baltic cfo outlook - seb bankas · 2017-09-04 · b23765 cfo o17344fi 4 2372651 4fi08 the...

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Baltic CFO OutlookOctober 2016

Baltic CFO Outlook

2 october 2016

Mihkel Nestor

Economist

AS SEB Pank

Tel. +372 665 5172

[email protected]

The Baltic CFO Outlook is based on a survey conducted by SEB:

• Participation by the 263 biggest companies in the Baltics

• Respondents – CFOs of the companies

• Hot topics: cost-cutting plans, digitalization, and innovation

Contents

Baltic CFO Outlook

3october 2016

Executive Summary

• Out of the three Baltic states, CFOs from Lithuania continue to be the most optimistic when it comes to both future business conditions and their company’s financial position.

• However, compared to 2015, expectations regarding the business climate over the next 6 months have deteriorated in Lithuania, while having improved in Estonia and remaining unchanged in Latvia.

• The greatest concern for Baltic companies continues to be low aggregate demand, although it is lower in Estonia and Lithuania than a year ago.

• Due to strengthening labour markets and high wage growth, finding skilled labour is a growing problem.

• Despite increased concerns over labour costs, companies in each of the Baltic states plan to hire more employees.

• The primary use of cash surpluses continues to be strategic investments, although an increasing number of companies are considering making them abroad.

• CFOs see the era of digitalization as an opportunity to increase efficiency in their everyday work.

Baltic CFO Outlook

4 october 2016

The macroeconomic climate in the Baltics has not changed signi-ficantly since last autumn, when the previous CFO survey was car-ried out. During the first half of 2016, the economies of Latvia and Lithuania both grew by a moderate 2.1 per cent in real terms. Estonia has been the worst performer thus far, experiencing a modest 1.1 per cent rate of GDP growth. The common denominator of the Baltic economies has been significant reliance on the growth of private demand, which again is supported by strengthening labour markets.

During 2016 H1 private consumption increased around 4 per cent year-on-year in each of the countries. Despite the low interest rates, capital spending remains weak with investments declining in Latvia and Lithuania and growing only marginally in Estonia. According to current macroeconomic forecasts, the rate of growth should nevertheless accelerate in 2017, as the Latvian economy is expected to grow by 3.5 per cent, Lithuania by 2.5 per cent and Estonia by 2.4 per cent.

Assessment of business conditions for the company in the next 6 months

As in the previous year, among the three Baltic states, Lithuanian CFOs continue to be the most optimistic regarding the futures of their companies. Fifty-three per cent of the respondents in Lithuania assess business conditions for their company to be favourable in the next 6 months. Nevertheless, compared to the previous year, business confidence has deteriorated somewhat, as last year the respective share was 57 per cent. A clear opposing trend can be seen in Estonia, where the share of CFOs considering future business

conditions to be favourable has increased from 36 per cent in 2015 to 44 per cent this year. While in 2015 the aggregated sales revenues of Estonian companies were in decline, this year growth has been restored, which may explain the surge in optimism. Business condi-tions are perceived as being rather stable in Latvia, where the share of CFOs giving a positive answer to the aforementioned question was 43 per cent in 2016 and 44 per cent in 2015.

Assessment of the overall financial position of the company

11%8% 10% 11%

16% 13% 13% 15% 16%

32%35%

35%45%

38% 42%

59%46%

40%

49% 55% 52%42% 43% 40%

21%33%

42%

Sep-14 Sep-15 Sep-16 Sep-14 Sep-15 Sep-16 Sep-14 Sep-15 Sep-16Lithuania Latvia Estonia

