2012年-CEPS欧洲政策研究中心_Are_the_Balance_of_Payments_Deficits_in_the_Baltic_Countries_Sustainable_27页_195kb

Summary of "Are the Balance of Payments Deficits in the Baltic Countries Sustainable?"

Core Content

This paper investigates the sustainability of the balance of payments (BoP) deficits in the Baltic countries (Estonia, Latvia, and Lithuania) over the past decade. Despite their economic success in terms of GDP growth, inflation control, and fiscal discipline, the persistent current account deficits raise concerns about long-term economic stability and the risks associated with fixed exchange-rate regimes.

Main Viewpoints

• Current Account Deficits: The Baltic countries have experienced large and persistent current account deficits, averaging 8.1% for Estonia, 7.1% for Latvia, and 8.6% for Lithuania from 1995 to 2002.
• Sustainability of Deficits: The paper argues that these deficits may not be sustainable in the medium to long term, especially under fixed exchange-rate regimes, which increase vulnerability to currency crises.
• Risk of Currency Crises: The risk of a currency crisis is heightened by the structural nature of the deficits, the reliance on short-term capital flows, and the presence of 'original sin'—currency mismatch in external debt.
• FDI as a Stabilising Factor: Foreign direct investment (FDI) is considered a more stable source of financing for current account deficits. However, the paper cautions that FDI may not remain a reliable source indefinitely, especially as it may shift from reinvestment to dividend payments in later stages.
• Exchange-Rate Regime: Fixed exchange-rate regimes, particularly those based on currency boards or narrow fluctuation bands, are more vulnerable to currency crises than flexible regimes.

Key Information

1. Economic Performance of the Baltic Countries

• Real GDP growth has averaged around 5.7% annually since 1995.
• Inflation has been reduced to EU levels, and budget deficits are below 3% of GDP.
• Debt-to-GDP ratios are relatively high compared to other EU countries.
• Trade has significantly increased and reoriented towards Western markets.

2. Theoretical Framework for BoP Deficits

• Current account deficits reflect intertemporal optimisation of consumption and saving in open economies.
• A deficit is sustainable if it can be offset by future surpluses, depending on the growth rate and interest rate.
• Public deficits and fiscal imbalances can undermine the sustainability of BoP deficits, especially in the context of economic policy.

3. Dynamics of Long-Term Debt Burden

• The debt burden is calculated as $ b = D / (P Y) $, where $ D $ is external debt, $ P $ is the price level, and $ Y $ is real GDP.
• The long-term dynamics of the debt burden depend on the relationship between the real interest rate $ r $ and the real GDP growth rate $ y $.
• If $ r < y $, the debt burden may stabilize; if $ r > y $, it may grow indefinitely.
• The composition of the current account deficit matters: trade deficits increase the debt burden, while transfer deficits may indicate a more mature and stable situation.

4. Economic Policy Vulnerability

• Capital Flows: Short-term capital flows (hot money) are more volatile than long-term flows. FDI is seen as more stable, but its benefits may diminish over time.
• Public Sector Deficit: Public deficits may distort national savings and investment, and could lead to macroeconomic instability.
• Original Sin: The problem of currency mismatch in external debt increases the risk of insolvency during a currency crisis.
• Exchange-Rate Regime: Fixed exchange-rate regimes, especially those with narrow bands, are more susceptible to currency crises due to limited flexibility in adjusting to external shocks.
• Openness and Labour Market Flexibility: More open economies and flexible labour markets are better equipped to handle external debt servicing issues.

5. Economic Development in the Baltics

• The current account deficits in the Baltic countries have been largely driven by trade deficits.
• FDI inflows have helped to finance these deficits, but their impact on the debt burden may be limited in the long term.
• The accession to the EU in 2004 and the eventual adoption of the euro will bring structural changes that may affect the BoP position.
• The Baltic countries are expected to benefit from EU structural funds and remittances from migrant workers, which may help to improve the current account balance.

Conclusion

The paper concludes that while the current account deficits in the Baltic countries are not immediately unsustainable, they pose significant risks in the medium to long term, particularly under fixed exchange-rate regimes. The transition to the euro and the eventual removal of trade barriers may help to stabilize the BoP position, but the structural nature of the deficits and the exposure to currency mismatches suggest that the risk of a currency crisis remains a concern. The sustainability of the current account deficits ultimately depends on the ability of the countries to maintain economic growth, manage public finances, and reduce reliance on volatile capital flows.