Tuesday, February 26, 2008

Loss of competitiveness?

Estonian exports in December declined 8% compared to December 2006, while imports declined 3.8%.

This sounds like the dreaded "loss of competitiveness" that economists have been warning about. With salaries rapidly rising in Baltics, so are the prices for Baltic goods and we may reach a point where the rest of the world would no longer buy them at higher prices. And then, the new higher standards of living that we've reached will be unsustainable.

If Estonian numbers represent a trend (rather than a one-time fluctuation which do happen in numbers from small countries like Baltics), Estonia may be there now. Latvia is still not at that stage but the events here repeat Estonia, with 1-2 year delay.

UPDATE: A commenter points out a longer version of the story from Bloomberg. It mentions one of companies that have moved the production from Estonia, due to rising costs: Nolato, a producer of components for mobile phones.

Also, the commenter asks why Rigibor (the interbank interest rate for latvian lats) has fallen so much. (The 3-month rate has fallen from almost 13% in October to 7% now.) I'm not sure but there are two possibilities. It's either some easing policy or the speculators have stopped sending the rates up by borrowing lats for devaluation bets, after realizing that Bank of Latvia will not budge.


hk said...

story from bloomberg on the same topic with additional info on Swedish telecom company relocation

hk said...

also, the rigabor rate has been below euro at 2.5% since the beginning of the year, seems like some sort of easing policy. What's happening with the rates on consumer and mortgage loans denominated in lats.

hk said...

thanks for the reply, what's your thoughts on Hungary abandoning the exchange rate band

obviously some similarities with Latvia (CA deficit, inflation), but some diffrences as well - how's their currency considered 'undervalued'