Very unfavourable Not so favourable Average Favourable Very favourable



8% 7% 10% 7% 6% 5%

23%11%

23%29% 25% 21% 27% 30% 28%

65%75%

58%53% 60% 58% 55% 57%

56%

10% 12% 16% 11% 6% 9% 9% 7% 12%

Very unfavourableNot so favourableAverage

FavourableVery favourable



Baltic CFO Outlook

5october 2016

The underlying condition for the optimism of Lithuanian CFOs is the strong financial positions of their companies. While in Latvia and Es-tonia 67 to 68 per cent of the respondents believed their company’s financial position to be favourable, the corresponding share was 74 per cent in Lithuanian companies. This fits well with the trends observed in national accounts. While operating surplus and mixed income constituted 46 per cent of Lithuania’s GDP, in Latvia the sha-

re was 43 per cent and in Estonia only 37 per cent. However, compa-red to last year, the confidence of Lithuanian CFOs has plummeted: in 2015, as many as 87 per cent described the financial positions of their companies as being favourable. In terms of overall business confidence, the assessment of the financial position remains almost unchanged from the previous year’s level in Latvia, but has improved in Estonia, despite the continuing decline in profits.

Expected changes in the cash flows of companies over the next 12 months

While expectations for business conditions remained relatively unc-hanged in Latvia, many CFOs were more positive when it came to future cash flows. Whereas in 2015, 49 per cent of the respondents believed that cash flows would increase over the next 12 months,

this year it was expected by 52 per cent of the respondents. In Estonia, that share increased by 2 percentage points to 53 per cent. Optimism decreased among Lithuanian respondents from 58 per cent in 2015 to 50 per cent this year.

The greatest concerns of companies in 2016

The greatest concern for Baltic companies continues to be low agg-regate demand. Although private consumption has been growing at a relatively healthy pace in each of the countries, growth in capital spending and exports has been slow or even negative. As all of the countries continue to be net recipients of EU funds, a change in the EU Structural Funds period has also had a negative impact on public sector investments. Fortunately, the share of respondents conside-

ring low demand to be the key problem has somewhat declined in Estonia and Lithuania. In Latvia, however, weak demand has become a much bigger problem than it was in 2015, which could be explai-ned by this year’s sharp decline in capital spending. Growing private consumption in many export markets and recovering public sector investments should, however, serve to boost demand next year.

No opinion Decline by more than 10% Decline by 0-10%

Remain unchanged from current levelsIncrease by 0 -10% Increase by more than 10%

9% 11% 10% 8% 4% 9% 13% 7% 9%

34% 31%36%

24%38% 36%

39%38% 34%

37% 49% 40%55%

43% 44% 34% 42% 40%

16% 9% 10% 11% 6% 8% 11% 9% 13%


0%

20%

40%

60%

Demand Skilled labour

shortage

Cost of raw material/

commodities

Labourcost

Foreign competition

Access to capital

Exchangerates

Interestrates

LT Sep-14 LT Sep-15 LT Sep-16

LV Sep-16

EE Sep-14 EE Sep 15 EE Sep-16LV Sep-14 LV Sep-15

Baltic CFO Outlook

6 october 2016

Strengthening labour markets have had an impact on the perceived skilled labour shortage. Last year, unemployment decreased the most in Lithuania, from 9.4 per cent in Q2 2015 to 8.0 per cent in Q2 2016. In Latvia, the unemployment rate reached 9.5 per cent in Q2 2016 – 0.3 percentage points lower than the year before. In Estonia, the unemployment rate remained unchanged at 6.5 per cent of the active population. Although the share of CFOs deeming the labour shortage to be a problem has increased in each of the Baltic states, it has been most acutely felt by Lithuanian enterprises, where 43 per cent of CFOs cited it as an issue. The corresponding figure in Latvia was 39 per cent, up from 35 per cent in 2015. Despite having the lowest unemployment level, the shortage of skilled labour seems to be somewhat less of a problem in Estonia, where 33 per cent of the respondents cited it as an issue.

Along with the shrinking labour supply, the cost of labour has become an increasingly serious issue. In Estonia and Lithuania, average salary growth reached 8 per cent year-on-year in the first half of 2016; in Latvia, growth was more moderate at 5 per cent. The situation is well-reflected in the survey: wage growth was named as a significant concern by 51 per cent of Lithuanian and 41 per cent of Estonian companies. The increase is especially noticeable in Lithuania, where in 2015 a mere 40 per cent of CFOs considered it to be an issue. The cost of labour has also become a bigger problem in Latvia, where the share of respondents citing it as a problem increased from 13 per cent in 2015 to 24 per cent in 2016. Latvia’s larger available labour pool, compared to its neighbouring countries, seems to be holding back wage pressure. Despite having both the highest average salary and the highest wage growth in the Baltics, there were marginally fewer respondents this year than in 2015 that cited wage growth as a concern in Estonia.

