The Latvian government is getting nervous about the level of lending coming from Swedish banks. According to the Financial Times, “Latvia’s prime minister has warned Swedish banks they risk choking off recovery in the Baltic state’s crisis-hit economy unless they resume lending.”

The Latvian authorities are complaining, it seems, that banks such as Swedbank and SEB, which dominate the Latvian market, have reined in credit as they struggle to contain rising bad loans amid the deepest recession in the European Union.

So basically, in this climate, with unemployment rising, and wages falling, and an economy contracting at nearly 20% a year, it isn’t hard to understand why not that much new bank lending is going on. Those who are creditworthy are trying hard to save, while those who need to borrow normally aren’t that creditworthy, so Dombrovskis’ plea is rather like asking the bank to subsidize new bad debts, and that is really not something you can do, and especially not when you are going along the course you are following because you wanted to, and against one hell of a lot of external advice. What kicked the whole process off was a short sharp credit crunch, but now it is the contraction in the real economy which is following its own dynamic, till someone finds a way to put a stop to it. It is the drop in output that is preventing banks from lending, and not banks being unwilling to lend that is causing the contraction to continue.

But there is another point in the FT article which should give food for thought:

Mr Dombrovskis…ruled out devaluation of the lat. While breaking the currency’s fixed exchange rate with the euro would help Latvia’s exporters, it would increase the burden of euro-denominated loans, which account for 85 per cent of lending, he said.

“We would not see much benefit from devaluation because we are a very small and open economy which means that any competitiveness gains we may get would be very short-lived,” he said. “We would redistribute wealth from pretty much all the population to a few exporters.”

Well, we haven’t advanced too far in all these months, now have we, if we are still wheeling out the argument that “external” devaluation will hit holders of euro denominated loans, since it should be generally recognized that the (very painful) internal devaluation which is now taking place is hitting Euro loan and Lati loan holders alike. And the argument is a strange one to use just shortly after the statistics office announced that due to the rapid reduction in the number of those employed and to the fact that many of them changed their working conditions from full-time to part-time, the number of hours worked in the 3rd quarter of 2009 fell by an annual 27.3%, while labour costs fell during the same time period by 30.1%. This fall in disposable income, and the continuing prolongation thereof, poses a far greater threat to the continuity of Latvian loan payments than the 15% reduction in the value of the Lat as compared to the Euro which the IMF proposed in the autumn of last year would have done. Indeed, it is, in and of itself, one of the pernicious consequences of having resigned yourself to an “L” shape non-recovery. Stress on the banking system only goes up and up, as incomes and employment fall, and the government has less and less ammunition left to counteract the contractionary pressure.

It is like sitting it out in freezing weather at the North Pole, in the vain hope that help will arrive. But help will not arrive, and the cruel truth about the post-crisis shock world we live in, is that nobody is coming to help you if you will not help yourself. In this sense, what Latvia doesn’t need is more international borrowing (hasn’t there been enough of that already) but some kind of meaningful strategy to start paying back the debt. But this means putting people back to work, and selling abroad, and financing Latvian lending from Latvian savings, and not pleading for yet more capital inflows to finance non-productive activities (attracting investment would be another matter, but as things stand right now the environment is far from “appetizing”, and according to the latest data from the Statistics Office, non-financial investment in Latvia was only 402.8 mln lats in the third quarter, a fall of 39% on the 3rd quarter of 2008).

And just to be clear, what we have seen to date is not a 30% drop in unit labour costs (which would, of course, mean a great boost to competitiveness), rather it is a drop in earnings due to the fact that the output people could have produced just isn’t needed, since no one is willing and able to buy it. In fact according to the data of the Statistics Office to hourly labour costs fell by only 3.9% in the 3rd quarter when compared with the same period a year earlier. Hardly a massive drop, and especially not when the large annual increases of earlier quarters are taken into account (see chart below). The internal devaluation has a long course still to run!

But Latvia is back in the news today for more reasons, since the constitutional court has just ruled against the government pension cuts, drawing a question mark over Latvia’s ability to meet the terms of its international lending commitments.

“The decision to cut pensions violated the individual’s right to social security and the principle of the rule of law,” the court said in its judgement, which cannot be appealed. The pension cuts – in place since July – formed a vital part of the Latvian government’s list of austerity measures, as it struggles comply with terms of the IMF-lead bailout, and the constitutional inability to implement them is another hammer blow against the credibility of the current Latvian administration.

According to the Baltic Course, Valdis Dombrovskis told Latvian State Radio that the Constitutional Court’s ruling on pensions must be carried out, and not debated. I am sure this will really come as music to the ears of people in Brussels and Washington. Basically pension reform forms a key part of the mid term strategy for sustainability of Latvian finances, and without the ability of the Latvian government to carry these out, then frankly the coherence of the whole strategy falls apart. If the Latvian constitution does not permit pension changes, then the Latvian constitution has to be changed, and the only surprising thing is that all this wasn’t foreseen when the initial loan negotiations took place in late 2008. Basically, it is impossible for the EU Commission and the IMF to accept any other view, since if any state could ring fence a whole part of social provision before entering debt negotiations, then non of the structural reform programs could possibly work. This may seem harsh, but it is the price you have to pay for becoming insolvent as a society. Latvia’s problems are not short term liquidity ones, but problems of the sustainability of an entire economic and demographic model, and, as in the case of Greece, these problems will not be solved by two or three years of (rather painful) fiscal deficit cosmetics. Real changes need to be made, and especially in raising the long term growth potential of the country, and frankly it is these changes which we have yet to see evidence for.

