The Baltic countries are expected to grow very slowly this year, experts predict

According to the representatives of the international credit risk insurer Coface, the Baltic countries are expected to have the weakest growth rates, taking into account trade relations with Russia.

Over the last two years, various economic conditions, support measures and legal changes have affected solvency trends in Central and Eastern Europe. The pandemic contributed 4% to the region’s economic downturn.

Although the number of corporate insolvencies fell in Central and Eastern Europe, this was due to large-scale state support measures for households and businesses. Now all the countries of Central and Eastern Europe are likely to suffer the direct and indirect consequences of Russia’s invasion of Ukraine, Coface predicts.

Coface points out that the region as a whole grew by 5.5% in 2021, but is expected to decline by 3.2% this year.

After the decrease in the number of corporate insolvencies in 2020, the number of insolvency proceedings increased in 2021, almost returning to the pre-pandemic level. Coface says this increase was expected given the intentions of national governments to end large-scale support measures. The weighted average gross domestic product (GDP) of the region, calculated according to the dynamics of national insolvency, showed an increase of 34.7% in 2021 compared to the previous year.

Last year, seven countries experienced higher insolvency rates than in the previous year (Bulgaria, the Czech Republic, Hungary, Lithuania, Poland, Romania and Slovakia), while five countries saw a decrease (Croatia, Estonia, Latvia, Serbia and Slovenia). Coface informs that the number of insolvency cases in Latvia in 2021 decreased by 30.93% compared to 2020. At the same time, the decline in Estonia was 18.79%. By contrast, Lithuania was the only Baltic country to experience an increase of 0.25%.

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Mindaugas Sventicks, head of Coface in the Baltics, explains that the global economic situation has created a challenging environment for Central and Eastern European companies over the past two years. The economic recovery that began in mid-2020 was faster than expected and led to growing demand, especially in the manufacturing sector. Energy prices, transport and the prices of metals and raw materials used in various production processes rose. In some cases, the shortage limited output.

Sventicks points out that the most striking example is semiconductors, the shortage of which has led to a reduction in the number of shifts in work processes and the temporary closure of factories in various car brands. Higher energy and fuel prices, rising commodity prices, reduced corporate profitability. These international events also apply to companies in Central and Eastern Europe, as they are part of various supply chains, and the region as a whole has significant trade links with Western Europe, Sventicks emphasizes.

Although the pandemic continues, another challenge is affecting the economy and companies, emphasizes the head of Coface. Namely, Russia’s invasion of Ukraine contributed to a sharp rise in energy prices, leaving Europe dependent on Russian oil, natural gas and coal imports. In addition, both countries are important producers and exporters of agricultural goods. Agricultural production is also affected by fertilizer prices, which have also risen, while the Central and Eastern European region is dependent on fertilizers imported from Russia and Belarus. In addition, higher global prices and metal shortages due to the war exacerbated supply chain disruptions.

Sventicks explains that these factors have led to further increases in energy and raw material prices for companies, including those in Central and Eastern Europe. The decline in the purchasing power of households also raises concerns about the potential customer base. The economies of Central and Eastern Europe have experienced rising inflation, mainly due to rising energy prices as well as rising food prices.

Russia is an important trade destination for the Central and Eastern European region, especially the Baltic states, Sventicks admits. For example, total exports and imports with Russia in 2021 accounted for about 11% of Lithuania’s international trade, while for Latvia and Estonia this figure was 8%. In addition, the Russian invasion of Ukraine has caused a huge humanitarian crisis with economic consequences.

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Although all Central and Eastern European countries are expected to show lower growth rates in 2022 than previously estimated, the influx of Ukrainian refugees could support regional growth, at least in the short term, Sventicks said. Given these challenges, Coface expects corporate insolvency to continue to rise in the coming quarters. The effects of the Russia-Ukraine war will accelerate this growth, especially as large-scale support programs for local businesses are unlikely to be implemented as they were during the pandemic.

Coface is one of the largest international credit insurers.