Spoke today (wow, these have been some busy public speaking weeks?) on East Capital‘s summit in Tallinn on the topic of building global Skype from the tiny Estonia. As the organizers introduced, the few hundred people in the audience indirectly represented about a quarter of a million investors who have put their money into the Baltics through East Capital. Hopefully I could help them understand the realities of what their capital can do in Estonia (effectiveness, innovation) and what they shouldn’t expect to happen with it (labor intensive industries).
I could just stay for a few other sessions, including the always enjoyable President Ilves‘ keynote. Despite his claims that he doesn’t know much of how the economics work, I still like the diplomatic & historic angles he can bring into a speech to make it interesting.
However, it was the very driven presentation from Mr Anders Aslund that really left me thinking. He claimed that all the analysis predicting a sharp collapse of the current economic boom in Estonia are overlooking two things (pardon potential misuse of terms as I’m by far more macro-economically challenged than the President):
- Even though there still is a significant foreign trade deficit, it is mainly due to statistical errors that derive from the accounting policies of local dominating Swedish banks (SEB & Swedbank/Hansapank). Suggestedly, their accounting internally treats transactions that in content are foreign investment flowing into Estonia, as short term credit between bank’s entities. thus messing up statistics on country level.
- High inflation is the only valve a country with a fixed exchange rate currency (such as the Estonian Kroon tied to Euro) has to deal with natural price increases. And thus the absolute inflation number shouldn’t be read into in the same way as with economies that have a freely fluxuating currency.
I don’t fully get (or thus yet buy) neither of the arguments, noting them down here to remember for a next chat with friends who know more about finance. You’re welcome to comment here of course.
Another reminder today: viewing the Baltics as a closely tied group is still a mistake. Lithuania is growing steadily and cautiously compared to Estonia. And various overheating risk indicators in Latvia are skyrocketing compared even to Estonia. However, the investor psychology still groups all three together because of small size, so if anything happens in any of those, the effects are imminent for all.