The cost of raw materials has become less of a problem in each of the Baltic states. This is no small miracle, taking into account the steep decline of import prices. In 2016 H1, the import price index dropped by 9 per cent in Latvia, 8.5 per cent in Lithuania, and 4.2 per cent in Estonia. Of course, the actual price of production inputs can vary across sectors. In Latvia, 29 per cent of the respondents cited input prices as being an issue, down from 37 per cent in 2015. In Estonia, the respective figure was marginally lower at 26 per cent

in 2016. The cost of raw materials is regarded as being relatively less important in Lithuania, with it being cited by 19 per cent of CFOs. Due to higher oil prices, however, import prices will also stabilise in the near future.

Being small, export-oriented economies, the Baltic states each com-pete heavily in foreign markets. Growing wage levels and a standstill in global trade have further intensified competition. Therefore, it is no surprise that companies increasingly perceive foreign competi-tion to be a problem. During the first half of this year, the export of goods declined by more than 2 per cent in both Latvia and Lithuania, while growing only marginally in Estonia. According to our survey, the share of enterprises in Latvia experiencing intensified foreign competition has grown from 15 per cent to 24 per cent. In Lithuania, the upturn has been equally high – from 12 per cent to 21 per cent. As the only Baltic country experiencing export growth this year, the share of companies worrying about foreign competition has decrea-sed in Estonia from 19 per cent last year to 17 per cent in 2016.

Smaller problems for Baltic companies include access to capital, exchange rates and interest rates. Raising finances seems to be an important issue for around 10 per cent of Estonian enterprises, while the respective figure is 8 per cent in Lithuania and only 5 per cent in Latvia. The share of respondents mentioning it has declined during the last couple of years in Latvia and Lithuania, but grown in Estonia. The cost of capital seems to be less of a problem, as only 6 to 7 per cent of Baltic companies cited it as a concern in the survey. In the current interest rate environment, the latter is no wonder.

Fluctuations in the exchange rate are the biggest obstacle for Lat-vian firms, with 13 per cent citing it as a significant concern is 2016. In Estonia and Lithuania, only 7 and 4 per cent of the respondents identified this as an issue, respectively. Although, when looking at trade figures, Lithuania should be the most vulnerable when it comes to fluctuations in the RUB/EUR exchange rate, most of it is re-export and very few companies have actual exposure to the Russian market. The number of companies doing business with Russia is presumably higher in Latvia. Also, the effect of Brexit and the depreciation of the British pound are having a greater influence on Latvia, as more than 5 per cent of Latvian goods reach the UK.

Expected changes in the number of employees at companies in the next 6 months

28% 29%43%

26% 21% 25% 23% 26% 33%

62% 52%

47%

58% 63% 59% 64% 57%59%

10%18%

9% 16% 16% 16% 13% 17%7%


Increase Be unchanged Decline

IncreaseNo changeDecline

Baltic CFO Outlook

7october 2016

Despite the concerns raised on rapidly increasing labour costs, few companies plan to reduce their number of employees during the next six months. In 2015, the share of companies with the same intention was similar in each of the Baltic states, at around 16 to 18 per cent. This year, companies seem to be much more optimistic in Estonia and Lithuania. In Lithuania, as many as 43 per cent of CFOs said their company is planning to hire during the next six months, while only 9 per cent foresee a reduction in the number of employees. Respondents were also very positive in Estonia, where

the number of firms planning to hire surged from 26 per cent in 2015 to 33 per cent this year. Only 7 per cent of the companies had the opposite plan. The labour market is expected to be more stable in Latvia, where the share of companies planning to reduce their number of staff remained at 16 per cent, unchanged from the pre-vious year’s level. The share of employers planning to increase their number of employees rose to 25 per cent, from 21 per cent last year. All in all, it could be said that the conditions on the Baltic labour markets are set to tighten in the near future.

