1. Peeter Piho, Swedbank Investment Funds
Do the Baltics deserve a second look? Scrutinising the
reasons for investor skepticism
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May 2010

2. The Baltic states
ESTONIA
GDP: €16.2bn
Pop: 1.34 mln
LATVIA
GDP: €18.3bn
Pop: 2.26mln
LITHUANIA
GDP: €27.7bn
Pop: 3.34mln
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3. Rise of the Baltics: 2000 – 2007
Real GDP Growth Rate (%)
Continuous GDP growth at average rates of
approximately 8.3% in Estonia, 8.7% in Latvia Estonia Latvia Lithuania EU27
and 7.5% in Lithuania, facilitated by: 15
•stable currency rates based on currency boards 10
in Estonia (since 1992) and Lithuania (1994),
fixed exchange rate in Latvia (1994)
•strong, compliant and innovative banking system
5
dominated by large Scandinavian banks since 0
late ‘90s 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009(f)2010(f)
•investor friendly economic policies -5
•simple, advanced taxation principles introduced
early (flat income tax in all three countries, no -10
corporate income tax in Estonia)...
-15
... But most importantly by:
•Strong FDI inflow Insert your Company
•Cheap credit widely available for banks to be Logo here
onlent to companies and individuals.

4. Fall of the Baltics 2008-2009:
GDP plunged hitting double-digit levels
Latvia bailed out by the IMF, Lithuania borrowing in the market to compensate for deficit.
Prompt devaluation of currencies was widely expected by foreigners across the winter 2008-
2009.
Export opportunities vanished due to the global crisis.
Consumer confidence dropped to all-time lowest level
After acute lack of labour up to 2007, unemployment skyrocketed within 12-18 months from ca.
4-5% to 14-17%
Banks panicked and cut lending to corporate sector; loan portfolio decreasing
Whole region generally despised by the investors’ community
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5. Before it all happened, investors had their say
In 2008 investors had said:
... and did not invest any more
 Your economies are unbalanced and need to Foreign Direct Investment Inflow (% of GDP)
25.0
be delevered
22.5
EXTERNAL DEBT/GDP 1.10.2009
20.0
160% 17.5
140% 15.0
120%
12.5
100%
10.0
80%
7.5
60%
40% 5.0
20% 2.5
0% 0.0
LAT SLK HUN EST SLV BUL LIT ROM POL CZK
-2.5
 Your currencies are overvalued and currency
Mar Jul Nov Mar Jul Nov
05
Estonia, EEK
06
Latvia, LVL
Mar Jul Nov Mar
07
Lithuania, LTL
Jul
08
Nov Mar Jul
09
Nov
10
pegs will not hold Source: Reuters EcoWin
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 Your assets are too expensive... Logo here

6. Exploring debt burden
Gross external debt (% of GDP, Q3 2009) Nominal debt is high but there are few things to highlight:
160% -Financial sector debt accounts for >50%. It’s all Nordic
140% banks’ loand to their Baltic subsidiaries;
120% -Another big chunk is FDI related
100% -Government’s share negligible even after Latvian IMF
80% package and Lithuanian 2008/2009 bond programs:
80% Government debt 2009
60%
70%
40% 60%
20% 50%
40%
0%
30%
Estonia Latvia Lithuania
20%
Banks FDI related Government Other 10%
0%
Estonia Latvia Lithuania EU 27
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Source: Eurostat Logo here
Most of the debt not actually collectible – Scandinavian banks not in position to call their loans.
The Baltic countries (except Latvia, for fiscal reasons) did not actually face liquidity crisis.

7. Exploring debt burden – financial sector
Baltics total (EUR 75.4 bln) Estonia (EUR 20.6 bln) Latvia (EUR 30.0 bln)
remaining; remaining; 18% Swedbank; 23%
Unicredit; 5%
2%
remaining; Parex; 1%
Swedbank;
15% Aizkraukles; 0%
Danske; 49%
Swedbank; 10% Hypoteku; 4%
Unicredit; 2% 30% DnB Nord;
2% Unicredit; 4%
Nordea;
Danske; 5% 13% SEB; 14%
Parex; 17%
Parex; 7%
Nordea; 10%
Danske; 1%
SEB; 20% DnB Nord; 9%
DnB Nord;
9%
SEB; 21% Lithuania (EUR 24.8 bln) Source: local banking associations
Nordea; 11% and FSAs, centrals’ bank data.
Siauliu; 2%
remaining; 1% Data as at end 2009
Snoras; 7%
Swedbank; 22%
Ukio; 5%
Unicredit; 1%
• Banking sector highly concentrated Parex; 2%
Danske; 7%
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• Scandinavian banks dominate the market Logo here
in Estonia totally, in Latvia/Lithuania DnB Nord; 14%
minority controlled by locals SEB; 30%
Nordea; 10%
Five largest banks have over 75% of the market share which is similar to Nordic countries

