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International Internet Magazine. Baltic States news & analytics Saturday, 04.07.2020, 05:13

Swedbank Nordic Baltic Business Report: Well prepared to take on the challenge

BC, Riga, 26.05.2020.Print version
The Nordic and Baltic economies will be hard hit by the Covid-19-induced shock due to their small size and relative openness. Strong economic fundamentals and a timely reaction to the health crisis ensure that the countries are in an advantageous position to take on the challenge. The crisis gives a chance to push for bolder and greener policies, as well as advance reforms aimed at streamlining the growing public sector and further tailoring the economy and human capital to the digital post-corona world.

Tackling on unprecedented challenge

The nature of the shock that Covid-19 has brought about is very different from previous crises. Tackling and surviving it requires extra-fast thinking, and an innovative government response, as well as digitally apt, creative, and flexible businesses and citizens. The Nordics and Baltics are rather well prepared to take on the challenge.

 

Virus containment strategies have differed. The Swedish strategy, while softening the blow to the economy, has put stress on the country’s already-pressured health care system. Nordic and Baltic countries overall, though, have so far been relatively successful at controlling the virus and ensuring that the health systems are able to cope with the inflow of patients. Timely action has allowed them to refrain from imposing even more suffocating measures on the economies. Risks, however, remain. While the Nordics boast well-developed and efficient health sectors, the health care system in the Baltics is weak, has been underfinanced and unreformed for many years, and can quickly become overwhelmed if the case count surges.

 

The abruptness and severity of the economic shock is unprecedented and far greater than that experienced during the global financial crisis. Economies all over the world are hurt via both the export channel and the dramatic fall in domestic demand.

 

The prospects for export markets seem gloomy – the recovery is projected to be slow all over the world. This paints a bleak background for the small and open economies of the Nordics and Baltics. Norway faces an additional hurdle due to its reliance on oil exports. Some other economies in the region count machinery among their key export products, which can also suffer more due to the long and complicated supply chains. Some respite is to come from such less-affected sectors as food exports and pharmaceuticals, which feature prominently in the export structure of Denmark and the Baltics.

 

Imbalances were a key feature of pre-2008 times, especially in the Baltics, but the Covid-19 crisis has come at a point when the economies are structurally sounder and, therefore, at a better starting position to weather the storm. Some differences emerge, though. The Baltics have seen a balanced development in the housing market and a lowering of private sector debt. However, in Norway, Sweden, and Denmark household debt levels remain high. The good news is that a credit crunch is unlikely—the region’s financial sector is well capitalised and able to support the economy in its fight against the virus.

 

Due to previously enacted sound fiscal policies and comparatively low public debt, the region’s economies can alleviate the economic crisis via a wide range of support measures. Even though the implementation of these support mechanisms often leaves much to be desired, the governments are learning fast.


Don`t waist a good crisis

The post-corona world is one that is likely to see a much greater role of government, the corollary of which is a steep rise in public debt. It is important to use these funds wisely, as well as streamline the public sector in order to increase its efficiency. Strengthening the health care system will be a key priority in all countries. The massive fiscal stimulus should also be geared towards green investment, especially in Norway and Estonia, whose ecological footprint is larger than that of other economies in the region.

 

The crisis has turbocharged the previous trend of moving towards a more digitalised way of life. This is good news for the Nordics since they are top scorers on digital readiness, while Latvia and Lithuania have some catching up to do in this regard. Within the countries, the less-digitally-savvy individuals and the ones most affected by the crisis are also typically those who are already at the bottom of the income and wealth distribution. Governments, especially in the Baltics, that score low on social inclusion should implement policies to prevent a part of the population from falling even farther behind.

 

 All the region’s economies score well on the World Bank’s Doing Business; therefore, they are in a good position to benefit from the shortening of supply chains and likely relocation of production. Attracting new investment is crucial, especially for the catching-up Baltics.


About Nordic-Baltic Bussiness Report

The Nordic-Baltic Business Report takes a broad perspective on the strength and appeal of the NordicBaltic region from the business and investor points of view. The Summary Sheet gives an insight into recent macroeconomic and financial sector developments, the long-term sustainability of current trends in environmental protection, social inclusion, governance, and medium-term growth aspects, and the competitiveness of the region’s economies. This report provides an overview of similarities and differences, strengths, and shortcomings for those doing business and considering investment decisions in Estonia, Latvia, Lithuania, Sweden, Denmark, Finland, and Norway.



 



Estonia: Crisis creates learning opportunities

Doing business in Estonia is easy and straightforward. The public sector is efficient and the tax system favourable. Still, many challenges remain. The economy needs streamlined policies that help companies through this crisis. The unprecedented fiscal stimulus should be used cautiously. Investment in green energy and infrastructure should be increased.

 

The Great Lockdown showed the importance of digital solutions

 Estonia has good prerequisites to go through the corona crisis – empty spaces are plentiful, social distancing is part of the culture, digital solutions are widespread, and the health system is trustworthy. At the peak of the crisis, 60% of hospital beds and 17% of intensive-care beds were occupied. Still, learning points from the crisis are many. The communication by the authorities could have been clearer, restrictions fewer and better targeted, and the activities and messages by different parts of the state better streamlined.

 

Estonia is a world leader in human capital, digital capability, and ease of doing business. E-identity and other public and private e-systems have helped people working and studying from home. Although doing business in Estonia is relatively easy, the global competitiveness index is dragged down by the small size of the market and the relatively poor health of the society – a result of unhealthy habits, which are partly due to the Soviet past, and long waiting lists for doctor appointments.

