While the economic growth is staggering in the Eurozone entrepreneurs in Latvia maintain cautious optimism. The recent Citadele Index study conducted by the Citadele Bank in collaboration with SKDS market and public opinion research centre suggests that mood index of Latvian entrepreneurs continues to improve. Experts explain this with the Latvian entrepreneurs’ ability to differentiate markets, the capability of offering high quality goods to export markets at competitive prices and with the positive influence of the Latvian domestic consumption increase on entrepreneurship.
The recent Citadele Index study suggests that Latvian entrepreneurs maintain cautious optimism despite the unfavourable tendencies taking place in the Eurozone, and the entrepreneurs’ mood index continues increasing. It increased from 51.89 in the 1st quarter to 53.04 in the 2nd quarter of this year. The indicator is currently at its highest peak since late 2007.
Entrepreneurs claim that the situation has improved slightly during the recent six months – the value of the current index has increased from 47.94 points in the 1st quarter to 51.18 points in the 2nd quarter of 2012. This suggests that in the 1st quarter entrepreneurs saw the current situation as somewhat pessimistic whereas the present situation is regarded as cautiously optimistic during the 2nd quarter of this year. Latvian entrepreneurs also have moderately optimistic views of the next six months: the index has reached 54.9 points.
Construction industry witnesses the most rapid improvement of mood
Analysis of various industries indicates that the entrepreneurs’ mood index has improved in all industries and it is cautiously optimistic. The industry to witness the most rapid improvement of the mood index is construction: the index has increased from 50.62 points during the 1st quarter to 55.13 points during the 2nd quarter of 2012. Manufacturing industry is the runner up with 54.68 points followed by trade (53.24 points) and services (51.88) industries.
“The biggest improvement of the mood regarding the economic activity in the industry has increased most rapidly among the representatives of construction companies. They also tend to be more optimistic than entrepreneurs from other industries in terms of future prospects,” acknowledges Arnis Kaktiņš, the head of SKDS market and public opinion research centre.
Entrepreneurs view the economic activity in Latvia in a positive light The entrepreneurs’ opinion regarding general economic activity in the state has improved significantly. In late 2011 businesspeople saw the economic activity as somewhat pessimistic. In the first six months of 2012 entrepreneurs became cautiously optimistic as the index grew from 43.94 points (in the 4th quarter of 2011) to 51.79 points in the 1st quarter and to 54.39 points in the 2nd quarter of this year.
Entrepreneurs also have positive views of the profitability of companies. During the 2nd quarter of 2012 this indicator exceeded 50 for the first time since 2007. The entrepreneurs’ opinion of the economic activity and competition in the represented industry, turnover, the financial situation and the amount of investments has also improved slightly.
The performance of the Latvian economy improves entrepreneurs’ mood
Zigurds Vaikulis, Chief Economist of the Citadele Bank, comments: “Economic growth in Europe has slowed down significantly. This is the reason why indicators of entrepreneurs’ mood, such as the German IFO index, continue to slide. Our Baltic counterparts also have felt the consequences of the events taking place in Europe. Processing industry in both Lithuania and Estonia are stagnating since mid-2011; this has resulted in a notable slowdown of the growth of the GDP. The situation in Lithuania and Estonia can be explained with the fact that these countries are comparatively more dependent on exports therefore they are more vulnerable to the events in the external markets, especially in the Eurozone. The current increase in domestic consumption comes as strong support for the Latvian economy and the entrepreneurs’ mood.”
Mr. Vaikulis warns, however, that “our country is not immune to external processes: exports to the Eurozone and the Baltic States, the two most important external demand regions for Latvia, have entered the phase of stagnation. As a result export growth pace has decreased after the initial post-crisis acceleration phase, however volumes tend to continue increasing.”
