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Monday, January 21, 2008

Swedbank Downgraded By Moody's

This news in Bloomberg this morning is hardly surprising, but does give an indication of the fact that such banks can't continue to fund a difficult situation indefinitely without seeing damage to their own balance sheet, and their own credit rating. According to Bloomberg the Baltic business accounts for 30% of their total profit (or if you like one third of their business), and that is not insignificant, or "small beer".

Swedbank AB, the largest bank in the Baltic region, may have its credit rating lowered by Moody's Investors Service, which cited concerns about the strength of the economies in Estonia, Latvia and Lithuania.

Moody's cut its outlook for Stockholm-based Swedbank's financial strength and long-term deposit rating to ``negative'' from ``stable,'' it said in a statement dated Jan. 18. It also lowered its outlook on Swedbank's Baltic subsidiary, AS Hansapank, to ``negative'' from ``stable'' and placed its C+ financial strength rating on review for a possible downgrade.

Swedbank is the largest bank in Estonia as well as Latvia, the fastest-growing economy in Europe, and the second-biggest in Lithuania. The Swedish lender's Baltic banking operations account for more than 30 percent of its operating profit.

``The rating action was prompted by Moody's concerns over the bank's high exposure to the overheating mortgage, real- estate and construction markets in the Baltic countries,'' the credit rating company said in the statement.

Tuesday, January 15, 2008

Latvia Inflation December 2007

Latvian inflation accelerated in December to the fastest pace in more than 11 years as household expenses and service prices in restaurants advanced, adding to concern the overheating in the economy is far from being under control. Latvia's inflation rate, which is the highest in the European Union, rose to 14.1 percent from 13.7 percent in November, the Statistical Office said yesterday. There was one small glimmer of hope though, since consumer prices only rose a monthly 0.7 percent, compared with 1.4 percent in November. So the monthly rate may be slowing. We need to wait a bit and see.

Household costs such as gas, electricity and water rose an annual 21.3 percent in December, the steepest gain of any category in the index. while services such as restaurants rose at an annual 21 percent rate.

This inflation rate, which is now the fastest since November 1996, is four times the rate of the average price growth in the 15 nations that share the euro, meaning that we are now a long, long way for the target zone where prospects might open to switch to the common currency. Indeed while noone really knows clearly what is going to happen next in the Baltics, Bulgaria, Hungary and Romania, one thing I think is clear, and that is that after the event we will need a post-mortum about how we all got to where we are. Was it in fact wise, for example, to make the issue of euro membership obligatory for all the new member states on joining the EU, and thus raising so many expectations (and as it were, stoking the fire). Certainly in the Czech Republic they are already begining to draw some conclusions along these lines as I explain in this post here.

This rate of consumer-price growth even as domestic demand is slowing also increases the possibilities that the economy may do a sudden "about turn" and start to contract. Unfortunately some kind of a correction is evidently coming, and we are just left watching and waiting.

Thursday, January 10, 2008

Latvia Foreign Trade November 2007

Both imports and exports declined in November, although both were up year on year. Compared with October 2007 the value of exports, at current prices, in November 2007 decreased by 1.7% or 6.4 mln lats, but in comparison with November 2006 it increased by 24.8 % or 73.0 mln lats, reaching 367.8 mln lats, according to Central Statistical Bureau data.

The value of imports in current prices decreased by 5.3% or 36.0 mln lats in November 2007 when compared with October 2007, but in comparison with November 2006 it increased by 4.8% or 29.6 mln lats, reaching 647.3 mln lats.

The total foreign trade turnover in November 2007 was 11.2% or 102.6 mln lats higher than in November 2006, with a total value of 1015.1 mln lats.

If we can see from the chart above that the deterioration in the trade balance has stabilised somewhat, we can see from the one below that this is largely to do with a deterioration (or improvement if you prefer) in imports rather than a substantial rise in exports.

Latvia Inflation December 2007

Latvian inflation accelerated in December to the fastest pace in over 11 years as household expenses and service prices in restaurants advanced, adding to concern the economy is overheating. The rate, the highest in the 27-nation European Union, rose to 14.1 percent from 13.7 percent in November, the Statistical Office said today. Consumer prices rose a monthly 0.7 percent, compared with 1.4 percent in November.

Goods price inflation was 13.2% and services inflation 16.4%. Administered prices were up 16.5% on the year. The price growth of food products and goods and services related to the housing had the greatest impact on the consumer price increase in 2007. During the year the average price level of food products increased by 19.9%. The prices of bread, cereal products, confectionery, milk and dairy products, cheese, eggs, meat and meat products, oils and fats, fruit and soft drinks all had steep increases.

Household costs such as gas, electricity and water rose an annual 21.3 percent in December, the steepest gain of any category in the index. Services at restaurants rose an annual 21 percent.