 

Massive fiscal stimulus should be well targeted

The economic impact of this crisis is smaller than what we saw 12 years ago because economic and credit growth have been more balanced. The very low public debt enables the government to borrow and spend on a massive scale. The economy needs measures that help companies survive the short but severe hit, so wage subsidies and other direct support has been well received. At the same time, the demand for loan guarantees, the biggest item in the government support package, has been very modest as demand for credit has dropped in the current uncertain environment. Some of the crisis measures, like the suspension of payments in the 2nd pension pillar or the decrease in the diesel excise tax, do not really ease the pain in the economy right now. In the longer term, public investment in Rail Baltica or better roads, or an even more efficient government sector, would help the economy prosper.

 

Estonia’s ecological footprint is relatively large, as all its electricity and a large part of its heat energy are produced from local shale oil. Massive fiscal stimulus would be a good chance to invest in green energy and reduce the northeastern region’s dependence on shale oil. Surging unemployment calls for social and labour market policies that help people adapt and find new jobs. So far, jobs have been lost among the most vulnerable, in sectors where the average wage level is one of the lowest: tourism and entertainment. Also, immigration should not be restricted when suitable labour is not available locally.


Latvia: Going more digital

The Latvian economy has taken its lesson from the previous crisis, earning the right to use more flexibility in supporting the economy in the corona-world. The stumbling blocks are the previously insufficient investments in the digital economy and protracted reforms in health care and education.


Old homework done, but digital skills and healthcare overlooked

The measures to limit the spread of the coronavirus, combined with deteriorating economic sentiment, are projected to result in a sharp fall in GDP in 2020. The light private sector debt burden, an advantage during a downturn, exposes subdued investment over the past decade, especially in R&D, innovation, and digital solutions. Before the pandemic, there was a lack of political will to push the health care reform through. Now, the underfinanced sector could quickly become overwhelmed if the number of Covid-19 cases surged. Luckily, the government has acted swiftly and decisively to mitigate the coronavirus outbreak, reducing the risks to the health care system.


Latvia’s digital preparedness for the stay-at-home economy lags its regional peers. Businesses have been slower to take up digital technologies, while almost half of the population still lacks basic digital skills, undermining productivity. This makes the private sector less flexible and more vulnerable during the pandemic. The good news is that Latvia is scoring relatively well in digital public services and connectivity, making this a good stepping stone for further progress. Furthermore, the financial sector is robust, the economy is much more balanced than in 2008, and public debt is low, allowing ample fiscal stimulus.

 

Corona helps fight resistance to change

The digitalised are more resilient in corona times and will be quicker to flourish post-crisis. During these couple of months, we have seen even the most reluctant Latvian businesses going more digital at a turbo speed. This not only helps to weather the crisis but also increases competitiveness and boosts productivity in the longer term. However, growing digitalisation, in conjunction with the crisis hitting the least-well-off disproportionately hard, can add to the existing income inequality, as people with poorer digital skills and already lower incomes are left farther behind.

 

The pandemic has made a very strong case for speeding up the protracted health care reform and increasing the sector’s funding, especially given Latvia’s ageing society. Another lesson is the importance of investing in human capital, digitally apt and flexible, at both individual and government levels. The education reform, currently in progress, is badly needed as the OECD comparisons of educational outcomes show that Latvia is lagging its counterparts in the region. The reform foresees changing the Latvian curriculum away from passive listening to embracing creativity, problem-solving and self-directed learning.

 


Lithuania: An opportunity to emerge stronger

A balanced economy and comparatively mild health crisis put Lithuania in a good starting position on a path to recovery. A loosened fiscal regime provides an opportunity, if executed competently, to address the problem of underinvestment, to improve competitiveness, and to create a more IT-savvy, dynamic, and inclusive society.


Meeting the crisis on solid foundation

The great shutdown of the economy will make a big dent in economic performance in 2020. However, this time around the Lithuanian economy is in a much better position to weather the storm. Despite the long business cycle, the economy remained balanced, the financial sector is very healthy, and, probably for the first time since independence, the government has the fiscal firepower to enact a meaningful countercyclical policy. Despite the ill-preparedness of the health system to combat the infection, early action on socialdistancing measures and the low population density meant that the health situation never got out of control. The benign health situation allows the economy to re-open and bounce back more quickly than Western Europe. While the government managed to deal with the health emergency rather successfully, economic support is more lacklustre and sometimes misguided. A quite wide array of measures was announced quickly, but, due to excessive red tape and lack of administrative capacity, the distribution of support in many cases has been somewhat disappointing. Luckily, the Lithuanian aversion to debt means that businesses and households have met the crisis with strong balance sheets; the solid IT infrastructure has also enabled a lot of people to continue with their jobs from the safety of their homes without much trouble.


An opportunity to fix old problem

The great lockdown, at least temporarily, introduced profound changes in lifestyle around the globe and likely will accelerate trends that were slowly brewing for a while. The shortening of supply chains is imminent, and, due to its favourable business environment and experience in attracting greenfield investment, Lithuania should be well positioned to benefit from a re-shoring of manufacturing. In addition, the reversal migration trends will help in improving the medium-to-long-term growth outlook. The pandemic highlighted the value of good policy and capable public administration, as well as the need to strengthen competences in most areas of the public sector. Hopefully, the massive experiment with digitalisation will not be forgotten once this is over and the best practices will stick. A wise implementation of digital technologies in the health sector could both reduce future risk of epidemics by expanding telemedicine and ease the burden on the health system, resulting in both more affordable and better health coverage. As most countries, Lithuania is planning a major medium-term recovery spending spree. It is an opportunity to improve both physical and digital infrastructure that could facilitate green and sustainable growth. Human capital is just as important. The education, health, and judicial systems should be propelled into the 21st century, not only to improve prospect






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