected to grow by1.5%thisyear,and4.5%thenext.Initially,netexportswillcontributetogrowth, but slowly domestic demand will take over as the growth engine, in particular due to inventory adjustment andEU-fundedinvestments.Theexpected euro membership may also enhanceforeigndirectinvestments.Private consumption will remain sluggish but gradually pick up in 2011 inthelightofimprovedconfidence,lower unemployment, and slightly higherwages.ThisimpliesashortdeflationperiodinthecaseofEstonia,and, with increasing labour costs, thechallengeistocreatesufficientcompetitiveness by enhancing productivity so that the export sector developspositivelyalsoinalonger-termperspective.Fiscalpolicyisexpected to remain prudent, but increasingly the government will need toworkonlong-termissues,includingefficiencyofthepublicsector,thetaxsystem, and the level of ambition for publicservices.

Latvia’s recession seems to be over, but the recovery is expected to be slow andfragile.GDPwillstarttopickup,but in annual terms it will shrink by 2.5%thisyearduetocarryovereffects.Then, higher exports will gradually strengthen investments and inventory build-up,thusgeneratinggrowthof4%in2011.Competitivenesshasincreased as unit labour costs have declinedbymorethan20%overthelast year, and the adjustment is set tocontinue,althoughmoreslowly.The unemployment rate seems to have peaked in April, but the decline willbeslow.Thefiscalsituationisdeveloping according to plan, and the budgetdeficitwillsqueezeinbelowthetargetof8.5%ofGDPthisyear.Atotalconsolidationofsome7%ofGDPisstillnecessarytocutthedeficittothe2012targetof3%ofGDP,inordertoachieve the goal of euro adoption in 2014.

Lithuania’s recession became less deep during last year due to stronger exportgrowththanexpected.Goingforward, the carryover effects will result inanegativegrowthrateof2%thisyear despite quarterly improvements, but a more robust annual growth of 3%willensuein2011.Netexportswill contribute positively to growth both years, and gradually domestic demand will strengthen as prospects for investments improve, mainly duetoEUstructuralfunds.Theinternal devaluation is set to continue aswageswilldecreasefurther.Unemploymentwillstabiliseonahighlevel, thus encouraging a new wave ofemigrationamongtheyoung.Wedo not foresee any strong rebound of

consumer spending during the forecast period.Publicfinanceshavebeenstabilised, and the government has agreed to a plan with the European Commissiontoreachadeficitof3%ofGDPin2012.Asthedeficitisseenat8%thisyear,theroadtoeuroadoptionin2014isstilllong,butnotunachievable.

Forecastrisksarebalancedasthepossibilities of reaching higher growth in Sweden and the Baltic countries are more or less equal to the risks ofexperiencinglowergrowth.Themain areas of uncertainty include the globalrecovery.Eveniftheriskfora double dip has decreased, it has nottotallydisappeared.Commodityprices, exchange rates, interest rates, and equity prices are just a few of the factorsthatcouldinfluencegrowthandinflationprospectsinourhomemarkets.Domestically,risksaregeared towards the labour market andthefiscalsituation,aswellasbalance sheets of households and companies.Therisksseenapartdonot seem serious as such, but together they could change the forecast substantially.

Remainingchallengesinourregionaremany,notleastinthemedium-andlong-termperspective.Globalisationis continuing, increasing competition and at the same time providing new growthopportunities.Demographywilllead to a decrease in labour supply, putting pressures on the welfare systems.Sweden’spotentialgrowthratewillbedifficulttomaintain,unlessproductivity is enhanced by structural reforms.TheBalticcountriesmustwork hard on the reform agenda to continue their convergence with the restoftheEU,asthefinancialcrisisandrecessionhaveslowedgrowth.Inparticular, investments must again be able to strengthen without dependence onEUstructuralfunds.Avoidingtaxevasionintheregionisanotherissue.Developingataxsystemthatisbothefficientandeffectiveismuchneededtoensurethatpublicfinancesbecomesustainable and are in line with welfare goals.

CeciliaHermansson

Export volumes (change in %)

-20

-15

-10

-5

0

5

10

15

Sw eden Estonia Latvia Lithuania

2008 2009 2010 2011

Sources:NationalstatisticsauthoritiesandSw edbank.

4 April 22, 2010

Swedbank Economic OutlookGlobal

Globalgrowth-butEuropeislaggingbehind

The global economy has moved from a stage of crisis to one of recovery, but, despite stimulus measures, the rebound isn’t convincing yet in manyoftheindustrialcountries.The major growth engines at the moment are the emerging markets, and,increasingly,NorthAmericaandJapan.Europe,ontheotherhand,is lagging behind, as production has stagnated and the region is crippled with downside risks from mounting sovereign debt and weak domestic demand.Monetarypolicyisexpectedtoremainexpansionary,butfiscalpolicy is becoming restrictive later in theforecastperiod.

We have revised upwards our growth outlook for the global economy from ourJanuaryforecast.GlobalGDPisnowexpectedtogrowby3.9%thisyearand3.6%in2011,andagain3.9%in2012.Thephaseoutof stimulus packages will have the biggestimpactnextyear.DespitethecurrentreboundintheUS,therecovery from the second half of this year will be slower due to lingering problems with unemployment, deleveraging, and weak real estate markets.Also,Japanwillgrowfasterin the short term, but somewhat slower

nextyear,asmosttradingpartners--exceptChinaandIndia,wheretheoutlookcontinuestobebright--are contemplating contractionary measures.Thegrowthoutlookforthe euro zone has been revised downwardsfrom1.1%to0.9%thisyear,andfrom1.6%to1.3%nextyear.Themainreasonsarebudgetconsolidation, and still rather low confidence,aswellasprevailingweaknesses in production, labour marketsandthefinancialsector.

Downsiderisksintheshorttermaremost important for industrial countries, as emerging markets are seen as holding up well in the next couple of

years.Debtproblemsintheprivate,financial,andpublicsectorswillresult in deleveraging and budget consolidation, creating uncertainties regarding timing offiscalmeasures,financialstability,andgrowth.Commoditypricesareincreasing,andanoilpriceaboveUS$100perbarrel would cause negative effects on growthandinflationinmanycountries.Thefinancialmarketsarefacedwithuncertainties regarding the sovereign debt crises and euro zone cooperation; the main risks include a Greek default and subsequent spreading of problems to other euro countries, such as Spain andPortugal.

GDP forecast 2010 - 2012 (annual percentage change) 1/

April January2009 2010 2011 2012 2010 2011

US -2.4 2.8 2.2 2.5 2.2 2.5

EMUcountries -4.0 0.9 1.3 1.9 1.1 1.6Ofwhich: Germany -5.0 1.3 1.5 2.0 1.5 1.8

France -2.2 1.5 1.8 2.2 1.6 2.0Italy -4.9 0.6 1.0 1.5 0.7 1.2Spain -3.6 -0.5 0.7 1.7 -0.1 1.3

UK -4.8 1.1 1.6 2.2 1.0 1.9

Japan -5.3 2.0 1.4 1.5 1.2 1.5China 8.6 9.5 8.8 8.0 8.5 7.8India 6.5 7.5 7.8 8.0 7.0 7.5

Brazil -0.4 4.7 4.5 5.7 3.5 4.5Russia -7.9 4.3 4.5 5.0 4.3 4.5

GlobalGDP -0.9 3.9 3.6 3.9 3.3 3.5

Sources:NationalStatisticalauthoritiesandSwedbank1/Countriesrepresentingaround70%oftheglobaleconomy.TheWorldBank'sweightsfrom2008(purchasingpowerparity,PPP)havebeenused.

Industrial production (index 2000=100)

80

100

120

140

160

180

200

220

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total

Euro Zone

Emerging Markets

Source:CPB

April22,2010 5

Swedbank Economic OutlookGlobal

Inaddition,medium-andlong-termsovereign debt concerns are building up with regard to larger economies suchastheUS,Japan,andtheUK,with consequences for the political situation,growth,inflation,andinterestrates.Protectionismthreatsremain,and the currency dispute between theUSandChinahasnotyetbeenresolved.Also,theeffectsongrowthduetore-regulationofthefinancialsector constitute forecast risks in theyearstocome.Evenifgrowthisbecoming better balanced between theUSandAsia,rebalancingglobalgrowthremainsalong-termchallenge.

FiscalpolicyisalreadyrestrictiveinIreland,Greece,Spain,andPortugal.AftertheelectioninearlyMay,theUKgovernment is also expected to start budgetconsolidation.During2011,many other industrial countries will follow,includingtheUS,Japan,andGermany.Acombinationofhighertaxes and lower public expenditures will dampen growth, especially private andpublicconsumption.

Although monetary policy is expected to remain expansive over the next two years, the degree of expansion will abatesomewhat.Inflationpressureswill be weak in most industrial countries and strong in many of the emerging markets where domestic growth is higher and stimulus measuresexpansive.TheUSFederalReserveandtheBankofEnglandwillstart raising their policy rates towards

the end of the year, bringing them upto2.25%bytheendof2011.TheEuropeanCentralBank will wait till thefirsthalfof2011beforeraisingthe policy rate, and then slowly make furtherhikes,reaching1.75%bytheendofnextyear.WeforeseethatrisingGDPgrowthandsomewhathigherinflationwillplaceupwardpressureonthelong-termbonds.Inaddition,concern about public debt and the phasing out of quantitative easing mayraisebondratesevenmore.Thewider spreads between Germany and euro countries with large imbalances will narrow somewhat as risks come down and subsidized loan packages are provided, but they will remain wider thanbeforethefinancialcrisisstarted.

WeforeseethattheUSdollarwillstrengthen against the euro and the yen during the forecast period, astheUSeconomyisexpectedtogrow more strongly and interest rates areraisedearlier.Inaddition,theturbulence within the euro zone will weaken the euro further, while the yen will be affected negatively by weaker financesandtherevivalofitsstatusasafundingcurrencyforcarrytrades.Already this year, or in the beginning ofthenext,theChineseadministrationwill return to a policy involving the slow appreciationoftherenminbi.

Our assumption of an average oil price ofUS$75forthisyearandUS$80for 2011 is based on an expectation of a stronger dollar, and then slower

growth after the initial rebound in the firsthalfofthisyear.However,therisksare skewed towards the upside, and higher oil and other commodity prices cannotbeexcluded.HousepricesarepickingupfromlowlevelsintheUSandtheUK,butcommercialrealestatemarkets are lagging and may still pose downsidegrowthrisks.Especially,thecombination of weak regional banks and falling commercial property prices intheUScouldweakentheoutlook.

As many countries are starting to exit from their stimulus measures, there is a need to focus more on improving the functioningoftheeconomies.Industrialcountries will feel that competition is increasing from emerging markets where economic policy and the financialsectorwillbesupportinggrowthintheyearstocome.IntheEuropeanUnion,theintegrationprocessshouldcontinue,financialsector regulation must be cleverly designed, and structural reforms shouldfocusonenhancinggrowth.Inparticular, reforming the labour markets makingthemmoreflexible,andimproving the climate for innovation andentrepreneurshipareimportant.Thereisapotentialforbenefitingmorefrom an increased division of labour and specialisation within the region, and thus improving the possibilities for competing with growing emerging marketsaroundtheworld.

