``The downgrade of the Baltic states reflects the risk that the deterioration in the European economic and financial environment will impose a more costly macroeconomic adjustment in the Baltic countries, given their large bank-financed current account deficits,'' Edward Parker, head of emerging Europe sovereigns at Fitch says in the accompanying statement.
All three Baltic economies are in the global top 10 of those with the largest gap between outstanding bank credit and bank deposits relative to both gross domestic product and total bank credit, Fitch said. Gross external financing requirements plus short-term external debt will be at around 400 percent of end- 2008 foreign exchange reserves in Latvia, 350 percent in Estonia and 250 percent in Lithuania, the highest ratios in emerging Europe.
Industrial Output Onwards and Downwards
Meanwhile in Estonia the whole real economy continues to meander along its steady downward course. According to Statistics Estonia, industrial output was down 2.6% in August when compared to August 2007. Month on month outpot was up 1.6% on a seasonally adjusted basis.
Manufacturing output was down 2% year on year. According to the statistics office statemet The main reason for the decline was the decrease in orders, both on the external and internal markets.
The decrease in manufacturing was mainly influenced by food production, and wood and building materials. The decrease in the manufacturing of food is obviously affected by the large price increases and by the decrease in consumption which follows. Compared to August 2007, 20% less beer, 15% less soft drinks and 10% less meat products were produced. Although the rate of price increases has eased back in recent months, food product prices increased 17% in August year on year.
As in previous months, production increased in August primarily in the export-oriented branches of industry — in the manufacture of metal products, chemical products, electrical machinery etc. Output was also up in the manufacture of machinery, precision instruments and motor vehicles, sectors where there is a sjgnificant export share. The share of exports was 89% in the manufacture of motor vehicles and 93% in the manufacture of precision instruments.
And if we look at the longer term evolution in the working day and seasonally adjusted output index, It is clear that output levels hit a maximum in the first two or three months of this year, since which time they have been moving gradually downwards. In the present climate we are unlikely to see any change in this trend anytime soon.
Retail Sales Also Continue Their Decline
According to Statistics Estonia, retail sales of goods of retail trade enterprises were down 6% in August over August 2007 at constant prices. Compared to July 2008, retail sales decreased by 4% in August at constant prices.
In August, retail sales ran to a total of 4.8 billion kroons. In grocery stores rsales were down by 3% compared with August of the previous year. The decrease in sales was significantly influenced by a rapid growth in the prices of food products (and of course this decline in sales then fed back into industrial output). Retail sales in stores selling manufactured goods decreased by 9% compared with the same month of the previous year. Compared to August of the previous year, retail sales decreased in most economic activities except mail order sale, which increased 24% during the year. The main reason for the increase in the mail order sale was the low reference base of the previous year. Mail order sales do not significantly influence the retail sales in retail trade enterprises, because the share of this activity is very small: it was only 2% in August 2008. The retail sales of stores selling household goods and appliances, hardware and building materials suffered the greatest decrease (15%) as compared to the previous year.
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