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Vilnius Industry and Business body chief: Baltic economy is about to edge downward.

Although the European Commission's short-term forecasts for the economies of the Baltic States of Lithuania, Latvia and Estonia are among the best EU wide, Sigitas Besagirskas, a prominent Lithuanian economist and President of Vilnius' Industry and Business Association (VPVA), cautions that the trouble is lurking around the corner. "The economies are at their peak of the growth cycle. The trends in the Baltic real estate market do point to their inevitable descent. The only question is whether it will be soft or hard, as in 2008," he told The Baltic Times.

With the year winding down, key indicators of Lithuania's macro economy are good. Is there anything to be concerned about?

As a matter of fact, there are always signs of trouble in any economy, in a rising one, too. What we are obviously seeing today is a ballooning bubble in the sector of real estate. Worrisomely, it is clear in Scandinavia, which sets trends for the entire Baltic region, due to the heavy presence of Scandinavian banks in it. In an attempt to rein in the bubble, the Scandinavian countries have already limited borrowing and have passed a set of measures in the regard. Swedbank and SEB banks were among the first to do it on their own, in fact. We indeed are very reliant on the Nordic countries, not only because of the heavy imprint of Scandinavian capital in the Baltic region, but also owing to the fact that Scandinavia is one of our key export markets. So far, only the German economy seems robust and is free of any recession signs. Germany is also one of our main trade partners.

Are the constraints that Scandinavia passed due to troubles in its real estate market?

Yes, namely because of that. For example, the Swedish government has enacted mortgage (issuance) restraints and to all borrowing on the whole.

They have been in place there for over a year now. Another bad omen is that the value of the three largest Swedish construction companies has been pointing downward for three consecutive years.

If the Nordic banks decide to tighten borrowing further, it is inevitable that their Baltic branches will be told to do the same. Should it happen, it would further prompt shrinkage of the local real estate market. As domestic consumption--one of the economy's key driving forces-reflects what is happening in it, the fallout will be a pace-picking decrease in the demand of goods, and certainly, real estate.

We also see that GDP growth has slowed down, as well as exports. For me, it is evident that the economy has reached, or is about to reach, the peak of its growth cycle and the descension is a matter of time. The question is whether it will be soft or hard, like in 2008.

How is the situation in the real estate market in Lithuania?

Our association has been observing lackluster activities in it since last February. House and flat prices are falling, and this is worrisome, although developers and realtors tend to talk about seasonal price corrections. This is not the case. I see a big danger that the spiral of deflation will pick up velocity.

To illustrate how it will ill-effect the real estate demand, I'd like to use this example. If you have a flat that both you and the realtor value at, say 100,000 Euros today, due to deflation, the realtor will put the price for it at 90,000 Euros next week, its market value will be even lower the following week, and it will be falling until the bottom is reached.

As of date, there are quite a few unsold flats in Vilnius. I want to see how sales will be at the turn of the year. And especially in the spring, as they now are, more or less, affected by seasonal (price) fluctuations. If the demand for real estate remains tepid or continues to decrease, developers, distressed by failure to sell new units, and burdened with the obligation to pay back bank loans, will be forced to further slash the prices. With buyers waiting for the lowest price, the market will fall to stagnation. This is the worst scenario and it seems plausible.

Let's hope purchasing rebounds, but frankly, the prospect of the start of the downward pointing economic circle seems a whole lot more realistic.

The Central Bank of Lithuania has not weighed in on the real estate trends yet, although its governor Vitas Vasiliauskas has hinted at a shaping-up bubble in the real estate market. What do you make of it?

This is understandable. The bank, as the banking system's chief watchdog, does not want to ignite panic with hasty statements. However, it will have to address the issue sooner or later. And furthermore: tighten borrowing and consumption. The situation in Vilnius real estate is no different from that in the other two Baltic capitals, Riga and Tallinn.

What are the other economic problems that Lithuania faces?

Emigration is certainly among the most acute problems in the country. Having assessed how the whole world has developed over the last 20 years and where it is moving to, one problematic thing stands out in particular: who will feed the budget coffers -0in, say, 20 years from now, considering that there are fewer people employed than ever before?

Statistically, in industrialized nations, 10-20 per cent of working people fill up to 80 per cent of the budget, while all the others, including the self-employed, chip in to it insignificantly. To use folksy language, if you run a bakery today and pay taxes, you will get a whole lot more (from the state) in retirement or when ill.

How can the state address the issue of the shrinking workforce and taxpayers?

Through automatization and robotization. The essence is simple: companies out there need to become innovative. That is the only way the increasing army of the unemployed can be handled without a strain to the state.

Speaking of emigration, I want to debunk the popular myth that they are big contributors to the economy. They have contributed billions of Euros before, by sending money to their relatives here, but with them settled in their new homes abroad, and with family members having been brought over (to live with them), the source of the budgetary income is tapering off.

