Analytics, Financial Services, Investments, The Baltic Course No. 27

Home experts cannot help but wonder: international rating agencies threaten to lower credit ratings or have already done so, inflation figures have risen high but European investors define the Baltic States as an attractive place for investments. Firstly, one has to keep in mind that the potential corrective measures regarding the Baltic market are transient by their nature and this in no way affects the overall potential of the market and the opportunity to invest and make a profit. The GDP growth in the Baltic States is 2 to 3 times higher than that of Western European countries, and according to a forecast by the European Commission this tendency of macroeconomic development will be seen in the Baltic States during 2007 and 2008 as well (see Table, GDP growth rates).

Secondly, investment capital is constantly on the move, in search for an opportunity to make a profit. There is no dispute as to Eastern Europe being a land of great opportunities; however, the level of political risk has so far prevented massive investments in Belarus, Russia or other countries of Eastern Europe. The Baltic States have become ‘accessible’ in this respect. Business is comparatively transparent; registers of ownership are clear and accessible. It only takes pressing a few keys on the computer keyboard to find out about the owners of a company or ownership of and liens on real estate. The law and tax system has been integrated into the unified European system. The Commercial Law, the fundamental law governing business, provides for the protection of investors’ interests in a convenient and easily understandable way. Ranging from 20% to 30%, the tax burden in Latvia is among the lowest in Europe, and tax-free zones are the only ones to offer lower taxes than this. Compared to other European countries, the tax burden there amounts to as much as 50%. Therefore it is obvious that the investment environment here is friendly and facilitates the flow of the global investment capital in this direction, i.e. to the Baltic States.

The global investment capital is moving from the developed markets towards developing markets, with further plans for the emerging markets in the East. The status of the investment market in the Baltic States has now changed from emerging to developing, therefore the Baltic market has become important for European investors, and this global flow is not affected by potential short-term corrections in the Baltic States.

In the eyes of an investor, the potential of development is characterised by indices such as private equity investments vs. GDP, which in the Baltic States is currently 4 times lower than the average European index or 10 times lower than the indices of the developed European countries. There is room for investment capital, as one may well see. An outstanding example illustrating the situation is non-life insurance costs per person: in the Baltic States this figure is approx. EUR 140 per person while elsewhere in Europe it is EUR 2140 on the average, even as much as EUR 4270 in the United Kingdom. The potential growth according to forecasts is more than 10 times!

The Baltic companies with private equity investments include the largest Latvian company by net turnover in 2006. It is a wholesaler of computer equipment with a turnover of nearly 0.5 billion lats. This is a demonstrative example of the phenomenon of small countries and a reminder for major investors that it is not the size of a country but the size of the project that matters.

The Baltic Course 27, Autumn 2007