The issue is not simply one of limping into the Euro in 2012, even if as Mark Griffiths, the IMF’s mission head in Latvia, said in Riga last week the Latvian government does face a lot of “hard work” in trimming the budget deficit enough to qualify for euro adoption, and how much more so if they cannot constitutionally implement the cuts they agree to.

“The key is meeting the deficit targets, and meeting the Maastricht criteria and euro adoption, that’s the path,” Griffiths said. “The government needs to work hard over the next year to find the measures which will deliver that adjustment to meet those targets. It’s going to be a challenging task.”

Oh yes, and Latvia was also in the news yesterday for another reason, since Latvian stocks dropped the most among equity markets worldwide as small investors sold stocks before the government starts to tax investment gains. The OMX Riga Index fell as much as 4.3 percent to 271.55, its lowest intraday level since August 21. In dollar terms, the drop was the biggest among 90 benchmark indexes tracked by Bloomberg. The reason for the sell off was that Latvia’s 2010 budget includes measures which will impose taxes on dividends, gains from trading stocks and bonds and interest income. These measures were agreed to in order to ensure the continued transfer of the 7.5 billion-euro bailout from the European Commission and the International Monetary Fund.

Latvian investors have increasingly sold their holdings ahead of the Dec. 31 deadline. Dividends and interest income will be taxed at 10 percent, while tax on gains from trading stocks and bonds will be 15 percent.

Finally one that wasn’t in the news, but should have been, since while everyone knows that at 20.3% Latvia’s unemployment is the highest in the European Union (see chart below), what they don’t know is that more Latvian’s than even are now being forced to leave their country in search of work.

According to a report by Oļegs Krasnopjorovs, economist with the Bank of Latvia, during the first half of 2009 8,300 Latvian residents left for Great Britain, a twofold increase over the year earlier period. 3,600 people emigrated to crisis-ridden Ireland in the first 11 months of 2009 – 3% more year-on-year. Among the new EU member states, Latvia has seen the sharpest increase in emigration to these two countries.

According to Krasnopjorovs, the data (which comes from the UK and Irish social security systems) confirm the trend identified by the Latvian Statistics Office, who examined data on long-term migration. In the first ten months of 2009, the number of long-term emigrants was 6,300, up 18% more year-on-year; moreover the steepest rise took place in the last few months, reaching a ten-year peak. For several years now the number of emigrants has exceeded that of immigrants in Latvia, with the exception of the second half of 2007 when a sharp rise in salaries and a steep drop in unemployment were fueled by the credit and construction boom, leading to labour force shortages and the expectation that incomes would rise even further.

The real problem here, of course, is that the Latvian economy remains mired in deep recession, and shows few signs of real recovery, something which is not surprising given that domestic consumption is in limbo land (where it is likely to stay), while the Prime Minister seems to attach little priority to boosting exports, and regaining competitiveness. Indeed, the contraction has rather gathered than lost momentum in recent months, and on a seasonally adjusted basis Latvian GDP fell another 4% between the second and third quarters of 2009. This was much faster than the 0.2% contraction between Q1 and Q2.

Year on year Latvian GDP fell by 19.0% in the third quarter.The decrease was largely due to a 28.7% drop in external trade (share in GDP 15.6%), a 18.2% one in transport and communications (12.5% GDP share), an 17.4% fall in manufacturing (10.2% GDP share, incredible) and by a 36% drop in construction (7.5% GDP share, not far below manufacturing).

Private final consumption fell by 28.1%. Government final consumption decreased by 12.4%, while expenditure on gross capital formation fell 39.4%. Goods exports (68.2% of total exports) fell by 11.7% and services exports by 20.5%. Goods imports (82.1 % of total imports) were down much more sharply – by 36.6% -and services imports by 29.1%. Which meant net trade was positive, otherwise the fall in GDP would have been greater, and nearer to the levels seen in domestic demand.

And entering the fourth quarter there were few signs of any real improvement. Retail sales fell in October by 1.3% from September (on a seasonally adjusted, constant price basis).

Industrial output, however, seems to be holding up a little better, and output has stabilized since the spring. The problem is that manufacturing industry is now such a small share in GDP that it will be hard to pull the entire economy on the basis of anything other than very strong rates of increase. Industrial production was up in October by 0.1% over September, marginal, but at least it wasn’t a fall. Unfortunately most of the increase was in the energy sector, with electricity and gas up by 10.3%, mining and quarrying contracted, by 2.1% as did manufacturing, by 1.9%.

The largest third quarter capital inflows registered under the capital and financial account were the result of government borrowing from the IMF-lead support program. There was some new foreign direct investment in Latvian companies to the amount of LVL 370.2 million, which to some extent offset direct investment outflows. Net external debt shrank by LVL 0.5 billion in nominal terms, but due to the fall in GDP (as I explained earlier) the ratio of net external debt to GDP posted only a tiny drop, reaching 56.4%, and gross external debt to GDP (excluding foreign assets) was up, reaching 145.8%.

So, as I say, a start has been made, even if there is still a long, long road to travel. Internal devaluation is the chosen path of the Latvian people, and the best thing I can suggest at this point is to get it moving in earnest (in fact there is some evidence from November producer prices that the rate of price fall is now accelerating), and that Latvia’s leaders start to value what they have (that is, export potential) instead of dreaming of what they can no longer have (dynamic domestic consumption driving growth). Living in the past is never a good idea, not even in the sentimental moments of Yuletide. A Merry Xmas to you all!