Latvian entrepreneurs reorient themselves to other export markets
Agnese Paegle, the Head of the Corporate Banking Sector at the Citadele Bank explains the entrepreneurs’ positive mood and the growth of exports with the differentiation of markets and with Latvian entrepreneurs' ability to react promptly to changes in the market. “Our entrepreneurs have significantly improved their work efficiency and productivity as well as acquired experience in reacting promptly to unfavourable changes in the market and differentiating markets during the crisis,” says Ms. Paegle.
Mr. Vaikulis also acknowledges that the increase of Latvian exports is continuing to grow thanks to reorienting exports. “A comparison between the data for the export market in the 1st quarter of 2011 and a corresponding period in 2012 reveals that export volumes to such European countries as Germany, Sweden and Lithuania have decreased. At the same time export volumes to such developing countries as Poland and Russia as well as comparatively exotic countries, such as Turkey, Afghanistan, Peru, Algeria, Egypt and Tunisia, continue growing.”
“The increase of Latvian entrepreneurs’ interest in relatively exotic countries can also be observed in the demand for bank guarantees and letters of credit which are necessary in order to participate in local or international tenders. Citadele’s clients have used guarantees and letters of credit for the sake of cooperating with such countries as Brazil, Algeria, Ethiopia, Pakistan, India, Vietnam, Korea, etc.,” explains A. Paegle.
“Macroeconomic indicators suggest that Latvian exporters have made a breakthrough by concentrating on new export markets,” admits Jānis Endziņš, the Chair of the Latvian Chamber of Commerce and Industry. “The position of the Latvian politics has also changed for the benefit of manufacturing companies. This is crucial for further development of manufacturing in our state. The decrease of the employee tax which is to be introduced within the nearest future plays an important role here. This would contribute to the improvement of the economic situation in Latvia even more.”
“Six months ago we said that the entrepreneurs who represent the mechanical engineering and metalworking industry are optimistic regarding the existing situation. In the beginning of this year 56% of the representatives of this industry anticipated the same level of turnover as in the previous year or even higher, and their prospects turned out to be accurate. Exports of metalworking have outstripped timber and food processing volumes during the first six months of this year. The fact that Latvia is no longer merely a supplier plays an important role: the engineering technical potential is utilized, too – we now design and manufacture everything here in Latvia starting from components and ending with end products. We offer high quality goods at competitive prices in the export markets,” explains Ivars Eniņš, Deputy Chair of the Association of Mechanical Engineering and Metalworking Industries of Latvia.
Experts, however, are unanimous saying that in spite of the unfavourable tendencies in Europe our entrepreneurs will face difficulties. The slow development of the economy in the Eurozone will influence Latvian exports indices thus resulting in poorer demands for goods imported into the Eurozone as well as other European and neighbouring countries.
About Citadele Index
The key task of Citadele Index is to obtain a unified index that characterizes entrepreneurs’ subjective assessment of economic conditions in the state. Citadele Index is calculated by summing up and assessing poll results obtained from managers of 750 enterprises of various sizes and representing various industries. The index also reflects entrepreneurs’ opinion and situation prognoses for economic activity in the State, economic activity in different industries and various business activity indices: profitability, turnover, financial condition, number of employees, amount of investments. If the index exceeds the value of 50 points, it speaks of optimism among entrepreneurs. Pessimism can be observed when it drops below the value of 50. SKDS market and public opinion research centre conducts this study in collaboration with the Citadele Bank once in a quarter. The last Citadele Index study was carried out in June 2012.
About Citadele Bank
Citadele is a local Latvian bank which offers banking, financial and asset management services. Citadele group is represented in the Latvian market as well as in 10 other countries. Citadele Bank is the only collaboration partner of American Express in Latvia and Lithuania who is entitled to issue American Express credit cards. In 2012 the bank was recognized as the best governed state-owned enterprise in the Baltic States according to a study conducted by the Baltic Institute of Corporate Governance. Citadele’s vision is to become the most valuable local financial group in the Baltic States. 75% minus one Citadele Bank’s shares are possessed by the State Joint Stock Company Privatization agency on behalf of the Latvian State and the owner of 25% plus one share is the European Bank for Reconstruction and Development (EBRD).