Niina Aikas: A stunning recovery after Covid-19 in the Baltics, with Latvia still standing out with the slowest lending pace

The Baltic countries are about a year ahead of the rest of the eurozone being able to quickly and convincingly deal with Covid-19 challenges. While this gives us many advantages, it is important to deal with the red flags signaling a dormant problems in each of the countries. It is not a secret that for Latvia it is the much slower lending pace. Given the severe consequences of the last economic crisis, entrepreneurs in Latvia are more cautious with new investments.

The Baltic countries have shown a stunning ability to deal with the Covid-19 challenges. The economies of Lithuania and Estonia returned to pre-crisis levels already in the first quarter of this year, whereas Latvia returned to that in the second quarter. These differences are insignificant. According to our forecasts, the eurozone will not be able to do the same until the second quarter of 2022.

Niina Aikas
Head of SEB Baltic Division

This vitality of the economies of the three countries allows us to look into the future with quite optimistic view and move swiftly towards greater prosperity. Last year, for example, the GDP per capita of Latvia's neighboring countries, taking into account purchasing power parity, reached the level of Spain, which is 86% of the EU average. Latvia lags somewhat behind in this indicator, at 72 per cent. I do not believe that there are general reasons why such a difference should persist. However, there are certain noticeable aspects. The economy should be looked after, investments must be made so that it bears fruits.

In Latvia, the corporate loan portfolio has decreased while in Estonia and Lithuania – increased

It is obvious that investment growth in Estonia and Lithuania is more convincing after recovering from the global financial crisis. This is also reflected in the development of the loan portfolio of banks. For example, the loan portfolio of banks in Estonia has increased by 20% and in Lithuania by 7% in July this year compared to the January of 2015. It should also be noted that in Lithuania the increase before Covid-19 was equivalent to that in Estonia, but the volume of loans decreased due to the supportive government policies; now it is beginning to recover.

Meanwhile the amount of loans issued to companies in Latvia has decreased by one fifth or 21.2% during this period. It is important to note that these changes also reflect the significant transformation of the financial sector itself and has affected lending.

This year, SEB banka has provided financing to large companies in Latvia totalling nearly EUR 200 million, which overall is a very good amount. At the same time, however, the loan portfolio has decreased by 8% since the beginning of the year. The decrease is not related to changes in the credit policy. There are two main reasons for this. First, growing cash balances in corporate accounts mean less need for bank financing. Second, the ability of companies to raise finance in capital markets has increased.

We are here to help the economy of Latvia, businesses, and people. This is our mission in all countries represented by SEB banka. Our lending policy is the same in all three Baltic countries. While we can do a lot, we cannot do everything. In order for loans to reach entrepreneurs, there must be an investment-supporting, transparent and predictable environment with a strong spirit towards development.

Banks are willing to lend more and more actively

How can we accelerate the development of lending for businesses? As a bank, we care about smart, long-term investments. The more far-sighted they are, the more valuable they will be. Green transformation, good corporate governance and social responsibility will be integral parts of the agendas of companies that want to export their products and compete internationally. Therefore, it is definitely worth for companies to engage in projects that help transform their operations in these directions.

The areas where we are ready to support corporate investment are improving process efficiency and digitalisation. Corporate governance issues are equally important: when companies invest in improving management and control systems, their clear decision-making structures and transparent financial accounting make them more attractive to banks.

I am convinced that the less severe than anticipated Covid-19 crisis and the rapid overcoming thereof will give businesses in Latvia more confidence in themselves and in the future, which will encourage a more active desire to invest both their accumulated and borrowed capital.

Wise long-term investments with a national perspective will enable Latvia to keep pace with the Nordic countries

Environment, social responsibility and corporate governance (ESG) are becoming increasingly important issues worldwide. Significant investments are expected to be made in the coming years to promote economic and social transformation. A current focus in EU countries is the use of The Recovery and Resilience Facility fund. Latvia will receive a significant amount of EUR 1.82 billion. Many targets have been set: 57% of the funds will go towards combating climate change and strengthening digitalisation.

Smart investing will be crucial. The long-term return on infrastructure investments must be carefully weighed. Latvia has every opportunity to keep up with its neighbors in the Baltics and Nordics, but if business environment won’t have enough determination and courage to take risks and think about long-term contributions, EUR 2 billion will not be enough to achieve the goals set.

Also, the role of the State in the further development of the economy will be crucial, both in terms of programmes and initiatives to support businesses, and in defining clear policies in sectors of national importance. Baltic and Nordic countries will need to work together in innovation and invest together in order to tackle the future challenges.

Niina Aikas, Head of SEB Baltic Division