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Thursday, 28.03.2024, 20:19
Swedbank Nordic Baltic Business Report: Well prepared to take on the challenge
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 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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