8. Lending before and after September 2008
• Combination of abundance of cheap
international credit and small size of the Baltic
markets pushed banks to fuel the loan growth
for years.
• Lehman crisis triggered a panic and banks
pulled the breaks. By Feb 2010 they have
taken out over EUR 2 billion purely from
corporate clients.
• Some of that reduction was prudent, some
clearly an over-reaction, and some needs to be
substituted by more appropriate capital.
• Deleverage represents ca 7% of the portfolio in
2008 and ca 6% of pre-crisis GDP.
• The key question is what will the banks do next
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9. Exploring exchange rate risk
Currency pegs in place: In 2008/2009 the market believed that devaluation
 Estonia (kroon, EEK)
is underway, starting from Latvia
Interbank Rates, 6 Month
Currency board since 20
20.06.1992 (initially fixed 27%
18
vs.DEM)

16
Latvia (lats, LVL) 01.01.2005
pegged to the €, +/-1% range.
14
1994-2004 was pegged to 12
SDR basket of 4 currencies; 10
 Lithuania (litas, LTL) 8
Currency board; 02.02.2002 6
at a fixed exchange rate
against EUR. 1994-2002 fixed 4
vs.USD 2
0
04 05 06 07 08 09 10
TALIBOR RIGIBOR VILIBOR EURIBOR Insert your Company
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10. Devaluation unlikely from the beginning
 Symbolic status of the pegs – overlooked by foreigners
 It would not have resolved problems due to open nature of the economies
 Substantially all bank loans in the Baltics have been nominated in euros, correct. But collection in € when
currencies devalued
Loan exposure in the Baltics
- Would have triggered credit losses for leading 200
Loan exposure in the Baltics
Shareholders' equity
banks in the magnitude jeopardizing their 180 172
capital base (see chart); 160
162
- Would have hit private individuals – 140
borrowers; that would have been politically 120
bn SEK
unacceptable; 100
95.4
89.9
80

60
All relevant parties against devaluation: 40
• Government 20
• Banks 0
• Entrepreneurs
• People (=mortgage borrowers) Insert your Company
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11. Response 1
Internal devaluation instead of nominal exchange rate adjustment
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Countries opted for adjustment via domestic labour market and fiscal tightening.
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Massive wage and employment cuts have proven the flexibility of real economy
and labour market.

12. Labour market flexibility has supported internal adjustment
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Source: Carley
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13. Response 2
Fiscal tightening
Governments cutting costs heavily:
 Estonia and Lithuania
voluntarily;
 Latvia under IMF programme;
 Estonia with it’s budget position
at -1,7% one of 5 EU countries
that met Maastricht criterion in
2009.
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14. Consequences 1
Loss of external competitiveness has now been stopped
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Internal devaluation takes generally longer time to have a meaningful effect.
First positive signs in export performance started to emerge at the end of 2009.

15. Consequences 2
Economic grounds for devaluation have effectively been removed
Inflation (HICP) growth (%) Balance of payments, current account (EUR mln)
Estonia Latvia Lithuania EU Average Estonia Latvia Lithuania
800
18
600
16
14 400
12 200
10 0
8 -200
6 -400
4
-600
2
-800
0
-1000
-2
-1200
-4
-6 -1400
Source: Eurostat
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15

16. Estonia’s euro accession
Maastricht criteria as of end 2009
Criterion Target value Estonia
Inflation 1,5% 0,2%
Government debt 60,0% 7,2%
Budget balance -3,0% -1,7%
Interest rates 6,1% N/A
Latvia and Lithuiania targeting to join in
2014
12 May publication of Estonia’s convergence report
June recommendation of euro-area Member States
8 June ECOFIN meeting, discussion of Estonia's compliance
18 June the European Council discusses Estonia's readiness to
join the euro area
13 July ECOFIN's final decision about Estonia’s accession
1 Jan 2011 Eurozone entry

17. 2010 - 2011 Time to enter for daring investors
From macroeconomic point of view:
 Acute recession is over. Export is a key to set the pace for recovery.
 Estonian eurozone entry will add stability to entire region. Devaluation currently off the
table, internal adjustment instead of exchange rate.
 Painful cost-cutting done, competitiveness improved.
In the market, almost no PE backed deals over the last two years. It will change since:
 Availability of financing still restrained, fundamentally healthy companies seeking
replacement capital.
 Extensive, diverse pipeline across the region and sectors.
 Valuation gap narrowed down.
 Revival of private equity (and property) investors’ interest visible.
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 Strategic investors already buying (2 major delistings)

18. Thank you!
Peeter.piho@swedbank.ee
+372 613 1582
+372 503 0130
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