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Tuesday, March 4, 2008

Estonia Retail Sales January 2008, and Sweden's Banks in the Baltics

According to Statistics Estonia retail sales grew at a 1% annual rate (in constant prices, ie real terms) in January 2008 when compared to January 2006. The growth rate of retail sales has been decelerated significantly during the last part of 2007 - as can be seen in the chart below - and this deceleration has now continued into January 2008. We have no sign at this point of any slowdown in the rate of deceleration, and if things continue like this we will evidently enter the contraction phase as of February.

Basically, if you keep following this blog you will one day get to see when a process of sharp deceleration finally gets to "bottom out", but that day evidently has not yet arrived.

On another front the Swedish banking sector is evidently begining to notice the wear and tear associated with its exposure in the Baltics. We have already reported on the decision by Moody's Investors Service to cut its ratings for Estonian banks on concerns of "weakening asset quality due to high exposure to the cooling property market". Moody's assigned a negative outlook to Estonian banks, including AS Sampo Pank, fully owned by Danske Bank A/S, and Balti Investeeringute Grupi Pank AS. This followed hard on the heels of their decision on Jan. 18 to lower the outlook of AS Hansapank, the top Baltic lender and a fully owned unit of Swedbank AB, to ``negative'' from ``stable.'' Hansapank accounts for more than half of Estonia's banking industry assets.

At the end of last week, in a revealing article in the Financial Times entitled Uneasy Calm At Sweden's Banks, David Ibison argued that all is not as straightforward as it seems in Sweden's banking system, and one of the reasons it isn't is the exposure out in the Baltics.

At the same time, the share prices of two of the banks – SEB and Swedbank – have been hit hard over misplaced concerns over their exposure to the emerging Baltic markets of Latvia, Lithuania and Estonia. Particular attention is being paid to the depressed valuation of Swedbank, whose Baltic operations are conducted by Hansabank, a wholly owned subsidiary.

Fears of a sharp slowdown in the Baltics and a related contraction in bank lending to the housing market have sparked worries that Hansabank will suffer and that its problems could have a knock-on effect on Swedbank.

At Swedbank's current price, Hansabank is valued at almost nothing, in spite of the fact there are no signs of problems with its Baltic loan book, which is well capitalised and where non-performing loans are well in hand.

Ronit Ghose, an analyst at Citigroup, said: "Hansabank has gone from a multiple in the mid teens to close to zero . . . The market is taking a negative view of these countries and of Swedbank's share price and is overlooking the positives."

Finally, and for those of you interested in comparative charts and urban legends, here is a retail sales comparison for Latvia and Estonia (Latvian retail sales actually declined slightly in January).

Now I mention urban legends here, since I think that in the Baltic context we have had two:

1/ The Baltic countries were so small that Nordic banks would have no difficulty keeping them supplied with funds, so there wasn't too much to worry about.

2/ Estonia was running along the same path as Latvia, only one year ahead (or was that behind?).

The first of these legends, as is shown by the material posted above, is now evidently false, the Nordic banks are now going to have to think very carefully about every move they make in the Baltics.

And the second also looks to me to be a bit ridiculous when you look at the two charts for retail sales movement, since what is striking is how similar they are, and given the level of external trade interlocking, and hence the dependence of export performance on internal demand in the other, this shouldn't surprise us terribly. Latvia's downturn is accelerating slightly more rapidly at this point than Estonia's, but the difference is secondary, and not one of substance. Certainly the credit crunch must have been applied at roughly the same moment last spring in both countries, and now a very similar process is working its way through the two systems. And in neither case, it seems, do the political authorities have any sort of coherent emergency "plan B" to deal with what is now an all too evident emerging eventuality.

And for those of you who are addicted to comparative charts, here is the latest EU economic sentiment indicator for the Baltic states. Here we can see that it is the case, Estonia did take off downwards rather earlier than Latvia, but Latvia has been fast catching up, while in the last couple of months sentiment in Estonia does seem to have stabilised. Whether or not this stabilisation constitutes an early indicator of "bottoming out" we will get to see over the next couple of months from the real data as it comes in. Certainly one to watch for. On the other hand it does seem that Lithuania WAS a "late developer" which is now also, and in its turn, in the process of catching up.


Latvian abroad said...

I think 2) used to be true - until the present credit crunch which was simultaneous. Construction boom took off 1-2 years later in Latvia (compared to Estonia) and so on.

Now, the events are mostly simultaneous. One exception is that Estonian exports are already declining year-on-year (loss of competitiveness?) while Latvian ones are still growing. Latvian salaries are 20-30% below Estonian which is around 1 year at the present salary increase rates - that could explain it.

Latvian abroad said...

And I'm puzzled why Lithuania has not experienced the same crunch...

Edward Hugh said...

Hi LA,

Nice to see you around here. Good point on wages. I am checking this out now, and will post something in my Latvian retail sales post on LEW.

"And I'm puzzled why Lithuania has not experienced the same crunch..."

Me too, Claus is really following this one. You may find this piece he did recently on Lithuania interesting.

Hope you are well.