Yes, the long term outlook is good, but… - Outlook for the Estonian economy Lars Christensen...
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Transcript of Yes, the long term outlook is good, but… - Outlook for the Estonian economy Lars Christensen...
Yes, the long term outlook is good, but…- Outlook for the Estonian economy
Lars ChristensenSenior Analyst, Head of New Europe Research
+ 45 45 12 85 30 (direct)+ 45 40 74 49 51 (mobile)
Danske Research, Danske Bank www.danskebank.com/danskeresearch
Investment Research
January 2008
2
Agenda
• A look at the good stories
• Some key long term challenges – the short version
• Outlook for growth in the coming years
• Macro prudential indicators – a “traffic light analysis”
3
Richer – impressive Estonian growth performance
GDP per capita, relative to Germany
0.10
0.30
0.50
0.70
0.90
Bul
gari
a
Cze
ch
Esto
nia
Hun
gary
Latv
ia
Lith
uani
a
Pol
and
Rom
ania
Slo
vaki
a
Slo
veni
a
Gre
ece
Por
tuga
l
1996
2006
4
Freedom is wonderful
Freedom Index
30
40
50
60
70
80
Bul
gari
a
Cze
ch
Esto
nia
Hun
gary
Latv
ia
Lith
uani
a
Pol
and
Rom
ania
Slo
vaki
a
Slo
veni
a
Gre
ece
Por
tuga
l
Den
mar
k
19962007
5
Less corrupt
Corruption Index
0
2
4
6
8
10
Bul
gari
a
Cze
ch
Esto
nia
Hun
gary
Latv
ia
Lith
uani
a
Pol
and
Rom
ania
Slo
vaki
a
Slo
veni
a
Gre
ece
Por
tuga
l
Den
mar
k
1998
2006
6
Living longer
Life expectancy at birth
65
70
75
80
Bul
gari
a
Cze
ch
Esto
nia
Hun
gary
Latv
ia
Lith
uani
a
Pol
and
Rom
ania
Slo
vaki
a
Slo
veni
a
Gre
ece
Por
tuga
l
1990
2004
7
Less child mortality, but still some way to go
Under-five mortality rate (per 1000)
1
6
11
16
21
26
31
Bulg
aria
Cze
ch
Est
onia
Hunga
ry
Latv
ia
Lith
uan
ia
Pol
and
Rom
ania
Slo
vaki
a
Slo
venia
Gre
ece
Por
tuga
l
1990
2003
8
More high-tech than anybody
PC- and internet users (per 1000)
50
300
550
800
Bulg
aria
Cze
ch
Est
onia
Hunga
ry
Latv
ia
Lith
uan
ia
Pol
and
Rom
ania
Slo
vaki
a
Slo
venia
Gre
ece
Por
tuga
l
PC
Internet
9
Some key long term challenges – the short version
• Two key challenges:• Negative demographics • Don’t become “too Scandinavian”
10
Fewer hands to pay for the fun in the future
Working age population (% of total population)
55
60
65
70
75
80
85
90
19
97
19
99
20
01
20
03
20
05
20
07
20
09
20
11
20
13
20
15
20
17
20
19
20
21
20
23
20
25
20
27
20
29
20
31
20
33
20
35
20
37
20
39
20
41
20
43
20
45
20
47
20
49
11
Where are all the men?
.
94 96 98 00 02 04 06
percent
1.04
1.06
1.08
1.10
1.12
1.14
1.16
1.18
percent
1.04
1.06
1.08
1.10
1.12
1.14
1.16
1.18 Women-to-men ratioEstonia
EU27
12
Don’t become “too Scandinavian”
• Estonia’s free market policies have served the country well, but there is a risk that Estonia (and especially Estonian politicians) is learning a bit too much from Scandinavia and increasingly is focusing on expanding the ”welfare state”
• This could hamper long term growth
13
Promises, promises…
• President Toomas Hendrik Ilves:
“Moreover, we wish and need to pay our employees better, and ensure our elderly with a better pension.”
14
Outlook for growth in the coming years
• Growth will slowdown further because of:
• A need to address imbalances in the economy
• Negative shocks
15
Huge imbalances and rising inflation
• Spurred by favourable external conditions – buoyant global growth, easy monetary conditions and a lot of risk appetite – there are signs that the Baltic economies have been growing too quickly
• Following the prolonged economic boom, there are now mounting imbalances in the Baltic economies
• This is visible in the acceleration of C/A deficits and rising inflationary pressures
Estonia Latvia Lithuania.
00 01 02 03 04 05 06 07
percent
-30
-25
-20
-15
-10
-5
0
percent
-30
-25
-20
-15
-10
-5
0 Mia. EEK
Publications.Figurbibliotek.EmergingWeek
C/A as a share of GDP - %
Inflation
Estonia Latvia Lituania.
00 01 02 03 04 05 06 07
percent
-2.50.02.55.07.5
10.012.515.0
percent
-2.50.02.55.07.5
10.012.515.0 % y/y % y/y
16
Bottlenecks are mounting in factor markets
Estonia Latvia Lithuania.
98 99 00 01 02 03 04 05 06 07 percent
0
percent
0% of labour force
percent
2.5
5.0
7.5
10.0
12.5
15.0
17.5
percent
2.5
5.0
7.5
10.0
12.5
15.0
17.5 % of labour force % of labour force
Estonia Latvia Lithuania.
00 01 02 03 04 05 06 07 08
percent
0
5
10
15
20
25
30
percent
0
5
10
15
20
25
30
Nominal wage growth
% y/y% y/y
17
History tells us that growth will slow
• What happens to growth when the current account worsens by 5% of GDP in two years?