The lending attitude of financial institutions towards companies

Although the share of non-performing loans continues to be much larger in Latvia and Lithuania, surveyed Estonian CFOs were least likely to consider the lending attitude of financial institutions to be positive. In 2016, a total of 74 per cent of respondents deemed the stance of financial institutions to be favourable or very favourable. However, this can be seen as an improvement from the previous year’s level of 69 per cent. The lending situation seems to be most

adverse in Latvia, where 8 per cent of CFOs claimed the attitude to be unfavourable, while the share of companies experiencing a posi-tive attitude was the highest among the Baltic states at 80 per cent. The lending attitude has somewhat deteriorated in Lithuania, where 5 per cent of the respondents cited the stance as being unfavourab-le and 25 per cent as favourable – down from 2 per cent and 26 per cent, respectively, in 2015.

The probability of a counterpart’s default in the next 6 months

18%26% 25% 22% 25% 27%

18% 15%23%

54%54% 51%

38%

57% 53%57%

54%51%

23%18%

18%

30%

9% 12% 23%27% 22%

4% 4%5% 6% 4%

4%5% 4%



7% 6% 5%

24%15% 10% 11% 7% 2%

86% 86% 91%

71% 85%83% 84% 88% 94%

7% 8% 4% 5% 6% 5% 6% 4%






Baltic CFO Outlook

8 october 2016

As in the previous year, the lack of confidence in the solvency of bu-siness partners continues to be the biggest problem in Latvia, where 10 per cent of the respondents expected a counterpart’s probability of default in the next six months to increase. Nevertheless, the figure has been much higher in previous years. Fear of an increase in bad

receivables has significantly decreased in Estonia, where only 2 per cent of the surveyed CFOs considered it to be likely in the coming months. In Lithuania, 5 per cent of the companies considered it likely that the probability of defaults by counterparts will rise, while 4 per cent believed it will decline.

Expected developments in the interest rate environment in domicile countries in the next 12 months

Globally declining policy rates are not very well mirrored in the survey results. In each of the Baltic states more CFOs believe that interest rates will rather rise during the next 12 months than decline. The gap is the largest in Estonia, where 18 per cent of the respondents predict a rise in interest rates, while 8 per cent expect a decrease. The expectation of higher interest rates is not entirely groundless, as according to statistics from Estonia’s central bank, the average interest rate for non-financial corporations has somewhat

increased since last summer. In both Latvia and Lithuania, 8 per cent of the respondents expect interest rates to rise, while 4 per cent expect a decrease. Compared to 2015, the number of companies expecting a surge in interest rates has nevertheless decreased. From a historic perspective, interest rates continue to remain extremely low in all three countries, which is why it is an excellent time to use cheap financing for investments.

Use of surplus cash in the next 6 months

In each of the Baltic states, the primary use of cash surpluses continues to be strategic investments. Most companies are planning to make investments in their domicile country; however, compared to 2015, interest in foreign investments has increased significantly,

especially in Estonia and Lithuania, where 17 per cent of the com-panies are considering investing abroad. That could also be seen as a maturing of the markets: both Estonia and Lithuania experienced slow GDP growth in 2015, which is why companies may be seeking

75%75%

88%76%

79%88%

68%

69%74%

13%3% 4%

16%4% 4%

21%4% 8%



13%22%

8% 8%16%

8% 11%27%

18%

30%20%

29% 34% 31%19% 20% 15% 16%

38%43%

39%42%

31%42% 44% 54%

39%

15%14% 10%

8%18% 18% 16% 10%

25%

6%5% 4%

5% 10% 4% 6%

8%11% 17% 8% 9%

12% 15% 10% 17%3% 8% 3% 5% 4% 5%


Pay down debt

Strategic investments in your domicile countryDividend to shareholders

Financial investments in your domicile countryStrategic investments abroad

Financial investments abroad


Baltic CFO Outlook

9october 2016

opportunities elsewhere. This is further supported by the fact that a whopping quarter of the companies in Estonia intend to use their cash surplus for dividend pay-outs. The share of companies planning to pay dividends is also high in Latvia, at 18 per cent. Latvia also stands out with a significant drop in the number of companies

planning to use their cash surplus to reduce their debt burden. In 2015, 31 per cent of companies had that intention, this year it is only 19 per cent. Despite historically low interest rates, in Lithuania and Estonia there were more companies this year who wanted to pay down debt than the year before.