Really I haven't got a lot more to say about all this over and above what I said in my more substantial analysis of Estonia earlier in the week:

So what happens next? Well obviously all of this is completely unsustainable, especially as most of the EU10 and Eurozone countries (not to mention the UK) are all now themselves likely to slow significantly. So now, to answer my own question a hard, hard landing seem unavoidable. How will this manifest itself? well basically we should expect to see increasing pressure on the Kroon currency peg with the euro, a pressure which, in the short term at least, the Estonian authorities will try and resist.

Basically, if we get the kind of very hard landing I am now anticipating, then we should expect to see inflation gradually ease, since there will be no demand pressure to push up prices. Possibly we will even see the reverse side of the coin, namely price deflation as we get into the second half of 2008, everything here depends on the pace of the "bust".

The only real issue in my mind is which of the group who are nearest to the cliff - Latvia, Estonia, Lithuania, Bulgaria, Hungary, Romania - will be the first to go over the edge. But perhaps the expression "canaries in the coalmine" first used by Morgan Stanley's Oliver Weeks is very appropriate here. Since why did the Baltic canaries start swooning in the first place? Why was there a lack of oxygen to ventilate the mineshaft? Bigger forces are evidently at work here, and we have Poland, Ukraine, Russia and China queueing up (more or less in that order) to put all the various theories to the text. And what is the ECB doing? My colleague Claus Vistesen made the following very valid point yesterday:

Eastern Europe? Could Trichet mention Eastern Europe tomorrow? I would seem strange but my feeling is that this is now set to crack at least in some of the countries. As such, the whole Eastern European situation could very well spill-over into the Eurozone through transmission mechanisms from Germany/Italy to Eastern Europe as well of course those famous Austrian/Swiss banks who have been supplying loans denominated in Euros and Swissies. In general on Eastern Europe you should not miss Edward's recent piece on Estonia which convinces me that this is about to go. The only question is whether we will see an orderly slowdown which I certainly hope but if currency speculation and runs on the pegs start to float on the jungle drums it could get out of hand and this would require the ECB to take action I think. Yesterday evening I updated my charts on Lithuania and despite a rather dubious spike in Q3 GDP growth (I simply cannot find the 5.2% figure in the q-o-q break up figures) I don't like what I see, especially on the labour market where the job vacancy ratio is beginning to signal one of those 'does not compute' (i.e. we have no more people!) moments. Finally, we need to consider which one of Eastern Europe's economies that is likely to (potentially) go first, as I noted recently in a comment over at Saxo Bank's Investor blog in the context of whether one or many of the CEE currencies would outperform the Euro in 2008 ...

At this point in time the silence over at the ECB is becoming absolutely deafening.

Industrial Output November 2007

Manufacturing output in Latvia fell again in November, according to data from Latvijas Statistikas. This is not good news.

The annual rate was less negative in November, but this can be due as much to a base effect as anything else.

According to seasonally adjusted data (seasonal and working day influence is taken into account) from the Central Statistical Bureau , when compared with October industrial production increased in November by 1% , of which there was a 0.6% rise in manufacturing. But output in electricity, gas and water supply gas decreased by 0.6%, and there was a decrease of 1.5% in mining and quarrying.

Compared to November 2006, in November 2007 total seasonally adjusted industrial output increased by 1.1%, of which output in electricity, gas and water supply increased by 17.7%, in mining and quarrying by 12.1%, while there was a decrease of 4.8% in manufacturing.

Compared to the November 2006, in November 2007 industrial output in manufacturing of food products and beverages decreased by 15.9%, of which in manufacture of other food products (bread, confectionery, sugar) – by 43.4% (it was greatly influenced by the discontinued production of sugar), in manufacture of grain mill products, starches and starch products – by 3.6%, in manufacture of dairy products – by 2.3%. Processing and preserving of fruit and vegetables, and manufacture of prepared animal feeds grew by 18.4%, processing and preserving of fish and fish products – by 11.1%, and the manufacture of beverages – by 6.6%.

Compared to November 2006, in November 2007 output increased in the following activities: in manufacturing of fabricated metal products, except machinery and equipment – by 35.6%, in manufacturing of rubber and plastic products – by 17.2%, in manufacture of pulp, paper and paper products – by 13.8%, in manufacturing of other transport equipment (repairing and construction of ships and boats) – by 3.1%, in manufacturing of basic metals – by 2.2%, in manufacturing of textiles – by 1.6%.

Compared to November 2006, in November 2007 the largest decrease in the industrial output was recorded in manufacture of radio, television and communication equipment and apparatus – by 30.1%, in tanning and dressing of leather; manufacture of footwear – by 29.1%, in recycling – by 23.4%, in manufacture of machinery and equipment – by 20.1%, in manufacturing of chemicals, chemical products and man-made fibres – by 11%.