Business expectations clearly spell another tough year lying ahead for Bulgarian companies, Roland Berger Strategy Consultants said.

Despite first improvements, small growth rates in 2010 will not compensate for the high declines of 2009, the international consulting company said in a survey entitled The Road to Recovery in Central and Eastern Europe (CEE).

The survey was conducted this summer among over 380 senior company executives to find out their expectations about the current financial crisis and its consequences for the region. It covered 11 countries in CEE: Bulgaria, Romania, Croatia, Serbia, Slovenia, Slovakia, the Czech Republic, Hungary, Poland, Russia and Ukraine. Austria was used as the benchmark Western European economy.

Bulgarian companies need to focus on adapting their structures and implementing strategic measures, standing still is the most dangerous option, the survey indicated.

Construction, textile and engineering have been hit hardest by the economic downturn in Bulgaria since the beginning of the crisis in the last quarter of 2008. In Romania, real estate transactions halved over the same period, and investment plans were frozen. Most affected industries in Croatia were tourism, wood processing and food production.

The construction sector in CEE is careful but more optimistic than in March, when Roland Berger Strategy Consultants conducted its previous survey of entrepreneurs’ expectations. Accordingly, half of the  companies surveyed in the summer expect a recovery already in June next year. Financing difficulties, however, remain.

Since the previous survey the optimistic expectations for the economy in CEE have slightly increased, but uncertainty is significantly high at 50% of those polled.

A vast majority of Bulgarian managers (70%) believe an upturn would take place rather later and expect recovery in their industry output and company sales no earlier than the fourth quarter of 2010. Just like in March 2009, Bulgarian companies still have to fight declining sales, worse payment behavior and financing difficulties.

The survey reveals a consensus among the polled company executives on the timeline of the economic recovery with the peak at the end of 2010.

Bulgaria was no exception to the overall improving expectations in CEE, the survey showed. The general assessment of the current economic situation in Bulgaria has not changed significantly since March. In comparison with the overall CEE attitude, Bulgarian managers are still rather pessimistic and uncertain on the economic outlook.

Croatian managers remain the most pessimistic in CEE, while the too positive attitude of the Hungarian managers is more likely wishful thinking and less reflected in macroeconomic results.

The ranking of the popularity of actions of the Bulgarian companies in reaction to the crisis showed no change compared to the results in March 2009. The main focus is still on operative measures, implementation of strategic measures is still low but has developed already, Roland Berger Strategy Consultants said. With the exception of tightened cash management, all measures gained in popularity since the previous study.

Increased customer bankruptcies are still one of the major sector-specific problems in the banking and insurance industry. Interestingly, price pressure is experienced again as less important.

Declining sales is doubtless the most important issue on the management agenda in the retail sector. However, 70% of the companies hope already for some growth.

The mood in the energy and utilities sector is now neutral: “Let’s wait and see”. Even hiring was stopped at only 50% of the companies surveyed in the summer.

The IT/media/telecom industry is among the most pessimistic sectors. Accordingly, a real recovery from the crisis is expected later than in other industries. Over half of the companies in this sector continue their investments.

Due to increasing demand and better prices for commodities there is more optimism in the metals ans mining sector now. High share of lower sourcing costs seems to be a sector-specific effect of the crisis.

In the spring of 2009, the services sector was the only industry demonstrating some hope. This positive attitude was further strengthened until September.

Until 2007, CEE countries enjoyed remarkable GDP growth rates and have been the main growth spot of Europe. The region, however, was not immune to the crisis. Until March 2009, the stock market indices declined by up to 70%, most national currencies lost up to 30% of their value against the euro and GDP growth forecasts turned negative.

In September 2009, however, the indices were already in upswing, although still not reaching their former highs.

Among the stock indices in the CEE region, the Bulgarian blue-chip SOFIX index is still the worst performer, having recovered to just 38% of its former market capitalization, while the Hungarian BUX is soaring, Roland Berger Strategy Consultants said. The Romanian and Croatian blue-chip benchmarks, the BET and the CROBEX, regained 69% and 59%, respectively.

As for GDP growth, 2009 was a tough year for all countries. The situation worldwide was so turbulent that forecasts have been revised several times. Despite the first slightly positive projections for 2010, a real recovery is forecast in CEE only onwards 2011.

GDP in Bulgaria is expected to go down by another 2.5% in 2010 after a projected 6.5% decline in 2009, Roland Berger Strategy Consultants said. The survey predicts the Bulgarian economy will grow by 2.0% in 2011 and by 4.0% in 2012.

The survey also forecasts a divide between the companies in CEE in the next 12 months. Those who have implemented relevant strategic measures should quickly start looking forward – market consolidation, mergers and acquisitions, sales initiatives, penetration of new markets. Those still timid about adapting to the crisis will need significant restructuring, or will be restructured by someone else.

“In my view … it is impossible to understand this crisis without reference to the global imbalances in trade and capital flows that began in the latter half of the 1990s.”

* Compared with the average quarterly value of GDP in 2007-08, the first two quarters of 2009 are down in nominal terms to the tune of 15.9%, 15.4% and 10.5% in Lithuania, Estonia, and Latvia respectively.