If the ongoing automatization will pick up and get close to the ferocious pace of modernization that, back in the early 1990s, was characteristic to computerization, then neither the depletion of the population nor its aging will seem like a daunting thing.

The EU has funneled large resources into the regions through the Cohesion Fund, but now Brussels policy makers say the policy failed. How so? Haven't our regions become nicer and more comfortable?

Indeed, the policy has not been a success in its entirety. It did fail for the most part. A lot of representative research shows that rich regions worldwide have become richer over the last 50 years, and the poor ones have become more miserable or improved little over the years. Speaking of Lithuania, our regions with the EU pecuniary assistance saw roads repaired, apartment blocks renovated, and nice new edifices built, and so on. But they have not become hubs of economic and business activity. Furthermore, tons of money funneled to rural areas was wasted.

It is evident that the world, the Baltics, and Lithuania, too, clusterize --rich hubs reaffirm their positions and some new ones emerge, but they do so in proximity of the megapolises. Like Vilnius, for example, and in Kaunas and Klaipeda, to a lesser extent.

In a major EU Committee of Regions event last October, a high-profile European Commission official told The Baltic Times off the record that, speaking of the Baltics, it is Estonia that eagerly invests in high technologies and innovations, whereas Latvia and Lithuania traditionally seek EU money for improving the existing infrastructure or building a new one. Do you agree?

Indeed, that is how things are. The EU has told all the member states to list their priorities (of development), the so-called smart specializations. Lithuania has come up with six directions, all of which are fine, I believe. However, the problem is that their execution has hit a stalemate. It would be very advisable that the technological steps were done faster and in a more robust manner.

Indeed, we still often imagine that investments can be only, to speak figuratively, in the brick, i.e. building something or titivating the existing edifices. Because of this approach, we have laid roads in scarcely populated settlements, despite the fact that it was a very costly thing. We do have plenty of nice modern buildings that are lifeless for a single reason: there are no people around them in a radius.

I do believe we have connected the largest Lithuanian clusters, Vilnius, Kaunas and Klaipeda, with larger cities elsewhere in the country, as quickly as possible. Yes, we have roads which are good, but, long-term, we may want to have a fast train running between the cities.

When it comes to investments, the state ought to promote the municipalities according to their concrete investment projects. Like in private business. When you come to the bank for a loan, you don't tell it that you need money to build a nice pergola in your backyard. What you need is to convince the banker about what kind of investment you want to pursue, what the return on it will be, and so on. I don't see it happening when it comes to assessing municipal investment projects.

Traditionally, the Klaipeda region at the Baltic Sea is seen as an attractive place for investment. Has the perception changed in a way?

It has. The Lithuanian seaport Klaipeda's free economic zone (LEZ) does very well, and more companies are willing to set up their business in it. What makes Klaipeda marvelous in general is its seaport--its companies are working very well and contribute tangibly to the state budget. Business-wise, the seaport offers a little higher service price than the rivaling seaport in Riga, yet the Lithuanian port is favored over the Latvian, because of its flexibility and efficiency.

However, in terms of creating an investment environment, the Klaipeda Seaport has not done their homework. I hear about it from investors all the time.

What do you mean?

Today, not only traditional factors matter whether the investor will choose one or another location (to invest), or not. Today, investors are a lot more demanding than they were, say, 10 years ago. And importantly, new requirements have become as important (in selecting location for investment) as the traditional criteria, like availability of a skilled workforce, good communications and transportation, etc. The attractiveness of the city, with the emphasis being put on availability of leisure activities, goes on par today with the traditional criteria of picking out an investment site.

In this regard, in the larger picture, Klaipeda certainly does better than other smaller Lithuanian cities, yet some investors notice that Klaipeda's range of leisure and entertainment is limited, is mostly focused on the seaside and at Akropolis, a popular mall. But, this is not enough for the new generation of investors, who look for a vibrant, all-inclusive cool place in general.

I remember, five or so years ago, a Danish company had zeroed in on the city of Siauliai as its possible investment location. They liked many things there, but at the end of the day, it voted down the city, because of a simple reason: there was little to do in the city in leisure time. The serious-faced Danes were telling me their high-level managers would be doomed to an inadequate life there, marked with limited amusement and leisure possibilities. In other words, the Danes and their families would have been bored in the city.

As the West has long embraced socially-oriented business standards, we in Lithuania ought not to forget that, nowadays, a whole lot more is needed to bring in investors than a good infrastructure and skilled workforce.

Linas Jegelevicius

Caption: Sigitas Besagirskas is a prominent Lithuanian economist and president of Vilnius' Industry and Business Association (VPVA).

Caption: Sigitas Besagirskas: "We are obviously seeing a ballooning bubble in the sector of real estate."

Sigitas Besagirskas' personal archive
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Author:Jegeleviciu, Linas
Publication:The Baltic Times (Riga, Latvia)
Geographic Code:4EXLT
Date:Nov 29, 2017
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