CeciliaHermansson

Interest and exchange rate assumptions

Outcome Forecast 20 apr 2010 30 Jun 2010 31 dec 2010 30 Jun 2011 31 dec 2011

Policy ratesFederalReserve,USA 0.25 0.25 0.50 1.50 2.25EuropeanCentralBank 1.00 1.00 1.00 1.25 1.75 Bank of England 0.50 0.50 0.75 1.25 2.25 Bank of Japan 0.10 0.10 0.10 0.10 0.10

Exchange ratesEUR/USD 1.34 1.32 1.24 1.20 1.20RMB/USD 6.83 6.83 6.83 6.60 6.40USD/JPY 93 98 105 112 115

Sources:ReutersEcowinandSwedbank

6 April 22, 2010

Sweden Swedbank Economic Outlook

Sweden:Exportmarketsfalter-yethouseholddemand picks up

The decline in economic activity in Sweden unexpectedly deepened inthelastquarterof2009,andtheeconomy contracted in real terms byalmost5%annually.Someofthemomentum of the recovery was lost, and we are revising downwards our economicgrowthforecastto1.8%for2010.Inparticular,domesticdemandwaslowerthanexpected.Thesharpcontraction of investments continued while household consumption did not provideasmuchsupportasexpected.Labour market dynamics improved, however, and trend employment levels areedgingup.Positiveeconomicgrowth is expected continue in 2011, but due to a slowdown of quarterly growthrates,itwillnotexceed2½%.We do not expect a recuperation of thelossestorealGDPcausedbytheglobalfinancialcrisisuntil2012.

The overall global economic environment is set to improve over the nexttwoyears.However,Sweden’smain export markets, in particular the eurozoneandtheU.K.,areexpectedto lag amidst prevailing imbalances anderodingconfidence.Furthermore,

the composition of Swedish exports, with a predominance of investment and capital goods, will hamper export growth as investments are lagging inmostdevelopedcountries.Thus,despite positive growth rates of export volumes, the recovery in 2010 is expected to be slower than we earlieranticipated.Withexpandingdomestic demand fuelling imports, the contribution of net exports to growth has been revised downwards by more than¾percentagepointofGDP.

We expect the policy stance to remain expansive for most of the forecast period.Thefiscaloutcomefor2009

was strong, with an estimated budget deficitoflessthan1%ofGDP.Inparticular, tax revenues surprised ontheupside.With2010beinganelectionyear,weexpectthedeficittocontinue to grow, but posing no threat tomacroeconomicstability.WebelievethattheRiksbankwillstartraisingthepolicy rate in July, but that the path to normalised rates will be somewhat slowerthanwepreviouslyanticipated.Forend-2011,therateisexpectedtohavereached1.75%.Consumerswillcontinuetobenefitfromgrowingrealdisposable incomes and ample credit availability, which will underpin the recovery.

Key Economic Indicators, 2008 - 2011 1/

2008 2009 2010f 2011f

RealGDP(calendaradjusted) -0.5 -4.7 1.8 2.4Industrialproduction 3.3 -15.5 3.8 5.2CPIindex,average 3.4 -0.3 1.4 2.2CPI,endofperiod 0.9 0.9 1.7 2.3CPIF,average2/ 2.7 1.9 2.1 1.4CPIF,endofperiod 1.6 2.7 1.5 1.6

Labourforce(15-74) 1.2 0.2 0.7 0.3Unemploymentrate(15-74),%oflaborforce 6.2 8.3 9.3 9.2Employment(15-74) 1.1 -2.1 -0.3 0.3Nominalhourlywagewholeeconomy,average 4.3 3.4 1.8 2.2Nominalhourlywageindustry,average 4.4 2.9 1.6 2.0

Savingsratio(households),% 11.6 13.9 12.7 11.5Realdisposableincome(households) 2.7 2.1 1.0 1.5Currentaccountbalance,%ofGDP 9.6 7.2 6.2 6.5Generalgovernmentbudgetbalance,%ofGDP3/ 2.6 -0.8 -1.9 -1.7Generalgovernmentdebt,%ofGDP4/ 38.3 42.3 42.8 42.8

Sources:StatisticsSwedenandSwedbank.1/Annualpercentagegrowth,unlessotherwiseindicated.2/CPIwithfixedinterestrates.3/Asmeasuredbygeneralgovernmentnetlending.4/AccordingtotheMaastrichtcritera.

Impact from crisis

8090

100

110120130140150

160170180

1985

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

2009

2011

Trend grow th

Sources:StatisticsSw edenandSw edbankcalculations.

RealGDP-level(1985=100)

April22,2010 7


Swedbank’s GDP Forecast – Sweden

competitorontheexportmarket.Thisis mainly the result of weak productivity developments.

Inourglobaloutlook,weforeseeanexport market growth for Swedish exportersof4%in2010,whichismore or less unchanged from January despiteastrongerglobalgrowth.A weaker growth in Europe, which accountsformorethan70%ofSwedish exports, is compensated for by a stronger export market growth in emerging countries, Japan and the US.Fornextyear,weexpectamarketgrowthof5%,drivenbyfurtherstrongdemand from the emerging markets and despite a weaker growth outlook inEuropethanweearlierexpected.

Duetoanunfavourabledemandcomposition and a stronger krona against the euro, we expect Sweden to continue to lose market share (in contrasttoourJanuaryforecast).We

have, thus, revised downwards the volume increase in total exports to closeto4%in2010andcloseto5%in2011.Thenegativeoutlookcouldbe mitigated by lower production costs, which would enable Swedish companies to lower prices and regain marketshares.

Weak domestic demand and industrial productionsignificantlysloweddowngrowthinSwedishimportsin2009.In2010and2011,importvolumeisexpectedtogrowby4.4%and5.9%,respectively, as industrial production starts to recover and domestic demand strengthens.ThecontributionfromnetexportstoGDPisexpectedtobesignificantlysmallerduring2010thanweexpectedinJanuary.Fornextyearwe foresee a negative contribution to GDPduetostrongerdomesticdemandandalimitedexportperformance.

The main downside risks to our forecasts are external and relate to the rising uncertainties concerning sovereignsolvencyandfinancialmarketturbulence.Ifrealized,thiswould have a further negative impact on Swedish growth, and on the labour market.Thehighcreditgrowthandincreasingly indebted households may pose a risk to private consumtion when interest rates increase, and could also affecthousepricesnegatively.

Weaker export performanceSweden’s export performance unexpectedly continued to worsen in thefinalquarterlastyear.Despiteaglobal recovery and growing import demand from the euro area, Sweden’s exportvolumedecreasedfurther.Thiswasthefifthconsecutivequarterwithfallingexports.However,whileexportsof goods had a sharp drop, the decline inserviceswaslesspronounced.

Swedish exports contracted more thanthefallonthegloballevel.Anunfavourable demand composition, particularlyforinvestmentandinter-mediate goods, which are the bulk of Swedish exports, is the major reason why Sweden lost market share.However,asthiswasthefifthconsecutive year with decreasing market share, competitiveness is also anissue.Since2007,theincreaseinSweden’s unit labour cost has been strong and has exceeded, for example, Germany’s, which is Sweden’s major

Changesinvolume,% 2008 2009 2010f1/ 2011f1/

Households'consumptionexpenditure -0.2 -0.8 (-0.6) 2.4 (2.2) 2.8 (2.5)Government consumption expenditure 1.4 2.1 (2.0) 1.6 (1.5) 0.6 (0.4)Grossfixedcapitalformation 2.6 -15.3 (-13.4) -2.0 (-3.2) 4.0 (3.5)private,excl.housing 4.6 -19.0 (-16.1) -4.4 (-5.9) 3.4 (3.0) public 2.8 6.9 (7.6) 3.2 (3.0) 2.2 (1.7) housing -5.2 -20.5 (-22.5) 1.2 (1.0) 8.7 (8.0)Changeininventories2/ -0.6 -1.5 (-1.4) 0.8 (0.5) 0.4 (0.3)Exports, goods and services 1.8 -12.5 (-12.5) 3.8 (4.6) 4.8 (6.0)Imports,goodsandservices 3.0 -13.4 (-13.4) 4.4 (3.5) 5.9 (6.2)

GDP -0.2 -4.9 (-4.3) 2.1 (2.3) 2.4 (2.6)GDP,calendaradjusted -0.5 -4.7 (-4.2) 1.8 (2.0) 2.4 (2.6)Domesticdemand2/ 0.8 -3.0 (-2.6) 1.3 (1.0) 2.2 (2.0)Netexports2/ -0.4 -0.5 (-0.5) 0.1 (0.8) -0.1 (0.4)

Sources:StatisticsSwedenandSwedbank.1/ThefiguresfromourforecastinJanuary2010aregiveninbrackets.2/ContributiontoGDPgrowth.

Export performance

-15

-10

-5

0

5

10

15

2001 2003 2005 2007 2009 2011-3

-2

-1

0

1

2

3

Sources:StatisticsSw edenandSw edbank'scalculations.

Exportgrow thinvolumein%

Changeinmarketsharein%(rs)

8 April 22, 2010


Investments are slowly recoveringThe downward trend in gross fixedinvestmentscontinuedinlastyear’sfinalquarter.Asinvestmentsdecreasedby15.3%in2009,theratioofinvestmenttoGDPfellto17%,thelowestlevelsince2005.Housingandthe private business sector account for the largest reductions, while public investments increased due to stimulus directedtoinfrastructure.

We foresee a continued decline this year,althoughataslowerrate.Weexpect total investments to fall by 2%,mainlydrivenbythelowcapacityutilisation rate in the business sector andthefragileglobaloutlook.Agradually better global outlook and a stronger domestic demand will lead to a modest recovery in the business sector in 2011, but for export goodstherecoverywillbesmaller.Instead,therewillbeashifttomoredomestic-orientedbranches.Alessnegative labour market outlook and a stronger purchasing power among households will increase the demand fornewhouses.Publicallyfundedinfrastructure investments will continue togrow.Totalinvestmentswillthusincreaseby4%in2011.

Stabilisation of the labour market within reachThe sharp deterioration of the labour market levelled out late last year, but overall employment levels still took asignificantbeatinganddecreasedbymorethan2%onaverage.Thenumber of hours worked decreased evenmoreasmanyfirmsreduced

working hours in line with falling demandandproduction.Theaverageunemployment level rose by more than 2percentagepointsto8.3%in2009,and reached, in seasonally adjusted terms,9.0%ofthelabourforceatend-2009.Netoffull-timestudentslookingfor jobs, the unemployment rate was 6.5%ofthelabourforce,comparedwith4.6%in2008.

Recentmonthshaveseensomeindications of a stabilisation of the labourmarket.Thenumberoflayoffnotificationshasdroppedsharplywhile the number of advertised positionshasrisen.Furthermore,anincreasingnumberoffirmsinthemanufacturing sector have stopped sheddinglabour,andforward-lookingsurveys suggest a growing number offirmsareplanningtoincreasetheirhiring.Theemploymentlevelsintheservices sectors, meanwhile, have heldupsignificantlybetter.Seasonallyadjusted, overall employment levels edgedupinearly2010.

Duetothestabilisationofthelabourmarket dynamics, employment is expected to start recovering over theforecastperiod.However,astheresponsiveness of the labour market to real economic activity seems to have decreased (employment rose inthelastquarterof2009despiteacontractionofrealGDP),weexpectemploymenttogrowslowly.Atthesame time, labour supply is positively affected by the fewer discouraged workers, as well as by demographic factors.Thereformsofthesicknessbenefitsystemwillpushanincreasing

number of people into the labour market.Puttogether,weexpecttheunemploymentratetoreach9.3%in 2010 before declining slightly in 2011.Thisimpliesthatweexpecttotal employment to decrease by a cumulativeof95,000over2009-11,comparedto170,000inourJanuaryforecast.

The cost competitiveness of Swedish production is expected to improve following the latest rounds of wage negotiations.Thecollectivebargainingprocess, involving more than 3 million employees, is coming to an end, and in general the agreements came in at relatively modest levels (in the paper industry and among electricians no agreements have been made and strikesareongoing).Theservicessector agreements, in particular in retail, exceeded those of the manufacturingindustries.Ingeneral,the agreements were considerably back-loaded,andweexpectthatwages for the overall economy will increasenominallyby1.8%in2010,beforereachingto2.2%in2011.