* The average quarterly current account deficit of the Baltics from Q3 2008 to Q2 2009 was mill 500 Euros. This amount to just 18% of the average quarterly current account deficit two years prior to the crisis. Consequently, the Baltics have delevered to the tune of 80% over the course of less than 1 year.

* In the two first quarters of 2009 (relative to Q1-2006 to Q4-2008), imports have contracted 16%, 33% and 11.5% more than exports in Lithuania, Latvia and Estonia respectively.

* In Euro terms, the Baltics have lost external financing to the tune of bn 1.87 Euros in the first half of 2009 compared to the peak of the boom which amounts to 12.6% of the entire region’s GDP in the same period.

The quote above from Fed chairman Bernanke is ripped from the introduction of a recent conference paper drafted by international economics icons Kenneth Rogoff and Maurice Obstfeld who suggest that the financial and economic crisis that is currently making its presence felt across the global economy, at least in part, has something to do with the notion of global current account imbalances. Now, and in all modesty, this is something I have argued extensively at this space and in this way I welcome the likes of Messieurs Rogoff and Obstfeld in the fold. I tend to go, of course, for the big prize in my stubborn persistence on the link between global ageing, global imbalances and thus by way of deduction the economic crisis as we have come to know it.

Now, I am not going to treat this link here but merely point to the rather obvious question at this point in time, in the form of whether in fact the crisis itself has been a catalyst of re-balancing? At a first glance this would clearly seem to be the case. In a crisis driven decisively by a violent process of deleveraging, those economies who had hitherto relied on borrowing have now been forced to scale back (and essentially correct either through a debasement of their currency, internal price correction, or a combination of these two) and the nations that had delivered the funding have likewise been forced to accept that their external surpluses have shrunk in a comparative manner.

So far so good then, but what happens when we have to get the patient out of intensive ward; who will run the deficits and surpluses and what size will the imbalances, if any, be. This is a difficult question to answer, but it appears that with the US economy now being effectively forced to correct its external imbalance (be it with Europe, China, Japan et al kicking and screaming or not), we have a situation with a lot of would be exporters and very little importers.

If this is the general set piece, it was with some interest that I read this VOX.eu piece by Mr. Richard Baldwin and Ms Daria Taglioni which dryly submits the thesis that although it may appear that rebalancing is occurring, this is only as a byproduct of the crisis. From ther horse’s own mouth;

Global imbalances are shrinking at a fabulous rate. This column argues that these improvements are mostly illusory – the transitory side-effect of the greatest trade collapse the world has ever seen. A global recovery will almost surely return the US, Germany, China and others to their old paths.

Not exactly the prospect we were all hoping for, but in the main I agree with this point except of course the small and important qualifier that the US economy will have to deleverage and reduce the external (and indeed internal) borrowing. Whether Germany, Japan, China will also need to export … well, this is ultimately a question of finding a customer.

Rebalancing the Baltics?

The obvious question to arise at this point is obviously what all this has to do with the Baltics? Well, in a direct sense not a whole lot since as the Economist so famously put it, the Baltics remain piqsqueaks and whether we observe current account positions, of either negative or positive pedigree, at some 20% of GDP it won’t do much to affect the global imbalances. However, in the light of the idea of rebalancing on the back of the economic crisis and whether this is sustainable let alone feasible, the Baltics become very interesting not least since they have chosen (or have been led into) a process of rebalancing through internal price deflation (devaluation) as their currencies, for now, remain fixed to the Euro. In that vein, I thought it interesting to have a look at how the Baltics have faired so far with a specific focus on the external balance.

Beginning however with a general view of the correction so far the picture is definitely one of a hard landing on the back of the economic crisis.

Most of the readers of this space will be well acquainted with travails of the Baltic economies (and in particular, the near collapse observed in Latvia earlier this year). In all three Baltic economies the Euro value of their GDP peaked in 2007-08 and has since fallen back dramatically. Compared with the average quarterly value of GDP in 2007-08, the first two quarters of 2009 are down in nominal terms to the tune of 15.9%, 15.4% and 10.5% in Lithuania, Estonia, and Latvia respectively. The Baltic economies have lost bn. 2.2 Euros worth of GDP in 2009 from the GDP output observed in 2007-08 which amounts to a loss of some 21% of the average value of the quarterly GDP output for all Baltic economies combined from 1999 to 2009. In short; these economies have taken some blow to the kidneys and even if we can safely say that the levels of nominal GDP observed in 2007-08 were unsustainable the way down is still rough, very rough.

On the price front the correction has indeed begun and the graph above actually underestimates the current bout of price deflation as it smoothes away, as it were, the fact all three Baltic economies are in deflation on a m-o-m basis. Only Estonia registers deflation on my representation with Latvia basically hovering at the 0% line and Lithuania still producing inflation rates at some 2%.

Moving on to the external balance it is worthwhile splitting up the analysis by having a look at first the import/exports picture and then grinding down to the income level and finish off with a look at the financial accounts and thus the inflows used to finance the deficit (or how the surplus is invested abroad).

This is perhaps the best picture of the Baltic correction there is and nicely illustrates the point emphasised by Baldwin and Taglioni that the correction of imbalances, at this point in time, has been very much forced upon the deficit economies. Consider consequently the average quarterly current account deficit of the Baltics from Q3 2008 to Q2 2009 at mill 500 Euros; i.e. at the point when the crisis made its mark decisively.This amount to just 18% (!) of the average quarterly current account deficit two years prior to the crisis. This means that the Baltics have delevered to the tune of 80% relative to the level of the current account deficit observed up to the crisis. Again and with the benefit of hindsight, we know that these levels were unsustainable, but please do remember that it was only back in the H02 2008 that we were discussion whether the Baltics were going to have a hard or a soft landing. It is remarkable to note the example of Latvia here which has gone from a current account deficit of -17.6% of GDP in the period 2007-08 to a current account surplus of 14% of GDP (mill 681.3 Euros) in Q2 2009 due mainly to the fact that imports and GDP have plunged.

