The results of SEB annual survey* of CFOs of large Baltic companies show that businesses are quite optimistic about the environment in the second half of 2023. Almost 80% stated that their financial position is good or very good, and we can confirm this from the bank’s perspective by analysing the companies' financial position. At the same time, the business environment in Latvia is characterised by risk aversion in an environment characterised by uncertainty, including concerning long-term investments. While this caution has so far helped to provide some stability and avoid various economic challenges, it can also mean missed opportunities when a new development cycle begins.
Overall, Baltic companies anticipate stability in 2024, which is good news. In terms of the Baltic business environment, our northern neighbours are the most pessimistic. In Estonia, approximately a third of entrepreneurs believe that the business environment will worsen, while in Lithuania (around half of respondents) and Latvia (40%) sentiment has improved. In part, this is due to a decline in Estonian GDP last year, some stability in Latvia and Lithuania, and some challenges in key export markets.
Increasingly, company money is sitting in bank accounts; investing is cautious
The global economic outlook is among the main concerns of CFOs when it comes to the short-term outlook, which was emphasised by more than half of the companies in all Baltic countries. Other important factors are geopolitical risks and declining demand as well as expected pressure on margins and prices. At the same time, almost 80% of companies rate their financial position as good or very good - an assessment that we at the Bank share. Latvian companies’ cash balances in bank accounts have grown by around 4-6% annually. At the end of 2022, account balances already exceeded companies’ total assets, and this trend has now stabilised.
On the other hand, some companies, aware of the uncertainty, are revising their development plans, reducing procurement, and optimising costs - they are doing everything they can to hedge against the unknown. This also applies to the willingness to invest, including through credit. Latvia has one of the lowest levels of credit debt in the EU. Many companies use their capital for development, which is one of the most expensive forms of financing in terms of the required return. The opinion of the CFOs of Baltic companies on their plans to allocate funds for early repayment of the loan is thought-provoking - in Lithuania, the share of such companies has dropped from 27% to 17%, while in Latvia it has been stable in the range of 20-25% for a long time. We have been very cautious in taking out loans, which makes it easier for us to survive times when the cost of money is relatively high. On the one hand, the caution of companies is understandable. On the other hand, the caution of not investing or postponing investment (with or without the help of credit) can mean missing out on long-term opportunities as the economy enters a new growth cycle.
Priorities in 2024: Latvia - digitisation, automation and innovation; Estonia - increasing cash flow; Lithuania - increasing capacity
While the Baltic companies seem to be very similar in many respects, there is one question to which the answers have always differed, namely the companies’ priorities. The introduction of new products and services has always been an important issue in Latvia, which this year was complemented by the desire for digitalisation, automation and investment in innovation (a priority for 26%). In Estonia, where digitalisation and automation have always been a top priority, entrepreneurs now see increasing cash flow as one of the biggest challenges (27%). In Lithuania, on the other hand, the priorities of companies have changed surprisingly little in recent years - for several years and also in 2024, investment in capacity expansion remains the top priority for 29% of respondents. The assessment of priorities by Lithuanian companies has raised serious questions about the different risk appetites of Baltic companies for several years, also in the context of economic cycles.
According to economists' forecasts, 2024 will be a “year of treading water”, i.e. a year of stabilisation or even stagnation in both domestic and export markets. Having experienced several economic cycles at the bank, the basic logic is that a downturn is always followed by an upturn. This often happens faster than expected. No one can say when, but what is certain is that the conditions for rapid development and growth will follow. The current trend is cautious demand - both on the private and corporate side, caution, restraint and value preservation have prevailed overgrowth in recent years. As confidence grows, demand could eventually skyrocket. This in turn can lead to challenges in terms of capacity and the ability to meet it, which is why early preparation is essential.
We hear at different levels and in different formats about the ambition to be ahead of our neighbours. There seem to be only three ways to achieve this: wait for luck, run faster or do it differently or smarter than others. Far-sighted decisions need to be made now. We should use this time of uncertainty to build or strengthen our potential, flex our muscles and prepare for the next economic cycle. This can be seen as investing in the financial markets - historically, the most successful investors always invest when others do not see an opportunity or are afraid to do so. I see that Latvian companies not only have the potential but can also afford to be more ambitious in their growth and long-term investments - and not just locally, but certainly across borders. All the ingredients are there, but sometimes companies need more encouragement.
* The survey was conducted in September 2023, including 277 Latvian, Lithuanian and Estonian companies with an annual turnover of more than EUR 20 million. SEB has been conducting such a survey since 2014.