Productivity levels will rebound gradually.Aperiodofeconomicdownturns normally leads to weaker productivity growth as companies often delay laying off personnel when faced withfallingdemand.Aseconomicgrowth rates turn positive, the opposite effectcanoftenbeobserved.Thus,with a stable employment outlook and a relatively slow real economic recovery, we expect productivity to grow by about 2½ percent in 2010, beforelevellingoffin2011.Unitlabour

Unemployment rate, 15-74 (% of labour force)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

2005 2006 2007 2008 2009 2010 2011


Full-timestudents

Households' expectations

-75

-50

-25

0

25

50

75

100

2000 2002 2004 2006 2008 2010

Netbalance

Ow n economy

Source:NIER

Unemployment

Sw edish economy

April22,2010 9


costs will decrease, although more slowly than we expected in January, following some years of increased levels.

Wide-rangingreformsinrecentyears can be expected to improve the functioning of the labour market over the medium term and reduce the equilibriumrateofunemployment.Inparticular,reducedwork-relatedtaxes(including the lowering of the social contributionratesforpeople25yearsor younger), lower replacement rates in unemployment insurance, and alimittosickbenefitscanimproveincentives to seek employment, not only among those already in the labour force but also among those who areoutside.Ithasbeenestimatedthatthe equilibrium unemployment rate has increased by 3 percentage points since theearly1980stoapproximately6%ofthelabourforce.1 With the recent labour market reforms, this rate could decline.

Consumerpriceshaveincreasedsomewhat faster at the beginning of thisyearthanweexpectedinJanuary.The most important explanation is higher electricity prices, due both to strongerweather-relateddemandandweakersupply.Wehavethusraised our forecast for this year, both regarding the consumer price index (CPI)andCPI-F(withfixedinterestrates)by0.5and0.8percentagepoints,respectively.Althoughpriceswill increase somewhat during this year, the developments during 2011 are revised downwards marginally, as it will take longer to close the output gap, the price pressures from the labour market are restrained and external prices pressures will be kept down.Theinflationtargetof2%willnot be met in the medium term as theCPI-Fwillfallto1.4%nextyear,although, including the effects of monetarypolicy,theCPIwillreach2.3%towardstheendof2011.

1See,forexample,AndersForslund,”Densvenskajämviktsarbetslösheten”,IFAU2008.

Households to increase spendingAfterfivequartersoffallingprivateconsumption, Swedish households increased spending in annual terms inthelastquarterof2009.Takinginto account the stronger purchasing power, when real disposable income grewby2.1%,householdswerecautiouslastyear.Asconsumptionfellby0.8%,thesavingsratioincreasedto13.9%(and8.3%,excludingpensionfundreserves).Itisthehighestsavingsratio2onrecordsince1994,i.e.,sincethelastfinancialcrisis.

Labour market developments have been negative, but not to the extent previouslyprojected.Thus,realdisposable income can continue to grow this year, but as savings and confidencearehigh,weexpectconsumption growth to be even strongerat2.4%(2.2%inJanuary).In2011, households will use more of their savings, as the unemployment rate stabilises and household expectations remainoptimistic.Privateconsumptionwillincreaseby2.8%andwillaccountfor more than half of total growth, thus representing the main growth engine in theeconomy.

Duringtheforecasthorizon,riskswill be balanced, as there are upside and downside risks facing labour andhousing.Swedbank’shousingaffordability index signals rising house prices during this year, and possibly astabilisationduringnextyear.Atthemoment, house prices are increasing in line with the high credit growth of

2Thesavingsratioisdefinedashouseholdsavingsinrelationtodisposableincome.

some9%.Ourinterestrateprojection,which has been lowered, supports the positive developments for retail trade, housing,andcarregistration.

However,therisksaretiltedtowardsthedownsidefor2012andonwards.The debt ratio will then have risen to almost200%andtheinterestratiotocloseto6%,andthusmoreofthedisposable income will be used for interestratepayments.Consumptiongrowth of goods and services, including vacation expenditures, will thendampen.Weforeseeincreasingtensions regarding the households within a couple of years, and the risks include a much higher repo rate, highermortgageratesduetofinancialregulation, and a worsening of the labour market, as well as falling house prices.

The Riksbank starts hiking – but at a slower paceTheRiksbankhaskeptthereporateat0.25%sinceJuly2009andhasalsoprovidedbankswiththreefixed-interest rate loans that will mature in June,August,andOctoberthisyear.Asweforeseenonewloanswithfixedinterest rates, the main policy tool going forward is the adjustment of the reporate.InJanuary,wereiteratedourexpectationofthefirsthikeinSeptember, but now July looks more likelyforseveralreasons:1)TheRiksbankhassignalledthatanearlierhike may be needed as the signs of an economic recovery have become clearer; 2) the labour market is viewed as being less gloomy; and 3) the financialmarketisfunctioningbetter.The strong credit expansion towards

Interest rate and currency outlook

Outcome Forecast2010 2010 2010 2011 2011

20 Apr 30 Jun 31Dec 30 Jun 31Dec

InterestratesPolicy rate 0.25 0.25 1.25 1.25 1.7510-yr.gvtbond 3.2 3.3 3.3 3.2 3.4

Exchange rates EUR/SEK 9.6 9.6 9.5 9.4 9.3USD/SEK 7.1 7.2 7.7 7.8 7.8TCW(SEK)1/ 129 129 129 128 128

Sources:ReutersEcowinandSwedbank.1/TotalCompetitivenessWeights.Trade-weightedexchangerateindexforSEK.

10 April 22, 2010


households may also signal a need to slowly adjust monetary policy to more normalconditions.Bytheendof2010,thereporatewillhavereached1.25%.

During2011,however,GDPgrowthin quarterly terms will start to dampen again, as Sweden’s main export marketsslowdown.Inaddition,financialregulationstocurbthecreditexpansion towards households may create expectations of wider interest rate spreads, thus contributing to a less expansionary monetary policy stance.Resourceutilisationwillbeweak and labour costs lower than normal.Theunderlyinginflationrate(CPI-F)isexpectedtodecrease.These developments will provide arguments for adjusting monetary policymoreslowlyduringnextyear.As many households have variable interest rates and are highly indebted, a slower hike of the repo rate may increase the likelihood of a more stable consumption and housing market in theyearstocome.Attheendof2011,thereporatewillbe1.75%,thus1.25percentage points lower than in our previousforecast.

The Swedish krona is expected to strengthen against the euro during theforecastperiod.Inthenearterm,theRiksbankwillraisethereporatefasterthanECB,buttowardsthe end of 2011, the policy spread willhavedisappeared.Strongereconomic growth in Sweden and better fundamentals compared to the Eurozoneshouldsupportthekrona.However,intermsofatrade-weightedexchangerate(TCW),thekronaappreciates marginally as the dollar

strengthens against both the euro and thekrona.

More room for fiscal policyStrong tax revenues led to a significantlybetterthanexpectedfiscaloutcomein2009.Thegeneralgovernment balance is estimated at -0.8%ofGDP,comparedwithawidelyexpecteddeficitofmorethan2%ofGDP.Surprisingly,indirecttaxation,mainlyvalue-addedtax(VAT),increased, as did consumer spending, asashareofGDP.Growinghouseholdincomesupporteddirecttaxation.On the expenditure side, spending related to unemployment shot up and, together with increased investment and consumption spending, led to a hikeof3½percentagepointsofGDP.

IncontrasttomanyotherEuropeaneconomies,thefiscalstanceinSwedenisonlymildlyexpansionary.Variouscalculationsindicateanimpactfromfiscalpolicyontheeconomyduring2009ofbetween½and1percentagepointofGDP,includingthe effects of the automatic stabilisers anddiscretionarypolicies.Theoutputgap is still substantial, and there is, thus,roomforfurtherfiscalexpansionwith no threat to macroeconomic stability.Indeed,thegovernmenthasalready signalled that the tax rate on pensions will be lowered again, and that spending on infrastructure will be broughtforward. Against this background, and taking into account the general elections in 2010,weexpectthebudgetdeficitto continue to widen in 2010 before decliningin2011.Thespringbudget

bill amounted to an expansion of about SEK5billion,includingincreasedchild allowances and spending on infrastructure.For2011,weanticipateadditionalfiscalmeasuresofSEK35billion(about1%ofGDP).Notonly lower tax rates on pensions, but also increased spending on public service.However,followingthestrongperformancein2009,itislikelythatthedeficitremainsbelow2%ofGDPin 2010 and improves slightly in 2011, duetoimprovedrealgrowth.

Also, the projected path for general government debt has been revised downwards.TheMaastrichtdebtincreasedto42.3%ofGDPin2009,lowerthanexpectedduetolargeone-offtransactionsandabetterfiscaloutcome.Thegrowingdeficitin2010will add on to the debt before the recovering economy stabilises the debt ratiobelow43%ofGDPin2011.

The main challenges over the medium term will be to reverse the underlyingimbalances.Weestimatethat the surplus in the public sector’s netsavingsneedtobeabout1%ofGDPover2011-14inordertoreachthe surplus target (calculated over a 7-yearbusinesscycle).Thereductionsof tax rates are permanent measures thatwillbedifficulttoundoinfullforwhichevergovernmenttakesofficeinlate2010.Thismeansthatthebulk of the adjustment will have to befoundontheexpenditureside.Part of the reductions will come from falling spending on labour market policies as the economy turns, and from the reforms of the sickness benefitsystem.However,itislikelythat additional savings will have to be foundelsewhere.Notaneasyfeatwhen the unemployment rates remain atelevatedlevels.

CeciliaHermanssonJörgenKennemarMagnus Alvesson

Public sector fiscal balance (% of GDP)

40

42

44

46

48

50

52

54

56

2003 2005 2007 2009 2011-2

-1

0

1

2

3

4

5


Expenditures

Revenues

Balance (rs)

April 22, 2010 11

Swedbank Economic OutlookEstonia

Estonia – Economic prospects improve

After a period of contraction, Estonia reportedstrong2.5%quarterlyeconomic growth in the fourth quarter of2009,whichindicatesthatthebottomofthecyclehaspassed.Annually,thedeclinewas9.5%,and the full year contraction was 14.1%,consistentwithourpreviousforecast.Overalldevelopmentsintheeconomyattheendof2009andinearly 2010 have been according to our expectations, indicating a stabilisation of the economy and a start of the recovery.Netexportsandinventoryincrease were the main contributors to growth, while other components continuedtheirdownwardtrend.

We keep our previous growth forecast,expecting1.5%growththisyearand4.5%growthin2011.Even though the outlook for Estonia’s most important export markets have somewhat worsened, the outcome for the domestic market is expected to improve.Withstrongerthanexpectedretail sales, together with increased confidenceaboutemploymentandfuture developments in the economy, households will start to increase spending.Inaddition,weexpectthat at the end of 2010 there may be a onetime jump in consumption caused by the fear of a possible price increase accompanying the euro

cashchangeover.TheexpectedEMUmembershipandbetter-than-expectedoutcomeofthe2009budgetwillhave a positive effect on economic developments in 2010 and 2011; however,thesearedifficulttoestimate.

The main assumption in our forecast is thatEstoniahasfulfilledtheMaastrichtcriteriaandwillbecomethe17th memberofEMU.Theformalprocess,however, will take several months, and thefinaldecisionwillbeannouncedinthebeginningofJuly.Estoniahassofarmaintainedaprudentfiscalpolicy,and the Estonian government has committed itself to working towards a balanced budget in the medium term aswell.

The growing public sector debt inmanyEUcountriesmaycause

turbulence that could increase the probability of negative risks for growthprospectsinEstoniaaswell.However,inbecomingamemberofEMU,Estoniamaybenefitfromamore stable environment and lower interestrateswithintheeurozone.Other possible risks for our scenario stemfromhouseholdspending-savingpreferences and foreign investors’ strategies.Theprivatesectorsavingsreached an unprecedented level in 2009andthisisabouttoincreasein 2010 before starting to decline in 2011.However,ifthesavinglevelwereto remain high for a long time, it will dampeneconomicgrowthprospects.WhileEMUmembershipandtheaccompanying decline in currency risk may encourage investments, the uncertainties in the euro area may diminishthisexpectedpositiveeffect.