This point in particular is important to emphasize since the extent to which we are able to talk to about a sustainable (or benign if you will) process of rebalancing rather than one entirely driven by a sharp correction in internal demand and thus imports. The intuition tells us that Baltics are currently subject to the latter form of rebalancing and thus it remains to be seen whether there is a virtuous circle of increasing competitiveness and rising export shares (and values) on the back of the current vicious circle. But just how vicious is the current circle then?

The graph to the right attempts to answer this question as it plots the equally weighted average of the evolution of exports and imports in the Baltics. The time series corresponds to the value of exports and imports in million of Euros of the three Baltic economies and is indexed with the average quarterly value between Q1-1999 and Q2-2009 of imports and exports as 100.

The graph easily shows how imports have contracted much more than exports and it is consequently here that we must look for the driver of rebalancing in the Baltics. If we take Q1-2006 to Q4-2008 as the peak of the boom (in terms of the external deficits), exports are down 10.8% in the first half of 2009 whereas imports are down a full 33.4% in the same period. This suggests that more than anything that rebalancing in the Baltics are currently driven by a sharp contraction of domestic demand. Splitting up the result on the three economies and looking exclusively at the second quarter of 2009, imports have contracted 16%, 33% and 11.5% more than exports in Lithuania, Latvia and Estonia respectively.

Another way to look at this is to approach the external deficit from the financing side and consequently have a look at the inflows used to finance the external deficits. In principle, you would normally and in the perfect world mainly look at portfolio and investment flows, but in the case of the Baltics we cannot neglect credit flows which, through all those Euro denominated loans supplied by Scandinavian banks, have been instrumental in driving the external deficits during the peak of the boom. If we begin with the inflows as a share of GDP we observe the drastic way in which the financing have been withdrawn in the context of the crisis.

Observe in particular the Latvian situation where an external surplus has been forced upon the economy, proxied here by “negative” inflows and thus outflows. In Lithuania, the total sum of important inflows had declined, as a share of GDP, to 60% in Q2-2009 relative to value recorded during the peak of the boom (Q1-2006 to Q4-2008). The corresponding figure for Estonia is 23% whereas for Estonia it has changed signs all together due to the fact that financing here has come to a complete standstill. In Euro terms, the Baltics have lost external financing to the tune of bn 1.87 Euros in the first half of 2009 compared to the peak of the boom which amounts to 12.6% of the entire region’s GDP in the same period.

As noted extensively above, this process is natural since we can say with some confidence that whatever the level (and flow) of incoming investment and credit during the peak years it was not sustainable. However, when it happens with such force in the context of the global financial crisis and, moreover, in relation to fixed exchange regimes and thus internal devaluation the obvious question that begs is what the risk is of pushing these economies into a hole from which they cannot emerge. One particularly important point here is what kind of general (and domestic!) credit and financing environment we will see as the external funding is ground down and thus, in some sense, what kind of domestic environment the Baltics will have to stage a recovery in.

This last point is perhaps the most important underlying theme to think about when assessing the situation in the Baltics. We could almost say that the extent and pace to which the Baltics’ growth path has crumbled is also the extent to which expectations of convergence, Euro membership, underlying growth potential etc have crumbled. Where we go from here is consequently anybody’s guess. A lot of unresolved question still clouds the horizon not least the continuing unravelling in Latvia where the IMF has so stuck with the country despite the increasing dire outlook as long as the currency peg remains. What I can tell you however is that the Baltics are going to rebalance, but the key is the extent to which it happens so as to allow the Baltic economies to enter a virtuous circle somewhere down the road.

So far, a preliminary assessment suggests that while the Baltics are indeed rebalancing, they are only doing so because internal demand has caved in. We are yet to see whether the dose of internal devaluation/deflation will bring back competitiveness in due time to turn a vicious cycle into a virtuous one.

The Ukranian Cabinet of Ministers sees continued cooperation with the IMF as the nations main anti-crisis program.

“We believe that continuing cooperation with the IMF is necessary to make it through to the end of the presidential campaign. This is a political stage for stabilizing the political situation in Ukraine and for overcoming the financial and economic crisis. It will be very difficult without the fourth tranche from the IMF,” Prime Minister Yulia Tymoshenko said today during a meeting with G8 and EU country ambassadors and representatives of the European Commission in Ukraine.

She also noted that continued cooperation with the IMF is a precondition for receiving assistance from the European Commission to maintain Ukraine’s macro-financial stability.

On November 30 the International Monetary Fund’s board of directors will make a decision on whether to grant Ukraine the next tranche.

“The IMF tranche will not be delayed. The IMF has no official position on whether to issue the tranche. Therefore, our work process is normal. On one hand we are reviewing the loan program and on the other we are conciliating the text of the letter of intentions. The planned meeting with the IMF is set for November 30,” acting Finance Minister Ihor Umansky said today.

