Foreign businesses cut back, but don't pull out.
In the boom times of days gone by foreign investment flowed as businesses sought to capitalize on the emerging Baltic markets.
But after gorging on easy credit and now faced with huge current account deficits and soaring debt, the Baltic States, and in particular Latvia, emerged as among the worst performing regions in Europe. Andris Ozols, director of the Investment and Development Agency of Latvia (LIAA) told subscribers of the organization's quarterly publication Latvia Invest that Latvia and its current economic challenges stemmed from both the global economic crisis and overheated growth of the economy in the past.
"Today, due to the global economic and financial crisis, Latvia has been affected like any other country and most certainly we are facing a number of difficult economic challenges. However, we are determined to overcome them. For this objective the Government of Latvia views attraction of foreign direct investment as an important tool for a successful economic recovery," Ozols said. However, a May 6 survey by the German-Baltic Chamber of Commerce in Estonia, Latvia and Lithuania (AHK) found some 80 percent of respondents were pessimistic about the economic situation and business environment in the Baltics.
Nine out of 10 companies surveyed expect further economic decline in 2009 and only 10 percent of companies expect further growth of turnover and profit in 2009, with the majority anticipating further steep decline. The majority of companies surveyed plan to limit their investment activities and might be forced to cut jobs in the current year due to the ongoing economic situation. Nevertheless, quite a few companies are still planning to keep their investments and employee numbers at current levels. Indeed, many are continuing to develop long-term strategies and business plans in expectation of better times ahead.
Though the attractiveness for investments in the Baltics has undergone a steep decline, the AHK survey found there was no obvious trend toward foreign companies pulling out of the region.
However, many companies polled cited ongoing corruption issues and high levels of bureaucracy within government organizations and institutions as a major barrier to business development in the region.
"Due to the current economic crisis the Baltic States face tremendous challenges. In the current situation political and economical stability and predictability are of utmost importance. Especially in times of great economic uncertainty, companies want and need to operate in a stable framework which offers reliable parameters for their entrepreneurial decisions," said AHK President Gunter Dunkel.
The AHK poll, which surveyed 118 German companies on site with the aim of assessing satisfaction with the conditions for doing business in the region, also saw the Baltics slip in terms of business competitiveness in Eastern Europe.
Latvia was ranked as the 11th most attractive country for doing business, down from seventh the previous year, while Lithuania was ranked 10th, down from fifth in 2008.
Estonia remained the same in sixth position. All three Baltic States were ranked behind the Czech Republic, which was deemed the most attractive country for doing business, and ahead of Albania in 18th place, rated the least favorable country for business.
CRASH AND BURN
Worldwide Foreign Direct Investments (FDI) in Latvia shrank by about 20 percent in 2008, and there is little doubt that recession will continue throughout this year and in 2010.
During the last three quarters of 2008 Latvia received 1.05 billion euros in FDI, a decrease of 24.4 percent when compared to the same period in 2007. A report published by the European Commission at the beginning of 2009 contends the global economy will grow by just 0.5 percent this year, but that of the European Union will decrease by 1.9 percent.
The recession has also hit Latvia's major investors, with Germany, the U.K. and the Nordic countries among those already affected.
Jan Brink, director of German construction company Bauplan Nord, said current market conditions in Latvia were strangling the real estate and construction sector.
According to Brink banking finance for development projects has dried up, making it almost impossible to invest in Latvia at the moment without some kind of private equity backing.
"There is a tremendous difference now. When we entered the sector [in Latvia], prices were rising very fast, at the same time rents were also rising," he said.
The company, which has been operating in Latvia for five years, completed its last major project in December 2008.
Brinks said the company initially struggled to attract tenants at its new Upmalas biroji office complex in Pardaugava.
"We were lucky to rent it out and we will have a big challenge to keep our tenants," said Brink.
"This is just one side of the story. It's not a catastrophe, but it's not a success story either," he said.
Brink said the economic situation was likely to worsen in the short-term and that recovery in the real estate sector would only come once the economy as a whole had stabilized.
"I can't see the upswing coming from the real estate sector itself. Recovery must come from either outside or from other industries inside. Right now there is a definite oversupply in all fields of the real estate sector. We need to fill up those empty spaces first before new investment in construction and real estate is possible," he said.
According to Ozols there remain divergent opinions within the business community about the conditions of doing business in Latvia. While the global economic crisis, credit crunch and ongoing financial market turbulences continue to impact on the business decisions of companies, Ozols believes there remain positive investment opportunities in Latvia present today.
Swedish-born businessman Mats Johansson, who runs his own computer maintenance business, agreed there are still opportunities in the Latvian market for smart, targeted investment.
"Business is still going and that's why I believe there is still opportunity. In this case the country is not dead. Of course some businesses are struggling, but others will continue," he said.
Like many businesses in the Baltics, Brink said Bauplan Nord was also digging in for the long haul and bracing for further market downturn.
"We will have another time that's very tough in the next year, but this situation will not last forever. Real estate development has very long-term dimensions," said Brink.
"In this business environment you have to stay strong. It may be one to three years before we see any upswing in construction. We are very long-term oriented. Everybody thinks it [economic improvement] will come, but the question is when," he said.
The German businessman also believes Latvia's market has potential and is confident the country will be able to claw itself back from the current financial abyss.
"I think Latvia will sooner or later close the distance in all economic fields and the gap between [Eastern and Western European] countries will close," he said.
Johansson, who plans to open a year-round sport's themed bar in Riga's Old Town later this month, said current market conditions and falling rent prices had paved the way for his latest business venture. Despite the current economic times, Johansson said he was optimistic about the future of his latest business project in Latvia.
"People always find the money to go out even in times of crisis. People still want to have fun and forget about reality. There's a demand for it. Gaming and alcohol goes even better in the bad times than they do in the good times," he said.