2008 2009 2010f 2011f

RealGDP -3.6 -14.1 1.5 4.5GDP,mlneuro 16073 13730 13700 14700Consumerprices(average) 10.4 -0.1 0.5 1.8Unemploymentlevel,%oflabourforce 5.5 13.8 14.0 11.5Realgrossmonthlywage 3.2 -5.2 -5.3 1.5Exports of goods and services (nominal) 6.9 -19.9 8.0 7.0Importsofgoodsandservices(nominal) -2.8 -30.6 6.0 7.0Tradeandservicesbalance,%ofGDP -4.3 5.9 8.0 8.0Currentandcapitalaccount,%ofGDP -8.4 7.4 8.5 8.0FDIinflow,%ofGDP 8.2 8.8 4.5 8.0Grossforeigndebt,%ofGDP 118.5 126.8 121.0 115.0Generalgovernmentbudget,%ofGDP -2.7 -1.7 -1.4 -1.0Generalgovernmentdebt,%ofGDP 4.6 7.2 10.0 12.5

Sources:StatisticsEstoniaandSwedbank.1/Annualpercentagegrowth,unlessotherwiseindicated.

Contributions to GDP Growth

-30%

-20%

-10%

0%

10%

20%

2006 2007 2008 2009 2010f 2011f

Households Government InvestmentsNetexports GDP Sources:SE,Sw edbankforecast

12 April 22, 2010


Economic growth founded on external demandThe main contributor to growth in 2010 will be net exports as export growth will strengthen while import developmentswilllag.In2011thelargest contributions will come from domesticdemand.Investments(including inventories) will already start to grow in 2010, although a decline in some quarters is possible due to high fluctuationsandone-offfactorsthatarehardtopredict.TheEUstructuralfunds will support public and private sectorinvestments.Governmentspending is set to decline in 2010 asbudgetconsolidationcontinues.Householdconsumptionwillalsocontinuetodecline,atleastinthefirsthalf of 2010, and growth in the second halfof2010willbesluggish.For2011, the growth contributions have shifted compared with our January expectations, and we are forecasting stronger support from household consumption and slightly less from inventorybuild-up.

Exports strengthen but imports remain weakRealexportgrowthwillbe4%in2010and5.5%in2011;realimportgrowth2%and5.5%.Wechangedourforeigntrade forecast due to the price and exchange rate movements, domestic and external demand patterns, and companies’ abilities to reach export markets.

AlthoughforEUcountriesthegrowthoutlook has weakened for 2010, we

project a comparatively good outcome for Estonia based on the change of geographicalandproductstructure.Nevertheless,exportgrowthwillbeslowerthanweexpected.Whilethe general structure of Estonian merchandise exports has been well diversified,theproblem–wellseeninlate2008andearly2009–isthat Estonian companies are highly dependent on economic developments inafewcountries.Thesharpdeclineof industrial production in Sweden andFinlandhadthemostdevastatingeffectonEstonianproducers.TheimportanceofFinlandandSwedenwill remain high, but will diminish somewhat because Estonian producers are looking for other markets(e.g.,non-EUcountries).Weare of the opinion that this tendency willdeepen.

Services exports will continue to show good results as the opening of EU’sservicesmarketandstrongerprice competitiveness will increase the possibilities for Estonian

producers.TheserviceswillbeprovidednotonlyinEstonia(e.g.,tourism,IT,andbusinessservices)but also in the destination countries (e.g.,construction).Thetransportand logistic services are about to recover, but this recovery might not be very rapid due to weak economic developments in neighbouring countries.Theeuroadoptionmayencourage tourism from the euro zone,particularlyfromFinland,asprice comparisons will become more transparent and currency exchange costs will disappear after euro adoption in2011.

Weak domestic demand for imported goods in 2010 will restrain the growth ofimports.Households’consumptionstructure has been shifting not only more towards domestically produced goods and services (food, housing), butalsotowardscheaperproducts.

Price movements and euro depreciation have affected exports and imports more than we assumed

Swedbank’s GDP Forecast – Estonia

Changesinvolume,% 2008 2009 2010f 1/ 2011f 1/

Householdconsumption -4.7 -18.5 (-18.5) -4.0 (-6.0) 4.0 (2.0)Government consumption 4.1 -0.5 (-0.8) -1.5 (-1.8) 0.4 (1.0)Investments -16.6 -44.9 (-45.0) 13.0 (13.0) 12.5 (20.0)

Gross capital formation -12.1 -34.3 (-32.0) 0.0 (4.0) 10.0 (10.0)Changesofinventories/GDP(currentprices) 0.4 -2.5 (-3.0) 1.0 (0.2) 2.0 (0.7)

Domesticdemand -7.4 -24.8 (-25.0) 0.5 (-0.5) 5.5 (6.5)Exports -0.7 -11.3 (-10.5) 3.5 (8.0) 5.5 (5.5)Imports -8.7 -26.8 (-27.0) 2.0 (4.0) 5.5 (6.0)Netexports,contributiontoGDPgrowth 9.0 17.7 (18.5) 1.5 (3.5) -0.1 (-0.5)GDP -3.6 -14.1 (-14.0) 1.5 (1.5) 4.5 (4.5)

Sources:StatisticsEstoniaandSwedbank.1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.ThefiguresfromourforecastinJanuaryaregiveninbrackets.

1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.ThefiguresfromourforecastinJanuaryaregiveninbrackets.1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.ThefiguresfromourforecastinJanuaryaregiveninbrackets.

Export Structure by Destination Country

0%

20%

40%

60%

80%

100%

2004-2006 2007 2008 2009

Other

OtherCIS

Russia

OtherEU

Germany

Sw eden

Latvia&LithuaniaFinland

Sources:SE,Sw edbankcalculations

April 22, 2010 13


in previous Swedbank Economic Outlooks.Importsbecamesubstantially more expensive last winter due to price increase of oil products, which means that less import is consumed domestically, and, at the same time, the price of exported products will also rise in time.

The turnaround of the foreign trade balanceduring2008-2009waslargerthanweexpected.Thecurrentand capital account surplus will, according to our forecast, continue to increase this year, after which gradualdeclinewillfollow.Wealsoexpectthefinancialaccounttoshowabigdeficitin2010thatwillbeginto decrease substantially already in 2011.

Foreigndirectinvestments(FDI)inflowin2010willbesmallerthanin2009duetotheprivatisationofEstonianTelekomattheendof2009.Excludingthis,weexpectFDIinflowtogrowin2010and2011asthe economic situation and growth outlookimproves.Reducedriskestimates and the elimination of devaluation fears through the euro adoption will also be encouraging factors.Weexpectthattheongoingproductiontransferprocess(e.g.,outsourcing) will intensify, thus creatingexportsandemployment.FDIoutflowswillremainrelativelyhigh due to the need to recapitalize loss-makingcompaniesanddueto Estonian companies investing in LatviaandLithuania.

Investments growth supported by EU fundsWe expect investments (including inventories)togrowbyabout13%in2010andby12%in2011,thuskeeping the outlook for this year anddowngradingitforthenext.According to our estimation, the economy is moving from inventory cuts to increases in inventories during 2010, and the growth rates will be verystrongatfirst.Afterwards,astheeconomic turnaround ends, inventory growthwillslowin2011.

In2010,weexpectinvestmentgrowthto be affected by the increased inflowofdifferentEUfunds.In2011,weforecastfewerEU-fundedinvestments, yet other investments areabouttoshowmodestgrowth.We have lowered our expectations because we see that in 2010 and 2011FDIiscomposedmostlyofM&A,and of loan payments, and less of productiondevelopment.Theexcesscapacities will be a strong obstacle forinvestmentsinnewtechnology.ManyFDIinvestmentsaretargetingcheap production in Estonia, which also means that investment growth willbenotverystrong.Thesituationwill hopefully change towards the production of goods at higher technological levels in the years beyondourforecastrange.

Householdinvestmentswillremainlow; however the harsh winter might have encouraged people to pay moreattentiontoenergyefficiency,which,togetherwithstate-supportedprogrammes, may increase housing

renovationinvestments.Thefirstnewresidential real estate construction may start already in the second half of 2010;however,thenon-residentialrealestate sector will remain in a stressful position throughout 2010, and maybe into2011aswell.

Labour market stabilizingWe expect unemployment to reach its highest level in 2010, and the peak willbeinthefirsthalfoftheyear.Bythe end of the year, seasonal factors and the economic recovery will graduallypushemploymentup.Still,job creation will be slow as companies continue to increase the workload of existing workers (who so far are workingpart-time)—atrendthatwasalready present in the second half of 2009.Wealsoexpectthatthelaboursupplywilldeclinebutafterone-twoyearsstartgrowingagain.Atthesametime the amount of active jobseekers will decline due to aging that may be accounted as one of the major risks forEstonianeconomyinthelongrun.We are of the opinion, however, that theshareoflong-termunemployedand the structural problems on labour marketwillincrease.

The private sector had already made downward adjustments in employment in2008and2009,whilethepublicsector started mostly at the end of 2009.Itispossiblethattherewillbeadditional layoffs in the second half of 2010 in the public sector as the budget situationdeteriorates(seebelow).Hence,thenegativeeffectofbudgetcutting will be felt on the labour market alsointhefirsthalfof2010,andtoa

Export of Goods and Services, 1Q 2004=100

90

110

130

150

170

190

210

2004 2005 2006 2007 2008 2009

Total Goods Services

Sources:EP,Sw edbankcalculations

Labour Market Indicators

-15%

-10%

-5%

0%

5%

10%

15%

20%

2004 2005 2006 2007 2008 2009

Employment, yoy Gross w age, real yoyUnemploymentrate Source:SE

14 April 22, 2010


lesserextentafterwards.

The decline of average real monthly wagewillbe5-5.5%in2010,butweexpectittogrowby1.5%in2011.Totalwagepaymentswilldropby1-2%thisyearbeforegrowingby5-6%in2011.The difference between the average and total growth in wage payments is explained by the change in working hours:whilein2009theydropped(hence cutting incomes more than the average wage, which is calculated for full-timeemployment),in2010theywillincrease.

Inflation to accelerate due to world market pricesThedeflationperiodwillbeshortinEstonia:after0.1%CPIdeclinein2009,weexpectconsumerpricestogrowbyabout0.5%in2010and1.8%in2011.Thepricegrowthispromptedby increases in tax rates (latest was in January), tariffs (electricity, heating, and natural gas) and global prices(mostofallenergy).However,weak household demand will limit price pressures, and most of the unregulated prices will continue to declineorremainstable.Householdswill also continue to shift towards cheaper products and services; hence, theconsumptiondeflatorwillremainnegativeforthisyear.Thegrowthofoil prices in the world will continue to have a strong effect on consumption offuelsinEstonia.1 Similarly, the price growth of other products in the world

1 Of course, there are other factors as well, such as an increase in fuel excises, and growing unemployment (less demand for everydaytravelling).

market has affected consumption (and therefore the amount of imported goods).

Household consumption continuously weakHouseholdconsumptionwillremaincomparatively weak throughout 2010 -weforecasta4%decline-butwillrecoverin2011,showinga4%growth.The higher forecast is the result of the stronger developments in the retail sectorobservedattheendof2009andbeginningof2010.Besides,theoptimism of households has been strengthenednotably.Still,withstrongseasonal spending growth on heating due to the unusually cold weather, a setback cannot be ruled out, which means that the risk of a lower outcome isrelativelystrong.Theotherreasonsfor upgrading the consumption forecast for this year and next is related to euro adoption and increased assuredness about employment, which seemstobeencouragingconfidenceand, hence, may trigger additional spending.Still,aswementionedabove, the savings rate in the private sector is very high, partly because of deleveraging, and this might not changesubstantiallyin2010-11,eventhoughspendingwillslowlyincrease.Also, there is a possibility of a onetime increase in consumption at the end of this year due to households’ fear of price increases after the euro cash changeoverin2011.