On November 10, Vice Prime Minister for European Integration Hryhoriy Nemyria announced that “government is interested in receiving the IMF tranche as soon as possible”. “If we reach a compromise inside of the country and reach a consolidated position with the IMF then within two weeks their board of directors will meet. At the earliest this may happen at the end of November or in the first ten days of December.”

With total trade volume between Turkey & Egypt expected to reach $3.5 billion by the end of the year Turkey’s Trade Minister, Zafer Çağlayan has announced a target to increase this figure to $10 billion within three years.

Delivering the opening speech at the Turkey-Egypt Business Forum on Tuesday on the topic of “New Cooperation Opportunities Between Turkey and Egypt,” Çağlayan noted that he believes trade between the two countries has yet to reach its full potential. Trade volume between the two countries by September of this year totaled $300 million more than total trade last year, he said, adding that they foresee the trade volume to increase to $3.5 billion by the end of 2009. The upward trend seen in the last seven years will continue in the coming years, too, the minister said, adding that they set their goal to increase the annual trade volume to $10 billion within three years. Trade between Turkey and Egypt is a “win-win” situation, Çağlayan remarked.

In addition to the $2 billion in Turkish investment made in Egypt, 250 Turkish firms operating in Egypt employ more than 50,000 Egyptians, Çağlayan said, adding that this level of employment is the equivalent of $7.5 billion to $10 billion worth of investment.

Calling for Egyptian firms to invest in Turkey, too — explaining that Turkey has attracted $65 billion foreign capital investment over the last six years, a figure which could have reached $85 billion to $100 billion if not for the global financial crisis — the minister remarked that Turkey is about to surmount the crisis and said their aim is to exceed $100 billion in exports by the end of the year. He stated a trade attaché has been assigned to Alexandria, Egypt, and will assume office within a few days.

‘Turkey has seen the light at the end of the tunnel’

In an assessment of the September industrial production figures on the sidelines of the meeting, Çağlayan stated that industrial production has declined a little more than the predicted level. Underlining that economic ups and downs can always happen due to seasonal factors, Çağlayan said Turkey has left those bad days behind. Turkey has started to recover from the global financial crisis, he added. “Both the rise in exports and the International Monetary Fund’s [IMF] predictions foreseeing Turkey among the seven G-20 countries that will grow in the last quarter of 2009 proves this recovery. Industry production will start growing again in the very near future.”

The recent crisis had its worst effects on the industrial sector and this has resulted in low levels of industrial production, the minister said, continuing: “However, the bad days have already been left behind. It is can be clearly seen that there is a light at the end of the tunnel. Turkey will start growing again in every field by the last quarter of this year and will reach its pre-crisis levels with an increasing trend in its exports.” Stressing that this situation should not be interpreted pessimistically, Çağlayan asserted the downward trend has ended completely.

Having experienced a poor summer season, with earnings and bookings down, Bulgaria’s tourism industry will be using the winter months to review the situation and find a solution.

There have been varying reports on the scale of the downturn in the sector, with the state seeking to adopt a positive interpretation of the industry’s performance in 2009, while private operators have pulled few punches in calling the situation bad and likely to get worse.

While figures issued by state agencies and the industry itself vary, with official sources saying arrival numbers are down between 3.9% and 7.8%, well short of the 20% or more some private organisations are reporting, there is agreement that 2009 has been one of the most challenging years in recent history.

Some Black Sea resort regions reported occupancy rates below 25% in the peak month of August, despite having slashed prices by as much as 50%, while earnings were down by between 20% and 25%. The poor season has prompted many in the industry to sell up, with around 700 of Bulgaria’s 3000 hotels put up for sale on the market, according to figures from the Institute for Analysis and Evaluation of Tourism.

The director of the institute, Rumen Draganov, said that as a result of the economic crisis, stiffer competition from rivals such as Turkey and Greece, and poor standards, up to 20% of Bulgaria’s coastal hotels had closed during the summer months.

Having earned $3.5bn last year, Bulgaria’s tourism sector will probably generate around $2.7bn in 2009, Draganov said, a fall in the order of 20%.

To counter the recent downturn and the longer-term malaise predicted by some for the industry, tourism operators and officials are being advised to diversify their product and develop niche appeal rather than continue to promote Bulgaria’s mass-market sun-and-sea image.

One idea is to increase the profile and the quality of Bulgaria’s spa and wellness tourism segment. The 8000 mineral spas across the country can serve as the stimulus to develop health tourism, according to Anelya Krushkova, the chairwoman of the State Agency for Tourism.

Spa and wellness tourism was expected to play an increasing role in the future, and it has been made a part of the state’s national strategy for sustainable development of the sector, Krushkova said.

There have also been calls to move even further away from the more accepted form of holiday trade. So says Lubomir Popiordanov, the head of the Bulgarian Association for Alternative Tourism, in an interview with the Sofia News Agency on September 25. According to Popiordanov, mainstream tourism in Bulgaria focuses on quantity not quality.

Without state support, such as incentives, promotion and the provision of infrastructure, mainstream tourism would collapse, he said, whereas minimal levels of assistance to alternative tourism would spread the benefits of the sector across the country.

“Bulgaria has all prerequisites to develop alternative tourism and few prerequisites to develop mass tourism. Mass tourism must stop expanding and start seeking to improve its quality,” said Popiordanov.

The foundation of alternative tourism is in the countryside, he said, with Bulgaria building on its rural heritage, a background he says the country has been trying to escape but should instead embrace in order to reinvent its tourism identity.