• A minor event-study of OECD-countries
• 14 examples
% GDP growth relative to "boom years"
-2.5
-2.0
-1.5
-1.0
-0.5
0.0
0.5
1.0
-2 -1 0 1 2 3
18
The negative shocks
• Growth has been buoyant but four factors are set to slow growth – potentially significantly – in the coming year:
• Inflation has spiked dramatically• Credit conditions have been tightened• Asset prices have peaked• Global slowdown
19
The nasty cocktail – higher inflation and tighter credit conditions
Slovakia
Latvia
Estonia
Czech Rep.
BulgariaSlovenia
Romania
Poland
Lithuania
Hungary
Kazakhstan
Ukraine
Russia
-100
0
100
200
300
400
500
600
700
-2 0 2 4 6 8 10Change in inflation percentage points since J anuary 2007
Cha
nge
in 3
mth
s. R
ates
(bp)
sin
ce J
anua
ry
20
07
20
Asset prices are moving south
.
J an07
Mar May J ul Sep Nov J an08
percent
70
80
90
100
110
120
130
140
150
percent
70
80
90
100
110
120
130
140
150 Index = 100, Jan 2007
Performance va Euro Zone, STOXX, Broad Indexin...
Estonia
Latvia
Bulgaria
Lithuania
Romania
21
A Traffic Light analysis for EU8+2
• We have taken a look at 10 macro prudential indicators for the EU8+2
• The indicators are:• Unsustainable GDP growth• Inflation• Current account situation % GDP• Credit to GDP ratio• Credit growth• FX reserves to import ratio• Exports to imports ratio• Short-term debt/FX reserves• Real interest rates• Public finances
Source: “A Warning not to be ignored II”, December 14 2007
22
More red than ever
Cze
ch R
ep
.
Pola
nd
Slo
ven
ia
Hu
ng
ary
Slo
vakia
Lith
uan
ia
Bu
lgari
a
Latv
ia
Rom
an
ia
Est
on
ia
Sustain-able zone
Reason for concern
Danger Zone
23
Estonian growth slows dramaticallyGDP growth
0
2
4
6
8
10
12
14
Latv
ia
Lith
uani
a
Slo
vaki
a
Bul
gari
a*
Pol
and
Esto
nia
Cze
chR
epub
lic
Slo
veni
a*
Rom
ania
Hun
gary
% y/y
Source: EcowinNote: Figures are from Q3-07, blue line shows data from Q3-06. * Numbers are from Q2-07.
Overheating Hot
Roo
m fo
r im
prov
emen
t
24
Inflation – take a look at this!
Inflation
0
2
4
6
8
10
12
14
16
Latv
ia
Bul
gari
a
Esto
nia
Lith
uani
a
Hun
gary
Rom
ania
Slo
veni
a
Cze
chR
epub
lic
Pol
and
Slo
vaki
a
% y/y
Source: EcowinNote: Figures are from November 2007, blue line shows data from year-end 2006.
Cool down - now please!
Uns
usta
inab
le
25
Current account – Its getting worse
Current account balance
-30
-25
-20
-15
-10
-5
0
Latv
ia
Bul
gari
a*
Esto
nia
Rom
ania
Lith
uani
a
Hun
gary
*
Slo
vaki
a
Slo
veni
a*
Pol
and
Cze
chR
epub
lic
% of GDP
Take cover! Unsustainable HealthySource: EcowinNote: Figures are from Q2 2007 and is calculated over the previous 12 months, blue line shows value by Q3 2006. * Numbers are from Q2 2007.
26
Credit growth – a few improvements visible
Growth rate of credit to the private sector
0
10
20
30
40
50
60
70
Latv
ia
Rom
ania
Esto
nia
Lith
uani
a
Bul
gari
a
Pol
and
Slo
vaki
a
Cze
chR
epub
lic
Hun
gary
% y/y
Source: World Bank, Regular Economic Report, September 2007Note: Credit growth is measured Q1-07, blue lines are from Q3-06. Slovenia was taken out of the analysis from 2007 - We have implicitly given Slovenia a green value.
27
The market impact of imbalances
-58
151
151
-40
25
260
333
335
660
Hungary
Poland
Czech Rep.
Slovakia
Romania
Bulgaria
Lithuania
Estonia
Latvia
Change in 3M money market rates since Jan 1, 2007 versus ranking from February 2007
Bp
Source: EcoWin and own calculationsNote: Money market rates from December 11 and J anuary 1 2007 have veen used. Slovenia has been left out of this chart. .
J an07
Mar May J ul Sep Nov J an08Mar
percent
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0
percent
-7.5
-5.0
-2.5
0.0
2.5
5.0
7.5
10.0 Change since Jan 2007 - %
EUR/SKK
EUR/PLN
EUR/HUF
EUR/CZK
EUR/RON
28
This publication has been prepared by Danske Markets for information purposes only. It is not an offer or solicitation of any offer to purchase or sell any financial instrument. Whilst reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and no liability is accepted for any loss arising from reliance on it. Danske Bank, its affiliates or staff, may perform services for, solicit business from, hold long or short positions in, or otherwise be interested in the investments (including derivatives), of any issuer mentioned herein. Danske Markets´ research analysts are not permitted to invest in securities under coverage in their research sector. This publication is not intended for private customers in the UK or any person in the US. Danske Markets is a division of Danske Bank A/S which is regulated by FSA for the conduct of designated investment business in the UK and is a member of the London Stock Exchange. Copyright (C) Danske Bank A/S. All rights reserved. This publication is protected by copyright and may not be reproduced in whole or in part without permission.