According to our observations, households have shifted their spending towardscheaperproducts.Theshare of the shadow economy may

have increased, while people prefer to buy goods and services directly from producers or provide them by themselves.Thegrowthoftheinformaleconomy may therefore underestimate currentdevelopments.

Tight fiscal policy continuesWe expect that the public sector deficitwilldeclinefrom1.7%ofGDPin2009to1.4%in2010andto1%in2011.Thepublicsectordebtlevelwillreach12.5%ofGDPattheendoftheforecastperiod.

The Estonian government cut budget spending and increased revenues throughout2009,thusendingtheyearwithapublicsectordeficitofonly1.7%ofGDP.Thebudget-tightening measures included some one-offitems(e.g.,theincreaseddividendpaymentsfromstate-ownedcompanies), and several decisions that affect the budget over several years (e.g.,thestoppageofpaymentsintothe compulsory pension scheme and the smaller increase in pensions than the law stipulates lowered costs, but the promises to make compensations in 2011 and onwards will increase spending).Expenditureswereloweredmore by cutting costs and increasing efficiency,andlessbycuttingservicesprovided.Weurgethatthisefficiency-increasing approach continue and widen to areas that so far have been relativelyuntouched(e.g.,tomanymunicipalities),andamorecase-by-case approach should be introduced insteadoftheone-measure-for-allapproach, which was widespread in 2009.

Price Indices and Deflators

-15%

-10%

-5%

0%

5%

10%

15%

CPI deflator PI goodsdeflator

PI goodsdeflator

Consumption Exports Imports

2008 2009 Source:SE

Confidence Indices, s.a.

-50

-40

-30

-20

-10

0

10

20

30

40

2002 2003 2004 2005 2006 2007 2008 2009 2010IndustryConsumerTotal economy Source:EKI,Sw edbankcalculations

April22,2010 15


Despitestrongbudgetcuts,theirdirect negative effect on economic growthremainedrelativelymodest:governmentconsumptionfellby0.5%in2009,althoughinthesecondhalfofthe year the annual decline reached 1%.Thisrelativelymodestoutcomecould be explained by increased use of EUfunds(particularlystartinginMay-June), and not so much decrease of theservicesprovided.Additionally,theoutcome was affected by the increase in social services due to the sharp rise inunemployment.

Government budget spending will remain tight in 2010 and 2011, and we

expect spending cuts to take place, but mostly in the municipalities that were not very eager to cut spending prior to thelocalelectionsinOctober2009andthushavinglargeproblemsafterwards.Hence,thestrongertighteningofspending started there in the fourth quarter, and this is about to continue throughout2010.Themunicipalities’budgets remain one of the major risks inourbudgetforecast.

We are of the opinion that the central government will continue its existing budgetary policy and will reduce the central government budget deficitin2010-2011.However,themunicipalities’ situation is about to

worsen, we cannot expect a strong improvement in the public sector balance (although it may happen, depending on how the budgetary problems at the local levels will be solved).In2011,severaldecisionstakenin2009willleadtoraisedspending,e.g.oncompulsorypensioninsurance-whiledecliningunemploymentwillleadtoareduction.Although the government plans to reach a budget surplus after a few years,wearescepticalaboutthis.Weare of the opinion that the government willbeforcedtoworkonlong-termdevelopment issues, particularly those affectingsocialservices(e.g.,thelabour market and health system), or otherwise the Estonian economy will faceanothercrisisin10years.Theefficiencyofthepublicsectorshouldbe improved, and access to public servicesaswell.Thetaxsystemmayneed some stronger adjustments to ensure that social systems will continue to work properly when, after five-sevenyears,theworking-agepopulationdropssharply.

Maris LauriAnnika Paabut

General Government Finances, % of GDP

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2005 2006 2007 2008 2009 2010f 2011f

Debt Budget balance Source:SE

16 April 22, 2010

Swedbank Economic OutlookLatvia

Latvia:RecessiontobeoverearlierthanexpectedKey Economic Indicators, 2008 - 2011 1/

The recession in Latvia is likely to beoveralreadyinthefirstquarterof2010duetoexportgrowthandbetter-than-expectedprivateconsumptiondevelopments.However,therecoverypath will be bumpy, and the growth willbefragileinthebeginning.The economy has become quite heterogeneous, with developments differing across sectors, and thus it is hard to forecast how they will interact inaparticularquarter.

The seasonally adjusted quarterly GDPfallslowedto2.9%inthefourthquarterof2009duetoslowerhousehold consumption decline and strongerexportgrowth.Last-quarterdevelopmentshighlyinfluencethe2010 forecasts due to substantial carryover effects (more negative for investments, less negative for consumption and imports, and more positiveforexportsvis-à-visourpreviousforecast).Forinstance,assuming that seasonally adjusted GDPisflatthroughouttheyear(i.e.,the same as the fourth quarter of 2009level),theeconomywouldfallby4.3%in2010.WeforeseethatGDPwill grow during the year mostly on account of exports, and thus the fall of2-3%willbeduesolelytocarryover

effects.Astrongerreboundisexpectedin2011,withGDPgrowingbyabout4%,supportedbyrecoveringdomesticdemand.Strongerexportsandrestocking will stimulate investments and,thus,importsin2011.

The job seekers’ rate is forecast to peakbymid-2010atabout23%andstart to diminish gradually afterwards, firstduetoemigrationandrisinginactivity, and in 2011 also due to slowjobcreation.However,thejobseekers’ rate will remain high for years tocome.Deflationisinfullswing,withtheannualconsumerpriceindex(CPI)declinereaching3.9%inMarch2010,and it will continue during 2010 and early2011.Thesmalldeficitintradeofgoodsandservicesin2009willturn

intosurplusesin2010-2011,drivenbyexportgrowth.

DomesticpositivesurprisesintermsofGDPandsectoraldevelopmentsseem to have become more likely thantherealizationofnegativerisks.However,theupcomingparliamentelections in October pose risks of delay in implementing structural reforms.Theriskofworseningtaxcollection may force the government to revise its 2010 budget to squeeze belowthedeficitcapof8.5%ofGDPand thus compress domestic demand evenfurther.Exportsmightbeweakerif competiveness gains do not become “cleverer,”i.e.,ifproductivitygrowthispoor.Theglobaloutlookisstillfavourable, although certain risks have

2008 2009 2010f 2011f

Economic growth -4.6 -18.0 -2.5 4.0GDP,mlneuro 21952 18067 16444 16859GrowthofGDPdeflator,% 15.4 0.3 -6.7 -1.4Consumerprices(average) 15.4 3.5 -3.0 0.0Harmonisedunemploymentlevel,%oflabourforce 7.5 16.9 21.5 19.5Realnetmonthlywage(average) 6.3 -5.9 -8.0 2.0Exports of goods and services (nominal) 10.6 -17.8 10.0 14.0Importsofgoodsandservices(nominal) -1.7 -37.6 0.0 15.0Balanceofgoodsandservices,%ofGDP -13.6 -0.3 4.3 4.3Currentaccountbalance,%ofGDP -13.0 9.4 9.0 6.5Currentandcapitalaccountbalance,%ofGDP -11.5 11.8 12.4 9.7NetFDI,%ofGDP 3.0 0.4 0.4 0.8Externalgrossdebt,%ofGDP 129 155 167 158Generalgovernmentbudget(accrualbasis),%ofGDP -4.1 -9.0 -8.5 -6.0Generalgovernmentdebt,%ofGDP 19.5 36.1 59.0 66.0

Sources:CSBLandSwedbank.1/Annualpercentagechangeunlessotherwiseindicated.

Seasonally adjusted quarterly real GDP (in %)

-20

-15

-10

-5

0

5

10

15

1Q05 1Q06 1Q07 1Q08 1Q09

GDP ExportsPrivate consumption Grossf ixedcapitalform.

Source:CSBL.

April22,2010 17


becomemorevisible.Iftrade-partnercountries see weaker growth than currently expected, it would slow the recoveryinLatvia.

Export growth stronger and broaderAlthough economic growth is expected to slow in the second half of 2010, the globaloutlookisstillfavourable.Theforecast of weaker demand in euro zone countries will be compensated for by stronger growth in some other EuropeancountriesandRussia,aswell as by a weaker euro against theU.S.dollar.This,togetherwithimproving competitiveness (see below) and the growing market shares of Latvian exporters, continues to supportgrowth.ThemarketsharesofLatvianexportersintheEU27andRussiawererisingduringallof2009.Although we expect faster real export growth due to carryover effects, we are keeping our nominal export forecast atabout10%for2010and12-14%for2011duetoslowerdeflatorgrowth.

Whileinlate2008-early2009,thefall in nominal goods exports was counteracted by services exports, by the end of last year goods exportsbecamethedriverofgrowth.Manufacturing growth is very fragile so far, and industry developments werequitedisappointinginthefirsttwomonthsof2010.Nevertheless,manufacturingconfidenceindicatorscontinue to improve, suggesting that manufacturing growth is likely to gain strengthlaterthisyear.

The situation also differs substantially acrossindustries.Forinstance,the

wood industry has become the growth engine both for manufacturing and exportsin2009,butthisgrowthisexpected to slow somewhat in 2010 with external competition for market sharesincreasing.Theoutlookforfood, metal, and chemical industries is quite favourable, while on a clearly negative trend are still the textile industry and the manufacturing of transportvehiclesandtheirparts.

Regardingservices,tourismprospectsremain relatively positive, due to a decreaseinvalue-addedtax(VAT)foraccommodation services and several large-scaleprojectsannouncedfortouristattractioninRiga.Businessservices developments have been alsorelativelygoodsofar.Incontrast,freight transportation started to decline inthesecondhalfof2009andremainsunderseverecompetitionregionally.

The fall in imports slowed substantially and goods imports were quite stable inthesecondhalfof2009.However,imports are still constrained by the substitution effect due to the growing difference between prices of locally

produced and imported goods (see below)andbyfallingincomes.Thepart of imports used for domestic demand will thus continue to fall, albeit more slowly, but the growing need for imports of exporting sectors willoutweighthiseffect.Realimportswill still fall in 2010, but we forecast nominalimportstobestable.Arebound is expected to follow in 2011 both in real and nominal terms due to growing investments and consumption, aswellrestocking.

The growing trade surplus will also keep the current account surplus highin2010atabout9%,butthiswilldiminishto5-7%in2011duetostrongerimportgrowth.Theincomeaccount surplus will still persist in 2010 because of continuing foreign direct investment losses, but it will be substantially smaller than last year andwillcontinuetodeclinein2011.CurrentandcapitaltransferaccountswillalsobeimprovedbyEUfundsinflows.Emigrantremittancesarealsolikely to increase, thus raising income andcurrenttransferaccountsurpluses.

Swedbank’s GDP Forecast – Latvia

Changesinvolume,% 2008 2009 2010f1 2011f1

GDP -4.6 -18.0 (-18.0) -2.5 (-3.0) 4.0 (4.0)Householdconsumption -5.5 -22.4 (-23.5) -9.0 (-12.0) 2.0 (1.5)General government consumption 1.5 -9.2 (-8.0) -7.4 (-3.0) -3.0 (-2.0)Grossfixedcapitalformation -15.6 -37.7 (-36.0) -27.0 (-17.0) 7.0 (5.0)Exports of goods and services -1.3 -13.9 (-15.0) 6.0 (5.0) 8.0 (7.0)Importsofgoodsandservices -13.6 -34.2 (-34.0) -8.0 (-7.0) 8.5 (6.0)NetexportcontributiontoGDP 8.5 14.4 (13.8) 6.6 (5.6) 0.1 (0.6)

Sources:CSBLandSwedbank.1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.ThefiguresfromourforecastinJanuaryaregiveninbrackets.

Exports by main product groups, millions of lats

0

20

40

60

80

Foodandagriculturalproducts

Wood, etc Machinesand

equipment

Metal etc Chemicalproducts

Mineralproducts

Transport Textiles,w earing,

leather etc

Jan.-Dec.2009 Jan.-Feb.2010 Source:CSBL.

