The Baltic States: Recovery, Outlook, and Challenges Economic Crossroads: From Recovery to Sustainable Development in the Baltic States and the EU Riga, November 24, 2011 Mark Allen Senior IMF Resident Representative for Central and Eastern Europe The views expressed in this Presentation are those of the author and do not necessarily represent those of the IMF or IMF policy.

2 Scope of the presentation Recovery in the Baltic States Outlook beyond the Baltic States Vulnerabilities to tackle

3 Scope of the presentation Recovery in the Baltic States

4 GDP has recovered to 2005/6 levels … GDP level (2004 = 100) Source: WEO database.

5 …but domestic demand is lagging… Domestic demand level (2004 = 100) Source: WEO database.

6 Source: WEO database Contributions to Growth (percent points) … although now contributing to growth.

7 Exports are gaining market shares. Source: IMF, Direction of Trade; World Economic Outlook; Eurostat Export markets growth (Weighted by 2007 export patterns) EstoniaLatviaLithuania

8 There has been some correction in wages... Source: Haver; IMF Country Reports Average Gross Earnings (Mar-04=100)

9 …and unemployment is falling from the peak. Source: IMF, IFS Unemployment rate (percent)

10 Market perceptions have improved remarkably. Source: Bloomberg CDS spreads (basis points)

11 Scope of the presentation Recovery in the Baltic States Outlook beyond the Baltic States

12 The world economic recovery is sluggish… Source: WEO database. GDP Growth (percent)

13 …and world trade is not looking healthy. Source: WEO database. Growth of Trade (percent) *Trade volume is calculated from the trade value deflated by CPB estimated price series

14 Advanced economy prospects have worsened sharply. Source: ConsensusForecasts. Consensus GDP Growth Forecasts for 2012 (percent) WEO Forecasts

15 A third wave of fear has hit the markets… Source: Yahoo Finance. Market Volatility Index (VIX S&P 500) LehmanGreeceEurozone

16 …and European banks are under pressure. Source: Bloomberg. Banks 5yr CDS Spreads (basis points)

17 Scope of the presentation Recovery in the Baltic States Outlook beyond the Baltic States Vulnerabilities to tackle

18 Current accounts are no longer a risk factor. Source: IMF, World Economic Outlook Current Account Balance (percent of GDP)

19 But total external debt, while coming down, remains high… Source: IMF, World Economic Outlook Gross External Debt (percent of exports)

20 …especially private sector debt. Source: IMF, World Economic Outlook Private Sector External Debt (percent of GDP)

21 This is reflected in lower foreign bank exposure Source: BIS Foreign Bank Exposure (USD millions) Decline from the peak (Jun-08) -36% -30% -31%

22 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone Slide by slide

23 Credit growth has stalled and NPLs peaked. Non-performing Loans to Total Loans (percent ) and Credit Growth (year-on-year percent change) Source: Haver, National banks, Latvian Financial and Capital Market Commission

24 Capital adequacy ratios have been strengthened Source: IMF staff Capital Adequacy Ratio

25 And the banking sectors are becoming more profitable Source: IMF staff Return on Assets

26 But loan-to-deposit ratio remain very elevated. Source: Haver Loan-to-Deposit Ratio

27 Thank you

28 Backup slides

29 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

30 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

31 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

32 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

33 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

34 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

35 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

36 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone

37 Fiscal positions are returning to Maastricht Source: WEO database Fiscal Balance (percent of GDP) Public Debt (percent of GDP) Maastricht zone Return