Wounded in the financial crisis, Baltic states are regaining strength

The “Baltic Tiger” label still applies to the three nations that make up the Baltic states. Despite suffering in the global financial crisis, Estonia, Latvia and Lithuania are growing again.

Image courtesy Jenn: http://www.everystockphoto.com/photographer.php?photographer_id=19229

Rooftops of Talinn, the capital of Estonia

With a nickname derived from the four Asian Tigers – South Korea, Taiwan, Hong Kong and Singapore – the Baltic Tigers share economic attributes that contributed to their rapid growth during the 2000s: highly educated populations, business-friendly regulatory environments, and low labor costs.

The Baltic states won Western confidence during that decade, and the former Soviet republics joined the European Union and NATO. With this confidence came foreign banks and large amounts of foreign capital. That capital fueled investment in industries but also gave average citizens access to significant credit – much more than they could obtain while under the Soviet sphere of influence.

Consumer spending fueled GDP growth in the Baltic states and helped them achieve the highest growth rates in Europe, until the collapse of Lehman Brothers in 2008 led to a global recession and a halt in easy access to foreign capital.

The Baltic Tigers saw some of the harshest economic contraction anywhere in the world during the global slowdown with reductions in GDP of 15% in 2009. Like much of Europe, the Baltic states responded to the economic crisis with austerity measures, and they have experienced varying degrees of success. Estonia’s low debt-to-GDP ratio of 6% has created more confidence than Latvia’s 44% and Lithuania’s 38%. Estonia grew 7.6% in 2011, while the other two Baltic states were almost 2% behind.

All three countries are now focusing on GDP growth based more on exports than on the consumer-spending-led boom that preceded the recession. GDP growth predictions of 4% across the Baltic states for 2013 signal it will take time for the region to fully recover, but leaders hope their liberalized economies will foster the innovation they need to return to their prior status as fast-growing Tiger economies.

Most Baltic equities are not easily accessible to American retail investors, and many ETFs will not have any Baltic holdings. The Guggenheim Frontier Markets ETF (FRNquote), formerly managed by Claymore Securities, provides some meager access to growth in Baltic states. A better strategy to access Baltic markets is investing in foreign companies that have Baltic operations. The banks in the iShares MSCI Sweden Index Fund (EWDquote) are a good example of such companies.