18 April 22, 2010


Investments to grow in 2011The largest fall in investments is over now,asgrossfixedcapitalformationis60%downfromitspeakinthesecondquarterof2007.However,investments will remain weak in 2010 due to continuing deleveraging, spare capacity,andexpensiveandhard-to-obtainfinancing.

On account of a steep fall in gross fixedcapitalformationduring2009,there are huge negative carryover effectsforthisyear(-23%).Despiteanexpected stabilisation in the middle of the year and gradual growth afterwards duetoincreasingconfidence,attractiveassetprices,aninflowofEUfunds,and lessening spare capacity, gross fixedcapitalformationisforecasttofallby25-29%in2010,almostsolelyduetothecarryovereffect.Arebound is then expected in 2011, with grossfixedcapitalformationgrowthreachingabout7%,mostlyowingtotheexportingsectors.InvestmentscofinancedbyEUfundsareestimatedtoconstituteupto7%ofGDPin2010andremainat5-6%ofGDPin2011.

Spare capacity in manufacturing is stilllarge,at42%,comparedwith27%onaveragein2005-2007.Thegrowthin capacity utilisation accelerated at the beginning of 2010, and the rate is expected to rise further, but, as elsewhere in the economy, the differencebetweenexporting-anddomesticdemand-orientedsectorsisbecomingmoreandmorevisible.Facinggrowingdemand,exportingsectors need to rebuild their stocks in

2010, increasing their production, and, as spare capacity gets exhausted, theirdemandforinvestmentswillrise.Forinstance,thecapacityutilisationrate in wood, food, and chemical industriesisalreadyclosetopre-crisislevels, although it might be temporary, as the rebound in demand is likely to slowlateron.Incontrast,destockingindomesticdemand-orientedsectorswill continue, and the necessary deleveraging provides additional pressure.

Unemployment will peak soonAlthough unemployment growth has stopped, the situation in the labour marketremainsdifficult.Sofar,competitiveness gains have been achieved mostly through labour cost reduction.1 The progress is remarkable –bytheendof2009unitlabourcostshaddeclinedby21%sincethefourthquarterof2008.Butthecompetitiveness adjustment should stillcontinue.Inordertoreducethepressure on the labour market and the rising negative domestic demand effects, further competitiveness gainsneedtocomeviaproductivity-enhancing structural reforms driving outputgrowth.

Reviseddatashowedaslowerincrease in the job seekers’ rate, and itreached20.3%inDecember2009.Preliminary data show that registered unemployment rate seems to have peakedattheendofMarch.We

1 See our Swedbank Analysis for more details:“CompetitivenessadjustmentinLatvia:nopainnogain?”Availableathttp://www.swedbank.lv/eng/docs/materiali.php

thus keep our forecast that the job seekers’ratewillpeakatabout23%,stabilizingduringthespring-summerand start falling very slowly later in the year due to emigration and a rising inactivityrate.Economicgrowthisexpected to be productivity driven; thus, employment growth starting in 2011willbeweak.Furthermore,thefirsttogainfromrecoverywillbethosecurrentlyworkingpart-timewhowillshifttofull-timeemployment.Thismeans that structural policies must be devised to support job creation and reducethenegativeeffectsoflong-term unemployment on the quality and sizeofthelabourforce.

Surveys show that majority of businesses are revising their remuneration packages in the beginningoftheyear.Therefore,the relatively small wage cuts in the private sector thus far most likely intensifiedinthefirstquarterof2010asunemploymentisalreadyveryhigh.Furtherdevelopmentswilldependon how strong productivity growth willbe.Currently,weexpectwagesto stabilize by the end of the year andstartgrowingslowlyin2011.Although government spending cuts will continue, most of the wage cuts in the public sector most likely are over inthefirstquarterof2010.Netwageswill also be reduced by the personal incometaxrisefrom23%to26%asofJanuary2010,butdeflationwilllessenthefallinrealincomes.Consequently,we forecast average net real wage to decreasebyabout8%in2010andgrowmarginallyin2011.

Industry indicators, s.a.

60

70

80

90

100

110

120

Jan/06 Jul/06 Jan/07 Jul/07 Jan/08 Jul/08 Jan/09 Jul/09 Jan/10-60

-45

-30

-15

0

15

30

Manufacturingoutput,2005=100

Production expectations for the months ahead, pts(rs)Manufacturing confidence, pts (rs)

Sources:ReutersEcoWin,CSBL.

Wage bill, productivity and job seekers (%)

-50

-25

0

25

50

1Q06 1Q07 1Q08 1Q09-20

-10

0

10

20

Wage bill, yoy Nominalgrossw age,yoyFTEproductivity,yoy Job seekers' rate (rs)

Source:CSBL.

April22,2010 19


Deflation in local goods and services to continueMonthlyconsumerpricedeflationeased in early 2010 mostly due to seasonal factors, but also owing to importedpriceincreases.Higherglobalprices are raising consumer prices in Latvia, but this is expected to slow in thesecondhalfof2010.Nevertheless,higher global oil prices will lead to increased gas and heating tariffs in Latviainthesecondhalfoftheyear.Localdeflationarypressureremains,supported by a weak labour market andcontinuingdeleveraging.Wethusforecasta3%averagedeflationin2010andaby-and-largestableCPIin2011.

Deleveragingisbecomingmoreprevalent,anddeflationismakingtheprocessmoredifficult.Fallingwagesand employment make debt servicing increasingly tough – a situation that is reflectedinrisenloanoverduesinthemarket.Sincelate2009,thepipelineofnew overdues is gradually drying up, suggestingacertainstabilisation.Also,real estate prices, and thus collateral values,havingdroppedabout70%fromtheirpeakinmid-2007,arestartingtoshowsometentativegrowth.

Creditstockisslowlyfalling,astheamount of newly issued loans cannot compensate for the amortization of existingloans.However,thedebtservice burden is increasing both for households and businesses as incomesaredecliningfaster.This,inturn, is weighing down on consumption andinvestments.

Deflationalsoraisestherealinterestrate,thusmakingfinancingmoreexpensive.Inaddition,europolicyrates are expected to start increasing inthefirsthalfof2011.Deleveragingis unavoidable and it will take time – global experience shows that this processtakesyears.Banksarestillcautious to lend, although mortgage lending is about to pick up as housing affordability has improved more than threefold since the real estate price peak,mainlyduetolowerprices.According to our estimations, currently one monthly average net wage buys 1squaremeter,comparedwithto0.3squaremeterin2007.

Household consumption to stabilise earlier than expected Householdconsumptionwillremainweak in 2010 due to falling incomes andcontinuousdeleveragingpressure.Theincreaseinconsumerconfidencesincethesecondhalfof2009doesnot immediately translate into robust economicactivity.However,recentretail trade turnover developments suggest that private consumption might have increased or at least been stableinthefirstquarterof2010(partly due to unusually cold and snowywinter).Weforecasthouseholdconsumptiontofallbyabout9%in2010, almost fully due to the negative carryover effect, and grow by about 2%in2011.Duetocontinuingdeleveraging pressure, household consumption will fall more than total incomes(i.e.,thewagebillpluspensions) in 2010 and grow less than latterin2011.

The surprisingly strong retail trade performance in early 2010, together with some stabilisation in household deposits and the continuing fall in taxrevenuesasapercentofGDP(see below), suggests that the shareof“envelope”income(i.e.,the“grey”economy)hasincreased.Forinstance,TheStateLabourInspectorateestimatesthatnearlyone-fifthofofficiallyregisteredunemployedactuallyareworking.Thisincreases the forecast error for private consumptionfortheupcomingyears.As the consumption side seems to better measure the economic activity than the income side, true incomes might actually fall less than our forecastsuggests.

Tax collection to be improvedDespiteaslightslipinfiscaldisciplineattheyear’sveryend,the2009budgetdeficitstoodat9%ofGDP(accrualbasis),i.e.,belowthe10%target.Thecurrentgovernmentbudgetplanincludes4.2%ofGDPfiscalconsolidationfor2010.Dataonthefirstquarterof2010showthefiscalsituation developing by and large in linewiththeplan.Weseenoneedfor the government to seek additional consolidation measures to meet the8.5%budgetdeficittargetsetbytheIMFandtheEC.Theoveralleconomic situation has developed more favourably than initially foreseen, and the Treasury has accumulated reservesof7%ofGDP. An additional 10%ofGDPisheldforfinancialsystemstabilizationneeds.InMarch,the government announced plans tosplitParexBankintoaso-called

Household consumption, retail tradeand VAT revenues

0

50

100

150

200

1Q05 1Q06 1Q07 1Q08 1Q09 1Q 10Retailtradeturnover(sa),2005=100Householdconsumption(sa),2005=100VATrevenues,2005=100

Source:CSBL.Note:1Q2010istw omonthsaverage.

Household consumption, income and savings

0

1000

2000

3000

1Q 00 1Q 02 1Q04 1Q06 1Q08

Housholdconsumption

Wages+Pensions+changeinloansst.-changeindepositsst.Sources:CSBL,LaB,Sw edbankestimates.

20 April 22, 2010


goodandabadbanktosellit.Thiswouldfreesomeofthefinancialsectorresourcesforotherneeds,e.g.,debtrollover, economic stimulus, or to reduce the borrowing requirement withintheEC-andtheIMF-supportedprogramme.

ThePrimeMinistersaidinmid-Marchthat Latvia may ask to postpone the disbursement of new funds from creditors or ask the arrangement to be turned into a credit line and access it only when necessary in order to avoid storing excess reserves and paying interestonthem.Thestabilisationhas been noted by rating agencies, which recently raised Latvia’s credit ratingoutlookfromnegativetostable.We expect further improvement in the outlook and perhaps in the rating itself laterthisyear.

We see tax evasion as the key risk that may force the government to draft a supplementary budget with morefiscalconsolidationalreadyin2010.During2009,taxrevenuesasapercentofGDPdeclinedto25.7%inthelastquarter(the2005-2008averageis29.9%).Whileautomaticstabilisers certainly played a role, such asharpdrop,alongwiththesignificanttax rate increases, clearly points to taxevasion.Thishypothesisisalsosupported by anecdotal evidence andpublicsurveys.Althoughweaktax administration is unlikely to cause severeshort-termfiscalstress,itwillcertainly add unwelcome pressure to

exercisedeeperexpenditurecuts.Atotalconsolidationofabout7%ofGDPis still necessary to cut the budget deficittothe2012targetof3%ofGDPto achieve the authorities’ goal of euro adoptionin2014.

Reforms must go onThedeepfiscalconsolidationandthe global recovery have improved confidenceandreducedfinancialmarketrisks.Thedecisionoftheruling coalition’s largest member, the People’s Party, to leave the governmentonMarch15,2010wastakencalmlybyfinancialmarkets.Itis widely expected that the incumbent PrimeMinisterDombrovskiswillremainintheofficeuntiltheparliamentelections this October, heading a minoritygovernment.Hence,suchshort-termpoliticalrisksas,e.g.,thegovernment’s falling apart, are very slim.

One should not, however, be lulled by the somewhat better than expected outcomes.Theeconomicsituationstillposescriticalproblems.LatviahasformallyfulfilledmostofthestructuralbenchmarkssetoutintheIMF-andEC-supportedprogrammesofar,butthe underlying structural adjustment isfarfromover.Manykeystructuralreforms are still to be designed, and fewhavefullybeenimplemented.Thedraftingofthefiscalresponsibilitylawis lagging, as is the implementation of civilservicewagereform.Thedesignof the education system reform is far

from clear – the rising pressure to maintain as much of the status quo as possible will deeply harm future competitiveness.Thedevelopmentofalternativefinancialmarkets,such as venture capital and a stock market, must be stimulated to reduce dependence on banks as the sole sourceoffinancing.Thesearejustafew structural adjustments from the long“to-do”listthatmustbecompletedto support a return to a sustainable andhealthygrowthpath.

