The Baltic States: a negative investment position

By Oleg Bozhko

We have to acknowledge that all three Baltic States are net-debtors, i.e. in their financial relationships with the world community they are insolvent, contemplates Latvian reviewer.

What is IIB?

S. Tulenev, Chas

International investment balance (IIB) reflects the ratio of foreign assets and liabilities of residents of a given country at a certain date. Structure of the IIB corresponds to structure of the second unit of the balance of payments (BP) - the so-called account of capital and financial operations. The difference is that BP reflects the situation for a yearlong period, whereas IIB shows the accumulated result starting from the date when the Baltic States regained their independence (See Table).

If non-residents’ financial investments in the economic development of a certain state exceed residents’ financial investment into their own economy, than the IIB balance (the difference between foreign assets and liabilities) becomes negative, and the country is regarded as a net-debtor in financial relationships with the world community.

If the IIB balance is positive, then the country is a net-creditor; these are basically the advanced countries. For example, Japan having the biggest in the world positive IIB balance - about 1,5 trillion dollars (plus 30% to the GDP).

Largest Baltic debtor country - Estonia

All the Baltic States and the majority of other developing countries in the world alike, are net-debtors, and Estonia has the largest negative IIB balance, i.e. 62,1% of the GDP. That happened basically due to direct foreign investments (DFI) in Estonia which exceed presently 4 billion Euro. Quite remarkable is that Estonian residents “channel” most of their DFI to Lithuania – 44%, and to Latvia – 32% (Cyprus with 14% DFI is at the third place).

For the last two years Lithuania has markedly outstripped her two neighbors in terms of growth of the DFI. For example, the growth in 2002 was 23,7%, and the aggregated DFI’s growth during the last 11 independent years reached 13,2 billion lits. In the beginning of 2003 Lithuania almost caught up with Estonia in this regard. However, in per capita DFI Lithuania lags behind Estonia about 2,2 times, but outstrips Latvia in this indicator: about a thousand Euro DFI per capita in Latvia. 

The DFI share in Estonia in 2002 reduced almost two times, up to 5,2 billion from 9,4 billion Estonian crones in 2001. However, Estonian experts believe, that this year foreign investments will again flow into the country in the previous volumes. As an example experts mentioned already fixed deal to sell Estonian wood-processing company Sylvester to Finnish concern Stora Enso for 2 billion EEK.

Long-term foreign investments, i.e. DFI plus long-term foreign loans, make up about 90% in Estonia, in Latvia – about 66%, and in Lithuania – 60%. That is an important stability factor for national currency, especially in critical periods when short-term loans, e.g. portfolio investments usually escape from the country.

National investments: specific features in the Baltic States

Latvian specific feature is such that her residents make double so much portfolio investments abroad than foreign portfolio investors do in Latvia. Right the opposite situation is in Estonia and Lithuania where non-residents invest from 2 to 4 times more in these countries than their residents do abroad.

Probably, this is the main reason why Latvian stock market continuously stagnating. Really, if this market does not attract the residents who know the local market “from within” and in fact do not believe in it, how could it be attractive to foreign investors?

It is worth reminding that investment in securities and derivatives is regarded a portfolio investment if investor gets less than 10% interest on invested capital. In contrast to direct investments when investor gets from 10% to 100% interest on invested capital, portfolio investments are, as a rule, short-term and have a speculative character. By other kind of investments are meant various   other international financial deals, e.g. deposits, loans (including trade loans), etc.

The greatest turnover of modern financial derivative tools (forwards, futures, SWOPs, etc.) has been registered in Latvia – 28,5 million Euro. Out of this amount about 3/4 of financial deals was made at the home market; most likely these were the Bank of Latvia’s currency SWOPs. The situation in Estonia is completely opposite: over 2/3 of the derivative financial tools’ turnover takes place in foreign markets.

An essential share of foreign assets of the Baltic States is made up of  gold reserves in their central banks: from 25% in Estonia up to 54% in Lithuania. They play an important role of “covering” the national currency in circulation as they have been rigidly fixed to major foreign currencies, i.e. to Euro and the SDR currency basket.