Key political risks to watch in the Baltic states

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Aug. 14, 2012 09:59
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Swedish Minister of Foreign Affairs, Carl Bildt holds the Baltic state flags in Stockholm to mark the 20th anniversary for the return of the baltic states to independence on August 27, 2011.
Photo by AFP

The government of Lithuania faces the biggest challenge this year in the Baltic states as opinions polls show it likely to lose an election in October to the centre-left opposition Social Democrats.

Both the Latvian and Lithuanian governments have set their eyes on euro adoption in 2014, though the euro zone debt crisis has cast a shadow over such ambitions.

Lithuanian President Dalia Grybauskaite said in a recent interview that the euro crisis might delay Lithuania's euro plans.

Following are some factors to watch in the region:


Lithuania holds parliamentary election in October. The centre-right coalition government led by Prime Minister Andrius Kubilius, which has followed the path of tax increases and spending cuts to keep the budget deficit in check, is lagging all three main opposition parties in polls.

All the main parties stated in their election manifestos that, if elected, they would seek to balance state finances. The election will be held against a backdrop of slow economic recovery, with the state budget on track to reach its deficit goal of 3 percent GDP this year, as fixed under the rules to join the euro zone.

What to watch:

Will Lithuania's budget deficit and inflation fail to meet the criteria to join the euro zone? Most analysts agree the margins are likely to be razor thin.

The country needs to roll over or repay a 1 billion euro ($1.24 billion) eurobond in March 2013. Its main goal is to refinance the debt in the international markets, but it might have to appeal for funding from the International Monetary Fund.


Latvia re-elected a centre-right government after a snap election in September last year and in December exited a bailout programme that was overseen by the IMF and European Union.

The economy appears to have recovered from several years of austerity and the government still aims to adopt the euro in 2014. The government plans to pass a supplementary budget later this year, including 70 million lats ($124.22 million) in extra spending that should remain in line with budget deficit targets.

What to watch:

Will the government miss budget targets and jeopardise its goal of joining the eurozone in 2014?

Will the economy grow the 4.0 percent this year and 3.7 percent in 2013 as forecast by the government?


Joined the euro zone last year and Andrus Ansip's government was re-elected in March 2011. But as Europe's economy slows, so too has Estonia's export-oriented growth and unemployment remains high. This could increase opposition for further measures to support troubled, yet better-off, euro zone states like Greece.

Some tensions exist among the ruling coalition partners over privatisation and the listing of some state-owned companies.

What to watch:

The finance ministry will mostly likely revise down its economic forecasts in late August or early September. In March, the finance minister forecast gross domestic product would grow 1.7 percent in 2012 and 3.0 percent in 2013.


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