The upcoming elections do pose the risk that implementation of quality structuralreformsmightbepostponed.Ifso,thecurrentgovernmentshouldat least prepare the blueprints that are ready to be implemented when thenextgovernmenttakesover.Otherwise, Latvia risks experiencing slowmedium-termgrowth,whichwilldeepen other structural problems, such as emigration and pension system sustainability.Withtheglobalrecovery,the government’s moves to implement structural reforms must become bolder (particularly after the elections) – a growing economy may “forgive” small mistakes in economic policymaking as long as the general trend is towards structural adjustment supporting sustainablegrowth.

MārtiņšKazāksLijaStrašunaDainisStikuts

General government budget, % of GDP

20

30

40

50

1Q07 1Q08 1Q090

10

20

30

Difference(rs) Tax revenues Expenditures

Sources:StateTreasury,Sw edbankestimates.Note:accrualbasis.

April 22, 2010 21

Swedbank Economic OutlookLithuania

Lithuania:Fiscalconsolidationisrewarded


The economy appeared to stabilize duringthesecondhalfof2009afterverysharpdeclinesinoutput.LithuanianGDPincreasedby0.5%quarter on quarter in the fourth quarterof2009,thusgrowingfortwoconsecutive quarters, with the annual rateofcontractioneasingto12.8%.For2009asawhole,theeconomyis estimated to have declined by 15%andthusperformedinlinewithourexpectations.Theeconomicrecession in the second half of the year was considerably softened by export growth, which has been improving since last autumn owing to therecoveryintheEUeconomies.Nosignsofimprovement,however,wereobservedinthenon-tradablesectors, as domestic demand stayed anaemic in the second half of the year.

We expect, however, that the economy will fail to expand during thefirsthalfofthisyear.Someleading indicators show that the slow recovery observed in the second half of2009stalledduringthebeginningofthisyear.DuetoslowerrecoveryintheEU,industrialproductionresultswere worse than anticipated and orders were growing considerably slower than at the end of last year

Retailsalesresultsindicatethathouseholdconsumptionkeptonfalling.Eventhoughconsumerconfidencehas been gradually improving, labour market developments allow us to forecast a very cautious approach to spendingthisyear.

We are more optimistic than in the last outlook published in January about the ability of the government to return thepublicfinancestoasustainablepath and about its commitment to carry out the proposed structural reforms (including making some savings permanent).Thesetofconsolidationmeasures adopted for the 2010 budget, which included reducing funding for the vast majority of social

benefitprogrammesandcuttingwagesfor public sector servants, has already yieldedsomeinitialpositiveresults.The fact that the government appears to have regained control of the public financesituationwasacknowledgedbythe international institutions and ratings agencies, which, together with the stabilization of the Baltic economies, lowered the risk assessments for the country.

Even though the government faces significantchallengesgoingforward,as revenues are still falling, the most vulnerable element in the public financesystemisthesocialsecuritysystem.Themajorityoftheproposedreforms, even if their adoption is

2008 2009 2010f 2011f

RealGDP 2.8 -15.0 -2.0 3.0GDP,meuros 32 203 26747 26081 27132Consumerprices 10.9 4.5 1.0 1.0Unemploymentlevel,%oflabourforce 5.8 13.7 16.0 15.5Realnetwage 10.1 -7.5 -5.0 0.0Exports of goods and services (nominal) 25.5 -25.2 6.0 8.5Importsofgoodsandservices(nominal) 18.9 -35.8 6.5 7.5Balanceofgoodsandservices,%ofGDP -10.9 -0.7 -1.0 -0.5Currentaccount,%ofGDP -11.9 3.8 1.2 0.0Currentandcapitalaccount,%ofGDP -10.1 7.2 4.2 3.0FDIinflow,%ofGDP 3.9 0.9 1.0 1.5Foreigngrossdebt,%ofGDP 71.6 86.0 88.0 86.0Generalgovernmentbudgetposition,%ofGDP -3.2 -8.9 -8.0 -6.0Generalgovernmentdebt,%ofGDP 15.6 29.3 38.0 42.0

Sources:LCDandSwedbank.1/Annualpercentagechange,unlessotherwiseindicated.

Contributions to GDP Growth

3.0%

-2.0%

2.8%

9.8%

-15.0%-30%

-20%

-10%

0%

10%

20%

2007 2008 2009 2010F 2011FHouseholdconsumption Government consumptionInvestment NetexportGDPgrow th

Sources:LDS,Sw edbankcalculation.

22 April 22, 2010


accelerated, are not likely to yield the necessaryresultsintheshortterm.

Given the developments at the beginning of this year and the global growth outlook, we have retained our January forecasts for economic growth for2010and2011.OurmainscenariothusseesLithuanianGDPfallingby2%in2010.Theeconomywillmostlikelycontractinthefirstquarter,withgrowth gradually picking up after thesecondquarterof2010.Overalldomesticdemandwillfallthisyear.Weare slightly more optimistic compared with the January forecasts regarding exportgrowth.

We do not completely rule out the possibilityofamodestpositiveGDPgrowth this year, which will largely depend on a faster than currently forecastedrecoveryofexports.Thus,both in terms of positive and negative risks, global developments will be the most crucial factor affecting the performanceoftheeconomythisyear.Theeconomyshouldgrowby3%in2011, as domestic demand, driven by investments,startstorecover.

Export recovery to continueExport volumes picked up faster than we anticipated, owing to economic stimulus packages adopted in the mainexportmarkets.Basedontheassumption that the positive trend observedinthesecondhalfof2009is likely to continue, we are more optimistic than in the last outlook in Januaryregardingexportgrowth.While in January we expected exports to grow only marginally during 2010, we currently forecast exports to

growbyapproximately4.5%inrealtermsovertheyear.Themainriskto the improvement in exports is a significantslowdownintherecoveryof foreign demand, especially in the EU. Admittedly, after showing steady signs of expansion, export results inthefirsttwomonthsof2010wereslightlydisappointing.Nevertheless,the sectors that took the lead in export recoveryattheendof2009–plasticand rubber goods and chemical products, as well as wood, paper, and furniture–continuedtoperformwell.

We are also raising our forecast for imports and expect them to grow by 2.2%thisyearinrealterms,asafasterrecovery of exports will subsequently increaseimports.Importgrowthwillalso move into positive territory due to an increase of energy imports after the shutdownoftheIgnalinanuclearplant,especiallyinthefirsthalfof2010.ThenetexportcontributiontoGDPgrowthwill remain positive, though slightly more subdued than was assumed in January; net exports nevertheless will

remain the principal factor limiting the fallinGDPthisyear.

The correction of the external imbalancesduring2009wasswift–thesurplusof3.8%ofGDPrecordedin the current account balance was higher than we had anticipated, primarily due to the rise in the surplus oftheincomeaccountbalance.Weare of the opinion that most of the adjustments have already occurred, especially regarding the trade balance account.Wehavethusretainedourforecasts and expect the current accounttoreach1.2%oftheGDPsurplus this year and to be balanced in2011.Exportgrowthshouldoutpaceimportgrowth,andthusthedeficitinthe trade balance will not deteriorate thisyearandnextyear.

The improvements in the income account are not likely to continue during 2010 as the losses observed thisyeararelikelytobesignificantlysmaller than the ones registered in 2009.Thesurplusinthenettransfers

Swedbank’s GDP Forecast – Lithuania

Changeinvolume,% 2008 2009 2010f 1/ 2011f 1/

Householdconsumption 3.6 -17.0 (-18.0) -5.0 (-5.0) 1.0 (1.0)General government consumption 7.9 -2.3 (-5.0) -4.5 (-5.0) -5.0 (-2.0)Grossfixedcapitalformation -6.5 -39.1 (-42.0) -3.5 (-4.0) 8.0 (8.0)Export of goods and services 12.2 -15.5 (-18.0) 4.5 (1.1) 6.5 (6.8)Importofgoodsandservices 10.5 -29.3 (-27.0) 2.2 (-4.2) 5.0 (4.0)NetexportscontributiontoGDPgrowth -0.5 11.6 (8.8) 1.2 (2.9) 0.8 (1.4)GDP 2.8 -15.0 (-16.0) -2.0 (-2.0) 3.0 (3.0)

Sources:LDSandSwedbank.1/Theseareaveragesoftheforecastranges,whichareca.2percentagepointswide.Roundingandvaryingforecastsoftheerrortermexplainswhysomeofthecomponentsdonotalwaysaddup.ThefiguresfromourforecastinJanuaryaregiveninbrackets.

GDP, 2000=100

100

120

140

160

180

200

220

240

260

280

300

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

HouseholdsconsumptionGovern.consumptionGross f ixed capital formationGDPExportImport

Source:LDS.

April 22, 2010 23


account,whichreached4.1%ofGDPin2009,shouldcontinueimprovingthisyear due to the faster implementation oftheEUassistance.

Investments to turn aroundInlinewithourexpectations,investments (excluding inventories) showed no signs of recovery during thelastquarterof2009.Thesituationwill remain problematic all of this year, particularlyinthefirsthalf.Comparedwith the January outlook, expectations have improved somewhat as the risk estimates of the Lithuanian economy have declined and the atmosphere inthefinancialsectorhaseasedconsiderably after the market’s favourablereactiontothefiscalconsolidationmeasures.Theresultsoftheimprovedriskassessments-cheaper and somewhat larger capital inflows,morelendingtocertaineconomic activities, will become visible only by the end of this year/beginning of2011.

We anticipate investments (excluding inventories)tofallby3.5%thisyear, and expect them to grow by 8%during2011.During2010,onecrucial source of investments remains theEUstructuralfunds.Inaddition,starting from the beginning of this year,corporateprofittaxrateswereloweredforsmallandmedium-sizedenterprises (SMEs) and brought back tothe2008levelforothercompanies.Even though this measure has only improved expectations so far, we expect that it will also provide the impetus for the investment recovery

starting in 2011 in line with the economicrecovery.

The government stimulus plan, apart from the faster adoption of theEUstructuralfunds,isbeingimplemented slowly, and its impact so farremainsambiguous.Forinstance,the allocation of funds for the SMEs and exporting companies began only in the second half of last year, and many companies might not have the opportunitytousethefundsasofyet.The renovation of old apartment blocks hasnotyetbegunandfacessignificantchallenges going forward for numerous reasons, including bureaucratic hurdlesandtheseriousflawsinthe design of the renovation model itself.Therenovationofpublicsectorbuildings seems to have stalled as well, mostly for bureaucratic reasons, such as, for instance, the inability to enact public procurement processes ontime.

Some positive developments have been visible in the residential real estate market at the beginning of the year.Thedeclineinpricesappearsto have slowed, and the majority of market players believe that prices and rents on residential property have either recently bottomed out orwillhitbottominone-twomonths.Thus, the most favourable time to buy is considered to be now, although developers and owners are no longer eagertooffersignificantdiscounts.Despitethesetwocontrastingforces,the volume of transactions has increasedatthebeginningoftheyear.

Buyers are not only interested in the capitalcityofVilnius,butarealsolooking at properties in the outskirts, where prices are assumed to have droppedthemost.Mostoftheseinvestments,however,arefinancedbyownfunds-giventheuncertainlabour market developments, buyers inneedofgreaterfinancingstillremaincautious and/or are unable to receive financing.

Despitethesomewhathigheractivityin the last few months, we are of the opinion that residential real estate prices will still decline overall this year, althoughnotbymorethan5-10%.Weanticipate that property prices stabilize duringlate2010-2011.

Duringlastyear,housingpricesareestimated to have dropped by about 30%,andfromtheirpeakinDecember2007byabout40%,whiletheoutputof the construction sector declined by43%during2009.Residentialrealestate prices in Lithuania are about 20%higherthanthoseinLatviaandEstonia; also, oversupply remains high – a considerable amount of newly built residential units are still vacant, and these need to be sold before the real estatemarketstartsasteadyrecovery.

