Enduring A Sharp Growth Slowdown
Overview:
For many years the Baltic States registered strong economic growth and huge current account deficits. While the latter were the cause of some investor concern, fixed/super-fixed exchange rates seemed sustainable and adoption of the Euro was seen as reducing the risk of a currency crisis in any of the three countries. High inflation has not only stopped these countries joining the Euro to date1 but pushed membership of EMU some way into the future. However, the problems that these economies are facing right now are not directly related to concerns about the sustainability of their exchange rate regimes but, rather, a dramatic slowdown in economic growth caused by a combination of the bursting of a domestic asset price bubble and slowing external demand as a result of the global credit crisis.
Recommendation:
We are neutral on local currency interest rates in the Baltic States. Currency regimes appear sustainable despite the current economic difficulties but interest rates are too low to be interesting.