“It is based on the value of Bulgarian architecture, the diversity of the Bulgarian cuisine, which is really rich and the quality of Bulgarian food products, which still exist in the villages. All this is competitive to the similar products in the developed states,” Popiordanov said.

Another public figure to advocate the benefits to be had from the country’s legacy of the past is the culture minister, Vezhdi Rashidov. “There is no tourism without history. Otherwise, it is just the accommodation. It is the time now when Bulgaria should turn into a real tourist destination, because tourists come for recuperation in the first place but they also want to take memories back home,” he said in an interview with the daily Standart in mid-August.

While increasing the profile of alternative tourism and raising awareness of the cultural and historic riches of Bulgaria will undoubtedly improve earnings and attract more visitors, the industry’s main income will always be mass tourism, fundamentally built around sun and sand.

Since coming to office in July, the new government of Prime Minister Boyko Borisov has taken a number of steps to overhaul state-based tourism operations. Foremost of these measures was to incorporate the state tourism agency into the Ministry of Economy and Energy under Traicho Traikov.

Although there have been some who have criticised the move, suggesting that the agency and its activities will be subsumed by the ministry, others believe having tourism represented at the cabinet level is a recognition of the sector’s importance to the economy.

Though no one is saying the new ministry will be able to resolve all of the sector’s problems in the short term, it is about to launch its first policy initiative for the industry, with a national strategy for cultural tourism due to be unveiled before the end of October.

According to Traikov, the new strategy includes a catalogue of the top 500 cultural tourist sites in Bulgaria. These sites will be given priority in receiving funds for the construction of a modern infrastructure, he told reporters on October 10.

Though Bulgaria will continue to promote itself as popular holiday destination, focusing on sun and fun, it is increasingly looking to broaden that focus as alternatives present themselves.

The Oxford Business Group’s series of publications are renowned as the leading source of economic information for nearly 30 countries across The Middle East, Africa, Asia, Eastern Europe and the Caribbean.

Concerns are growing that Romania’s political crisis, which has seen something of a vacuum develop after the fall of then Prime Minister Emil Boc’s government, could impact on the country’s capital markets, harming investor sentiment and blocking the inflow of much-needed funds to the economy.

Though the ousting of Boc’s coalition government after it lost a vote of no confidence on October 13 did not send a major shiver through the Bucharest Stock Exchange (BSE), the failure of prime minister designate Lucian Croitoru to form a new cabinet, and the obvious reluctance by opposition parties to back President Traian Basescu’s nominee, are starting to undermine the confidence of Romania’s capital markets.

While a respected economist, having been Romania’s representative at the IMF from 2004 through to 2007 and a former advisor at the National Bank of Romania (NBR), Croitoru appears unable to command enough political support, with Boc’s Democratic-Liberal Party (PDL) being the only party prepared to throw its weight behind Croitoru’s efforts to form a government.

Parties representing around 65% of the seats in the parliament, including the Social Democratic Party (PSD), the National Liberal Party (PNL) and the Democrat Alliance of Hungarians in Romania (UDMR), are backing a bid by Klaus Johannis, the mayor of the city of Sibiu, to be given the mandate to form the next government.

Views vary on the impact of the government crisis on the economy and the country’s markets, with Petru Rares, the president of the Romanian Banking Institute (IBR), saying the current political volatility should not affect the economy’s progress towards recovery, as long as certain fundamental principles were maintained.

“Our anti-crisis programme is established together with the IMF and the EU, and we must stick to those coordinates,” he said in an interview with the Agrepress news service on October 15.

Less optimistic was Gabriel Necula, deputy operations manager with brokerage firm Prime Transaction, who said in the lead up to the confidence vote in the parliament that the ongoing political crisis was making the position difficult.

“I believe the situation is ticklish for Romania, therefore the stock exchange can no longer correlate with external markets,” he told daily Ziarul Financiar on October 10. “The political crisis Romania is confronted with at present reflects on the exchange rate and the BSE, therefore we cannot stay indifferent.”

While the market has not remained indifferent since the fall of the Boc government, it has remained cautious, the gains of one day being all but cancelled out by falls the next.

Of immediate concern is the $5.2bn needed to meet budgetary requirements up to the end of the year. With no government in place, the expected sources of much of this funding, the IMF and the EU, are not in a position to fill the gap.

The IMF has announced that it will not resume talks over the release of a $2.25bn tranche of its standby agreement with Romania until a new government has been formed, while Brussels is reluctant to hand over up to $1.5bn in agreed funding. Further widening this funding hole is the fact that the political crisis has meant the Finance Ministry has had to defer plans to raise around $1.5bn of Eurobonds through the international market.

On October 20, Croitoru said it would be difficult to raise the $5.2bn in a short time, a situation made “even harder to collect in a time of political crisis”.

“Any delay can bring upon enormous costs,” he said.

To avoid at least some of these costs, authorities are looking to domestic markets to obtain the funds needed to keep the state running, though there could be limits on the levels of capital available, and borrowing costs could also be higher, especially for loans in local currency.

On October 19, the Finance Ministry held a successful bond issue worth $77m, with the key subscribers being Romanian-based banks. The ministry has said it plans to raise up to $2bn through treasury bond issues in October, having drawn $19bn from the market in the first nine months of the year, up from $4.33bn in all of 2008.

Though the success of this stepped-up borrowing programme does indicate lenders are still prepared to service the state’s needs, the higher costs of raising funds through the local capital markets is likely to come back to haunt the next government.

