The Baltic Countries

 Estonia, Latvia and Lithuania have chosen different paths to reach economic stability and future inclusion into the Economic Union. The choices that have been made with respect to economic and monetary policy has created a situations of varying degrees of economic development and currency stability within each country. These varied circumstances have different degrees if probable success and pose particular issues for foreign investors.

Estonia, Latvia and Lithuania all have similar currency policies in that they all have pegged their currencies to the currencies of other countries in the world. Estonia has chosen to peg its currency to the German Mark (now the Euro), while Latvia chose the SDR and Lithuania chose the dollar. The choice to peg their currencies is directly reflective of the individual countries desire to show the greatest amount of stability to the world community. However, although all the countries have chosen to peg their currencies, the success of this move to demonstrate stability to the world is not the same for all of the countries.

Here's what the IMF reports for the three countries:

Estonia
The currency board and the fixed peg to the deutsche mark (and euro as of January 1, 1999) continued to provide a transparent and credible framework for financial operations and the formation of economic expectations.

Latvia
Directors considered that the exchange rate peg to the SDR had served Latvia well and remained appropriate, even though a switch to a euro peg in the medium term appeared to be desirable.

Lithuania
The currency board has withstood pressures caused by the turmoil in international markets. Starting in September 1998, there were net foreign exchange outflows through the currency board, which initially led to an increase in interest rates to about 14 percent in October (on three-month treasury bills). From October onwards, the government used privatization funds to meet part of its financing need, while foreign exchange outflows tapered off. By June 1999, interest rates had declined to about 10 percent. The foreign exchange coverage under the currency board has remained comfortable, at about 143 percent of litas liabilities at end-May.

Sources: www.imf.org. Public Information Notice: IMF Article IV Consultation. Each Public Information Notice contains a background section, a table of selected economic indicators, and an Executive Board assessment.

 

The most successful of the countries is probably Estonia. Estonia has been vigorous on a variety of fronts to create an economic and monetary environment attractive to the world community. Private debt accumulation has increased at a rate that is not desirable, however relative to the other countries in the region it is very much under control. In addition, the exposure Estonia had to Russia was less significant than the other Baltic countries and as a result, when the Russian economy tumbled, it was far less affected. Estonia has continually sought the expansion of trade with countries throughout Europe and North America to a far greater degree than its neighboring countries. And the domestic financial regulations with regard to privatization and bankruptcy can provide the world with the confidence that the country is working to create an attractive financial landscape. The government has been eyeing the growth in the productivity, which although not at the desired target levels are within range.

Latvia and Lithuania are not quite to the point in their economic development that Estonia is. The two countries are still working controlling spending and their borrowing activities to bring it in line with its growth level to create a manageable and less inflationary environment.

Investment in the Baltic region is decision that should be made with great caution. The size of the economies makes it difficult to look at the countries in isolation. The three almost have to be viewed as one entity within, dramatically affected by, the countries throughout the region. As a result, the investment made to the area should be primarily in the form of collateralized loans backed by marketable assets. The stability of the region is dependent on foreign investment and until the regulatory environment is brought in line with the rest of the world there will remain significant risk with respect to direct investment in Baltic enterprises.

Michael Jones; adapted by Ian Giddy
September 1999