All economies of the Baltic Sea region – including Russia, where recession ended this year – are growing. This growth, however, is modest. Brexit and outcome of elections in USA show that populism is gradually becoming a normal occurrence in the world, according to Swedbank’s latest Baltic Sea report.

This does not mean there will be a victory march of populists in every country soon. It is clear, however, that political and economic processes will be more aimed towards securing internal markets, putting at risk trade and long-term growth. More expansive fiscal policy will contribute to growth, but not in a long-term perspective. Such a policy is simply not sustainable, because debt levels are already high in many countries. Competitiveness will be important as never before for all Baltic Sea region’s countries, comments Swedbank’s senior economist in Latvia Martins Kazaks.

According to data from Swedbank’s Baltic Sea Report, the business environment’s quality remains on the level of 2015 – 7.7. This year, improvements were noticed in Germany and Sweden, whose contribution is already above the average in the region. Lithuania has also shown improvement in its competitiveness. Among the region’s advantages are found in education, logistics and management. The biggest challenge lies in the major differences in business environments of the region’s countries, which slows down the region’s business development and economic growth. Russia is a big exception. Its accomplishments in many field is behind that of other countries. This includes areas like external trade, management and financial markets. BSI does not fully reflect (geo)political risks. Because of that, differences in the business environment with Russia are even bigger in practice. It is likely those differences will keep growing in the future, the economist explained.

Latvia remains behind the region’s average level – BSI has reduced from 6.9 to 6.8. It is higher than indexes of Poland and Russia, but below the region’s average and below indexes in Estonia and Lithuania. Latvia’s relative position has worsened in areas like education, labour market and financial market. Compared to its competitors, Latvia has demonstrated improvements in only three areas – entrepreneurship, tax policy and infrastructure. Economic growth in Latvia has been unexpectedly low in 2016. The main reason for that is the same as it was before – delayed EU funds, crisis in the construction sector and residents’ cautious approach toward spending money. The lowest point has been passed, it seems. Investments are expected to grow next year following the inflow of EU funds and better corporate lending opportunities. It is not enough to ensure more rapid sustainable growth. BSI data shows the progress of reforms is insignificant. The labour force resource is gradually running out. Because of that, high and sustainable growth can be secured only by means of improvements of productivity and effectiveness, as well as wiser fiscal policy. Similar to previous years, the ball is on the policy makers’ side of the field.

Although private consumption has been the main engine for economic growth in Baltic States in the past several years, only growing exports of goods and services can provide high and sustainable growth in small and open economies like Baltic States. Exporters have successfully recovered from the Russian shock. Redirection of goods and services to other markets, mainly the EU, has helped at least partially compensate losses from the Russian market. Exporters are currently trying to conquer new markets. What’s more important, however, is their ability to stay in those markets. For example, dairy product exporters are trying to enter the Chinese market. Latvia has developed exports of lumber to China; exports of metals, mechanisms and devices to Turkey and exports of electrical appliances to UAE. In the next couple of years, global price growth and improvement of external demand will secure more rapid growth of exports. Exports of services continued to grow in 2015, when it was equal to 17% of GDP in Latvia, 26% in Estonia and 16% in Lithuania. In Estonia and Lithuania, exports of services have grown three times more rapidly than exports of goods in the past five years. In Latvia, on the other hand, exports of goods have grown the most. The most rapidly growing services are IT, telecommunications and other business services. They also have the highest potential. In 2015, export volumes of those services reached EUR 1.6 million in Latvia, EUR 2.3 million in Estonia and EUR 1.2 million in Lithuania.

The transport sector currently faces the biggest challenges in terms of exports of services. Russia’s decision to divert the transit flow from Baltic ports to its own ports has negatively impacted transport service providers in Baltic States. For example, the volume of cargoes LDz has transported in the past ten months has declined 17%. Losses will remain in the industry in the next couple of years, as it is unlikely it will be possible to replace the lost cargoes with new ones. Nevertheless, the decline in exports of transport service will be possible to compensate in other industries (IT and telecommunications).

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