With the approval of a government not expected until the end of October at the earliest, Romania’s markets will have to wait until the first half of November or beyond before there will be any clear indicators over a time line for release of the IMF and EU funds.

This uncertainty, coupled with the lack of a hard economic policy from either Croitoru or Johannis, could signal a lack of direction for Romanian’s capital markets in the short term, with prospects not likely to firm up until late in the year.

Though there have been marked improvements across Turkey’s educational infrastructure, the system needs further investment and development to meet the growing demands being placed upon it by the market.

Education is the single biggest budgetary outlay for the national government, with allocations regularly topping 10% of total state expenditure. For the 2010 budget, which was placed before the parliament in mid-October for consideration, the National Education Ministry is to receive $19bn from the $193bn of planned expenditure. Next year’s allocation for education is almost twice that of defence, and is well up on the $18.5bn set aside for 2009.

While this level of expenditure on education is commendable, the funding is spread somewhat thinly across the needs of more than 15m school students, 60,000 schools and the wages of over 700,000 teachers, administrators and ancillary staff.

Added to this are the costs of Turkey’s higher and vocational educational facilities, with the country having just over 100 state universities and colleges, along with more than 25 private universities, the majority of which are concentrated in Istanbul.

In its most recent report on Turkey’s progress towards meeting the EU’s political and economic criteria for membership, the European Commission (EC) had both praise and criticism for the country’s education system.

The report, released on October 14 and covering a 12-month period ending in mid-September, said that Turkey had continued to make progress in relation to the EU’s common standards for education and training over the past year and had improved its performance in all benchmarked areas.

While highlighting some significant advances, the report also stressed that more needed to be done to improve the quality of the education system and ensure an equality of service provision across the country.

One area where praise was given was in the promotion of education for girls and the reduction of the gender gap in primary and secondary education. The report noted that, “Between 2007 and 2008, the gender gap in primary education has been halved to 1% and has decreased by a fifth to 4% in secondary education.”

Though this is an achievement, the report does go on to say that there remains a high level of regional disparities in access to education, both for boys and girls, though far more for the latter.

“The good results on reducing the gender gap in primary education need to be sustained and improved, in particular by ensuring that girls continue to attend school and by identifying and addressing school drop-outs,” the report said.

The report also gave a mixed review of Turkey’s state-funded higher education system, which saw a further 23 new universities established in the period covered by the study. However, the EC cautioned that most of the recently set-up centres of learning lacked both proper facilities and teaching staff.

In many areas of Turkey, class sizes are well above the averages of Organisation for Economic Cooperation and Development (OECD) member states, while in some regions, especially away from the major population centres, infrastructure and teaching materials are often lacking.

According to İsmail Koncuk, the president of the Turkish Education Personnel Union, the new school year, which began in late September, saw a shortfall in funding.

“Only 2.5% of gross national product is allocated for education,” Koncuk said in an interview with local press on October 2. “This is a very inadequate amount.”

While wages and basic services are covered by allocations, many schools find that they have to plug the funding gap to meet costs for cleaning, maintenance and supplies by requiring donations from parents. Families may also be called on to pay administrative fees to ensure their child is enrolled in the school of their choice.

The country’s education system is undergoing a period of rapid evolution, with authorities trying to improve standards and equip schools with electronic teaching aides such as computers. However, this laudable initiative can be undermined is some regions where schools often lack guaranteed connections to electricity, while a shortage of teachers trained in the use of new technology means at times such equipment remains underutilised.

Though Turkey has made great strides in recent years, it still has a long way to go before it can overcome decades of underinvestment in infrastructure, staff and equipment. Nevertheless, it is now in a better position to respond to the demands of a modern economy, advances in technology and the requirements of Ankara’s push for European integration.

The Oxford Business Group’s series of publications are renowned as the leading source of economic information for nearly 30 countries across The Middle East, Africa, Asia, Eastern Europe and the Caribbean.

THE European bank for Reconstruction and Development recently announced that it will support the development of private businesses in the agriculture sector in Turkey with a credit line in Turkish lira for micro and small enterprises (MSEs).

Micro and small businesses represent a major part of the Turkish economy, accounting for a large proportion of the countrys businesses and total employment. In its first transaction in the banking sector in Turkey, the EBRD will grant a €20 million equivalent loan to DenizBank, one of the leading private lenders to the agriculture sector in Turkey, to finance its agricultural loan facilities. The fund will help DenizBank to meet the increasing demand for agricultural loans and to maintain the availability of credits to small companies and farmers in the remote areas in the current challenging environment.

“The EBRD credit line will be used to finance operations of small agricultural producers in Turkey, with loans worth up to €100,000. Supporting micro and small-sized companies, including in the agricultural sector, through local banks is a cornerstone of the EBRD strategy in Turkey. The loan provided to DenizBank, which has a wide regional presence in the country, will boost the flow of finance to small agribusinesses and will contribute to further development of the Turkish economy,” said EBRD First Vice President Varel Freeman.

DenizBank Financial Services Group President Hakan Ates said “Agriculture is of critical importance for sustainable development in Turkey. DenizBank are the leading private bank in agricultural banking. We are once again breaking new ground with this credit agreement with EBRD and are proud to contribute to the development of agricultural economy on this occasion”

Through this latest transaction, the EBRD is building up its portfolio in Turkey, having already committed €105 million to the Turkish economy. By 2010, the bank expects to have invested some €450 million in Turkey.