epc (ekonomiskās prognozēšanas centrs)
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EPC (ekonomiskās prognozēšanas centrs)
The impact of the global financial crisis on the industrial sectors of Eastern European countries and
industrial change in Croatia
The European Economic and Social Committee's Consultative Commission on Industrial Change (CCMI)
Public Hearing
The impact of the global financial crisis on the industrial sectors of Eastern European
countries and the case of the Baltic States (Latvia)
Acad. Raita Karnīte, EPC, Ltd
Zagreb, April 27, 2009
• Main aggravating factors of the crisis
• Possible solutions
• CEE countries, Baltic countries, Latvia
GDP per capita, current prices in PPS, 2007
Total external debt/GDP, %
General government debt/GDP, %
Budget balance/GDP, % FDI/GDP,%
Latvia 14,4 134,2 9,7 -0,04 8,0
Estonia 17,9 110,3 2,9 2,8 11,7
Lithuania 15,0 ? 17,3 -1,2 5,0
Hungary 15,7 97,7 66,0 -5,5 4,0
Bulgaria 9,5 97,3 19,8 3,5 21,1
Slovenia 22,0 96,5 24,1 -0,1 3,0
Croatia 13,9 89,1 38,9 -2,3 9,6
Slovakia 17,0 54,7 29,4 -2,2 3,8
Poland 13,3 48,3 45,0 -1,8 4,4
Czech Republic 20,3 38,0 28,7 -1,6 5,2
Rumania 10,1 31,7 18,6 -2,3 8,9
CEE countries - selected indicators, 2007 Source: CEE Quarterly, UniCredit Group
Main aggravating factors of the crisis – input
Massive money (loans) inflow since end 2003
Growing consumption (real estate, long-term household goods, cars)
Main activity - real estate market (speculative demand)
Consumption driven growth – 5 sectors (real estate, trade, banks, construction, building materials industry) provide 75% of GDP growth, 80% of growth on the basis of external money
Growing prices in resource sector (labour, energy, row materials)
Main aggravating factors of the crisis – outcome
Active markets (real estate and financial) saturate
Loan activity of banks slows down (loan/deposits ratio more >2 in foreign owned banks, <1 in local banks)
Declining financing – declining consumption
Scale and contribution of main industries to GDP decline – negative GDP growth
External market
Main aggravating factors of the crisis – industry
SME dominate, subcontracting (SME promoting policies)
Main exporters – wood processing, textiles, food industry - traditional products
Finances – loans less available, rare proposals for EU structural funds
Wage competition
Productivity
Internal consumption decline
External markets
Labour costs -one hour, LVL %
0
5
10
15
20
25
30
35
40
1/2004 2/2004 3/2004 4/2004 1/2005 2/2005 3/2005 4/2005 1/2006 2/2006 3/2006 4/2006 1/2007 2/2007 3/2007 4/2007 1/2008 2/2008 3/2008 4/2008
Series1
Production costs in construction, in % to relevant period of previous year
0
10
20
30
40
50
60
70
2006 I 2006 II 2006 III 2006 IV 2007 I 2007 II 2007 III 2007 IV 2008 I 2008 II
%
Construction, total Prices of building materials Wages and salaries Equipment
Number of market sector economicaly active companies
0
2
4
6
8
10
12
14
16
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Thsd
.
0
10
20
30
40
50
60
70
Construction (F) Real estate (K) Manufacture (D) Agriculture, forestry, fishing(A+B) Trade (G) Hotels and restaurants (H) Total (number on righ axe )
Turnover of retail trade in % of average monthly turnover in 2005
Manufacturing output (quarters 2000-2009, 2005 = 100)
Exports and imports, miln. LVL
Dynamics of GDP, prices and wages, in % to previous period
-15
-10
-5
0
5
10
15
20
25
30
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Economic Growth Inflation Real wages Producers' prices
GDP, thsd LVL
0
2 000 000
4 000 000
6 000 000
8 000 000
10 000 000
12 000 000
14 000 000
16 000 000
18 000 000
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 20080
1 000
2 000
3 000
4 000
5 000
6 000
7 000
8 000
Total, real prices Total - 2000 prices Per capita - real prices Per capita - 2000 prices
GDP in Baltic Countries
-15
-10
-5
0
5
10
15
I/2007 II/2007 IIII2007 IV/2007 I/2008 II/2008 III/2008 IV/2008
Latvija Lietuva Igaunija
Theoretical solutions
Markets are the main factors – internal consumption, exports (state procurement)
Production capacity - confidence, availability of resources (labour - education, health care)
Competitiveness – inovations, equal competition
Specialisation, mobilisation of resourses to selected, most profitable directions (post-war renovation experience)
Good social and security services• Confidence of tax payers• More money for state
The role of the state increases in post-crisis period
Business is not pessimistic
Arguments:
Lower resource prices
Less and better competition
Business environment more predictable
Time to mobilise for growth
Time to start business
Some worry about uncertain state policy, others do nat care
Real action
National level objectives :
To fulfill requirements of international organisations
State budget deficit less than 5% (7% is not allowed)
Wage cut on 15%, 20% ... in four steps (recently 40% cut is under discussion)
Economy in social expenditures (education and science 30-40% less, health care less, schools and hospitals closed)
Reforms in public sector – what and why - capacity of public institutions in difficult period
Implementation of memorandum is strongly controlled
Is Latvia unique????
Priorities:
Cut of costs, not devaluation of lats (CB reserves in foreign currency will not be published in future)
In economics:
Strenghtening of financial system (international aid (loan) to banks (36% of total) and state budget (35% of total plus 21% for refinancing of state debt plus 8% for loans from the state budget)
Heating of economy through state procurements in infrastructure projects (housing) – budget??
Capacity rising of SMS companies – market ????
EU Structural funds – credit guaranty system
Exports – export guaranty system (90% of export value, not more than 1 million EUR per deal, high
requirements)
No proposals in market development
Conclusion
Market forces will be the main politician in the field of economic policy
Industry development is not clear
High level of free economic capacity but this need to be employed
Social crisis may cause human crisis
Better is slow recovery on the basis of industry than on the basis of “new” money – impact of local government elections
The role of government is important
International organisations
Thank You for attention !
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