The outlook for the commercial real estate sector, however, remains dire – there are no signs of improvement as of yet; given the considerable oversupply and high vacancy rates, we anticipate this sector to bottom out approximatelyinthemiddleof2011.

Labour Market

-12%

-8%

-4%

0%

4%

8%

12%

16%

20%

24%

2004 2005 2006 2007 2008 2009 2010f 2011f

Unemploymentrate Gross nominal w ageNetrealw age

Source:LDS,Sw edbankforecast

Confidence Indicators

-100

-80

-60

-40

-20

0

20

40

2006 2007 2008 2009 2010

Overall sentiment IndustryConstruction RetailtradeServices Consumer Source:LDS

24 April 22, 2010


Labour market: internal devaluation to continueAs anticipated, the unemployment rate was still increasing and the number of vacancies declining in the fourthquarterof2009.Thelargestwave of job reductions, however, occurredinthefirsthalfof2009,whileinthesecondhalfof2009theriseinunemploymentsubsidedslightly.Employment, however, continued todeclineatanalarmingrate-thenumberoffull-timeemployeesfellby15%overtheyearinthefourthquarterof2009. Unemploymentrosetoanaverageof13.7%over2009,upfrom5.8%in2008.

We expect that the unemployment rate will reach a peak and stabilize most likely in the second quarter of2010.Jobcreationwillbeslowinitially.Companiesarelikelytoremaincautiousandwillfirsttrytoincreasethe workload of existing workers (currentlyworkingpart-time.

Poor employment opportunities are encouraging a new wave of emigration, particularly among the youngergeneration,whichsignificantlyunderminesmedium-andlong-termeconomicgrowthprospects.Even though the shortage of labour, especiallyqualified,isnotfeltatpresent, the problem could become acuteinthemediumterm.Wehavenot altered our forecast compared to January and expect the unemployment ratetoincreaseto16%over2010anddeclineto15.5%in2011.

Wageswillcontinuetodecrease.Inthe

fourthquarterof2009,grosswagesandsalariesweredownby8.6%percentyearonyear.Realwagesandsalaries look set to shrink by roughly 5%in2010andthenstayflatin2011.Duetoadministrativedecisions,thedecline of wages in the public sector in 2010 will be considerably faster than in the private sector, which started adaptingtothechangesearlier.Ascompanies started adjusting by initially cutting workforce and working hours, total wage bill in the beginning of 2010 wasabout20-25%lowercomparedtotheendof2009.Wagebillisexpectedtodeclinebyafurther7-10%during2010.

Even though it has been improving for a couple of months, consumer sentiment remains weak by historical standards.Thisshowsthathouseholdspending recovery is not imminent andwillbemodestatbest.Whilewellabove its lowest point at the beginning of2009,theindexhasbeenfluctuatingfor three or four months, and the improvement noted has not been large enoughtobeconsideredsignificantorsustainable.

Availabledataforthefirstquarter,such as retail sales, have been disappointing and suggest that householdspendingisstillshrinking.Given the meagre employment prospectsandstill-fallingwages,prospects do not look much better for theremainderoftheyear.Wethusretain our January forecast and expect household consumption expenditure to declineby5%thisyear.Onlyaslightimprovement-1%growth-isexpectedin2011.

Price growth depends on global forcesAnysignificantupturninconsumerpricesisveryunlikelythisyear.Infact,the situation will remain rather similar to2009,especiallythefirsthalf,whenweak domestic demand resulted in cleardeflationarytendencies.Theonlypricesthatincreasedduring2009wereprices for products or services affected by the raises in the excise taxes and value-addedtax(VAT)rates,orthoseinfluencedbyglobaldevelopments.

Duringthefirstquarterof2010,electricity price increases also pushedpricesupwards.Asexpected,consumerpricesjumpedupby1.3%month on month in January after the electricity tariff increase of nearly 30%forhouseholdconsumers;however, the price decline resumed in FebruaryandinflationwasmarginalinMarch.Theconsumerpriceindex(CPI)increased0.3%monthonmonth(-0.4%yearonyear)inMarch,resultinginannualaverageinflationslippingto-2.2%.Inouropinion,the indirect effects of electricity priceincreasesarequitemodest.Duetoweakdomesticdemand,itis hard to pass the cost increase to consumers.Atthesametime,therisein electricity prices tends to crowd out the consumption of other goods and thus exerts downward pressure on the pricesofothergoods.

As was mentioned in the previous outlooks, global price developments will be the only major sources pushing prices upwards, especially inthesecondhalfoftheyear.Asthe

Consumer Prices

-4%

-2%

0%

2%

4%

6%

8%

10%

12%

14%

2006 2007 2008 2009 2010-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

CPI,mom(r.s.) CPI,yoy(l.s.) Source:LDS

Lithuania's Industry

-30%-25%-20%-15%-10%-5%0%5%10%15%20%

2006 2007 2008 2009 2010

IndustrialproductionManufacture (refined petroleum products excluded) Source:LDS

April22,2010 25


developments so far have been in line with our expectations, we retain our forecastthatCPIinflationwillreach1%thisyearandin2011.

Some stabilization in public financesThe stringent budget consolidation package adopted at the end of last year has already brought some positive developments, so far mostly in the recognition of the government’s efforts by international institutions and ratingsagencies.TheS&PandFitchratings agencies have raised their outlook for Lithuania’s sovereign rating from “negative” to “stable,” basing theirdecisiononthecountry’sfiscalpolicy.Encompassingbothbudgetcuts and very much needed structural reforms is likely to lay the foundations forlong-termgrowthandasustainableeconomicrecovery.InJanuary2010,theEuropeanCommission(EC)alsoacknowledged that Lithuania has taken adequate measures to counteract thedeteriorationinitspublicfinancesand therefore approved shifting the deadline for correction of the excessivedeficitfrom2011to2012.Theatmosphereinthefinancialsector

has eased considerably as well, as the markets have responded to the government measures and successful emissionsofthebondissues.Interbankrateshavereturnedtothelevelsregisteredbeforethecrisis.

We also feel more comfortable than in January regarding the sustainability of publicfinances,especiallybecausethegovernment has agreed to a plan with theECtoreachadeficitnothigherthan3%ofGDPin2012.Eventhoughthegovernmentwillfacesignificantchallenges going forward, as the export-basedrecoverywillresultinhigher revenues only in 2011, we have changed our forecast and expect the deficittoreachonlyabout8%ofGDPin2010,and6%ofGDPin2011.Thisallows us to expect government debt toreachonly38%and42%ofGDPin2010and2011,respectively.Wereittomaterialize, this scenario would make Lithuania eligible for euro adoption in2014.Thereremainsomepitfalls,however.Inourview,thereisariskthat some structural reforms are not goingtobeimplemented.Forinstance,some savings may not be made permanent, while resources for tax

collectionneedtobeenhanced.Fiscalprudence could also be undermined by the parliamentary election in October 2012.

The cost of borrowing has so farbeenhigh–duringFebruary,Lithuania’s10-yearEurobondissue,amountingtoUS$2billion,wassold,withayieldof7.6%.However,thesuccessful emission of this bond issue can be credited with lowering risk assessmentsinthefinancialmarkets.About60%ofgovernmentborrowingin2009wasraisedfromforeignlenders,includingtwoEurobondissues.Thisyear, the country is continuing to financeitsfiscalgapfromprivatesources, nevertheless, after the improvement in risk assessments, the yieldisgoingtobelower.

At present, the social insurance fund (Sodra) is the most uncertain and vulnerablepartofpublicfinances.Sodra’sdeficithasdramaticallywidened recently due to rising unemployment, a fall in employment, andtheworseningfinancialsituationofhouseholds.Thegovernmentisholding discussions about reforming the social insurance system (including such measures as increasing the pension age, and transferring the costofthefirstsevensickdaystothe employer), which could increase its revenues and improve its control ofexpenditures.Thereforms,evenif adopted in a timely manner, would yield the results only in the medium term.

LinaVrubliauskienėIevaVyšniauskaitė

General Government Finances, % of GDP

-10%

-8%

-6%

-4%

-2%

0%

2006 2007 2008 2009 2010f 2011f0%

10%

20%

30%

40%

50%

Debt(rs) Budget position (ls)

Sources:LithuanianMoFandSw edbankcalculation.

26 April 22, 2010


Economic Research Department

Sweden Cecilia Hermansson +46858591588 [email protected] GroupChiefEconomist ChiefEconomist,Sweden Magnus Alvesson +46858593341 [email protected] Senior Economist Jörgen Kennemar +46858591478 [email protected] Senior Economist Helena Karlsson +46858591028 [email protected] Assistent

Estonia Maris Lauri +3726131202 [email protected] ChiefEconomist,Estonia Elina Allikalt +3726131989 [email protected] Senior Economist Annika Paabut +3726135440 [email protected] Senior Economist

Latvia Mārtiņš Kazāks +37167445859 [email protected] DeputyGroupChiefEconomist ChiefEconomist,Latvia Dainis Stikuts +37167445844 [email protected] Senior Economist Lija Strašuna +37167445875 [email protected] Senior Economist

Lithuania Lina Vrubliauskienė +37052684275 [email protected] ChiefEconomist,Lithuania Ieva Vyšniauskaitė +37052684156 [email protected] Senior Economist

April22,2010 27


Disclaimer

ThisresearchreporthasbeenpreparedbyeconomistsofSwedbank’sEconomicResearchDepartment.TheEconomicResearchDepartmentconsistsofresearchunitsinEstonia,Latvia,LithuaniaandSweden,isindependentofotherdepartments of Swedbank AB (publ) (“Swedbank”) and responsible for preparing reports on global and home market economicdevelopments.TheactivitiesofthisresearchdepartmentdifferfromtheactivitiesofotherdepartmentsofSwedbank and therefore the opinions expressed in the reports are independent from interests and opinions that might be expressedbyotheremployeesofSwedbank.

Thisreportisbasedoninformationavailabletothepublic,whichisdeemedtobereliable,andreflectstheeconomists’personalandprofessionalopinionsofsuchinformation.Itreflectstheeconomists’bestunderstandingoftheinformationatthemomenttheresearchwaspreparedandduetochangeofcircumstancessuchunderstandingmightchangeaccordingly.

This report has been prepared pursuant to the best skills of the economists and with respect to their best knowledge this report is correct and accurate, however neither Swedbank or any enterprise belonging to Swedbank or Swedbanks directors, officersorotheremployeesoraffiliatesshallbeliableforanylossordamage,directorindirect,basedonanyflawsorfaultswithinthisreport.EnterprisesbelongingtoSwedbankmighthaveholdingsintheenterprisesmentionedinthisreportandprovidefinancialservices(issueloans,amongothers)tothem.Aforementionedcircumstancesmightinfluencetheeconomicactivitiesofsuchcompaniesandthepricesofsecuritiesissuedbythem.

Theresearchpresentedtoyouisofinformativenature.ThisreportshouldinnowaybeinterpretedasapromiseorconfirmationofSwedbankoranyofitsdirectors,officersoremployeesthattheeventsdescribedinthereportshalltakeplaceorthattheforecaststurnouttobeaccurate.Thisreportisnotarecommendationtoinvestintosecuritiesorinanyotherwayenterintoanyfinancialtransactionsbasedonthereport.Swedbankanditsdirectors,officersoremployeesshallnotbeliableforanylossthatyoumaysufferasaresultofrelyingonthisreport.

We stress that forecasting the developments of the economic environment is somewhat speculative of nature and the real situationmightturnoutdifferentfromwhatthisreportpresumes.

IFYOUDECIDETOOPERATEONTHEBASISOFTHISREPORTTHENYOUACTSOLELYONYOUROWNRISKANDAREOBLIGEDTOVERIFYANDESTIMATETHEECONOMICREASONABILITYANDTHERISKSOFSUCHACTIONINDEPENDENTLY.

Swedbank Economic Outlook, 2010, April 22

Economy & Finance

Transcript of Swedbank Economic Outlook, 2010, April 22