Bearing All

Over the course of the last year and a half or so, anyone with sense should have learned to treat economic predictions with a pinch of salt big enough to defrost the entire Via Baltica.

From the EU to the IMF to the how-come-they-are-still-in-business Ratings Agencies, anyone sticking their head out of the Delphic temple to shout out a prophecy of doom has invariably repeated the trick a month or so later saying that they weren’t nearly doom-laden enough last time around.

That’s when they admit to being less than accurate at all – usually they just pass over inaccuracies like experienced mediums summoning up Auntie Doris. And like, dear departed Auntie Dot, they tend to accentuate the positive things like how nice it is in heaven rather than the fact that ‘orrible Uncle Herbert somehow managed to sneak through the Pearly Gates as well to sit on the right hand of god and smoke Woodbines.

Most people have learned that their gut instinct and the behaviour they observe of people buying things in their local corner shop is just as likely to be informative as some sharp-suited, degree-toting entrail examiner.

But perhaps the one Oracle that I’ve still got faith in as far as the Baltics are concerned is Capital Economics, the refreshingly no-bull London outfit. They have been consistent and persistent Jeremiahs compared to the rest of the economists who have tried to talk things down by degrees.

By their own admission they are “amongst the most bearish forecasters in the market.”

So reading a release from them today about the prospects for the region was doubly worrying. Not only do CapEcon raise some serious questions, they ‘ve convinced me that I might also have been a bit too optimistic – which is not something I’m used to, as I generally pride myself on my mastery of cynical pessimism.

Bang goes my new year’s resolution to try to look on the bright side.

To see the reasons for my mood’s downgrade from AAA to junk status, here are a few choice excerpts from CapEcon.

The ‘Super Deficit’ countries [including the Baltics] will be hit by weaker demand from Western Europe, but a ‘sudden stop’ in capital flows remains a much bigger concern. As global credit conditions tighten, domestic demand is likely to contract in order to close the region’s current account deficits. The result may be double-digit contractions in output.

And there’s more:

Turkey, Romania, Bulgaria and the Baltics will also be hit by weaker demand for exports from the West. But they face a much bigger challenge. Over the past five years or so households and firms have borrowed vast sums from abroad to finance a boom in domestic demand. The result has been an explosion in current account deficits.

These, of course, require funding. Indeed, once short-term foreign debt obligations are accounted for, the external financing requirement of the ‘Super Deficit’ countries rises even further.

Brace yourself…

Latvia has the largest funding gap relative to the size of its economy – currently around 60% of GDP. To put these numbers into perspective, the IMF used to be concerned about when an emerging market’s external financing requirement
exceeded 10% of GDP.

We are approaching a climax…

The resulting impact on the real economy is likely to be
dramatic – both Latvia and Ukraine could contract by close to 10% this year, Estonia and Lithuania are likely to contract by 5%.

10%?! Oh lordy. However, looking on the bright side, I think… er… well there must be something… um…

It could be worse. And in the next forecast, it probably will be.


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One response to “Bearing All

  1. Pingback: Signs of Times | All About Latvia

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