Expected change in the level of corporate acquisitions and divestments in the domicile country in the next 12 months

Optimism regarding the growth of the M&A market continues to be strong in the Baltics. The highest growth is expected in Lithuania, where 42 per cent of the surveyed CFOs expected such deals to increase. Compared to 2015, this figure has notably abated. In Latvia and Estonia, the share of respondents predicting that the number

of M&A deals would increase was marginally lower, at 38 and 37 per cent, respectively, yet still higher than in 2015. Slow economic growth pressures companies to seek efficiency, and consolidation clearly offers a solution in this regard. Therefore, it is reasonable to believe that the trend in M&A deals will continue in the Baltics.

How is the CFO role affected by the increase in digitalization?


Increase significantly Increase somewhat

No changeDecrease somewhat

Decrease significantly

No opinion

46% 52%42% 29% 32% 38% 32% 27%

37%

41% 34%45%

42% 44%47%

41% 54% 42%

10% 6% 3%16% 9%

4%20% 5% 5%

3% 8% 9% 8% 15% 11% 7% 12% 15%

0% 10% 20% 30% 40% 50% 60%

Not effected

Impacts my role as a CFO and business partner

Provides an opportunity to trade transactional tasks for value adding ones

Changing business models requires increased change readiness and flexibility within finance

Requires a different skillset in the finance function ( i.e. analytics, IT/systems)

Enables increased efficiencies

LT Sep-16 LV Sep -16 EE Sep -16

Baltic CFO Outlook

10 october 2016

Each year, the CFO survey also includes some questions on topics that are currently ‘hot’ in the economy. One of the special topics of this year’s survey was the role of the CFO in an increasingly digitalized environment. Very few of the respondents claimed that digitalization has no effect on their job. CFOs mostly emphasized increased efficiency, which is enabled by today’s IT solutions, ack-nowledged the most by Latvian CFOs. As a related advantage, many

saw it as a possibility to trade transactional tasks for value adding ones. At the same time, many of the respondents said that the new era also requires a different skillset in financing functions, which was considered to be most troublesome in Estonian companies. Estonian CFOs were also most prone to mention the fact that chan-ging business models require increased flexibility and also a change in readiness in finances.

What are your plans regarding your company’s expenses in 2017?

Another of this year’s hot topics was innovation. The best way to increase added value is to innovate. Rapid escalation of the cost base and increased competition have pressured Estonian compa-nies the most, as 64 per cent of the surveyed CFOs said that their companies are planning a product or service innovation in 2017. Although slightly lower than in Estonia, the number of companies planning to innovate some of their products or services was also high in Lithuania and Latvia, with respective figures of 56 and 47 per cent. The training of staff was seen as being the best investment in Latvia, with 58 per cent of companies planning to do so in 2017. The share was almost equally as high in Estonia. In Lithuania, only 38 per cent of the respondents said that their employer plans to do so. On the other hand, Lithuanian companies were the most revolu-tionary when it came to changing their business model: in Lithuania, 21 per cent of companies had made such plans for 2017, while the figure was 16 per cent in Latvia and 15 per cent in Estonia. Latvian companies stick out due to the fact that one-fifth do not have any innovative plans, while in Lithuania only 12 per cent said the same thing, and in Estonia this figure was as low as 6 per cent.

What kind of innovations and developments are you planning for 2017?

Surging labour costs during an era of low growth have put a consi-derable strain on the balance sheets of companies. To determine whether companies are planning to tackle this issue by cutting other costs, we added a special question to this year’s survey. As we found out, many more companies see their budgets increasing rather than decreasing in 2017. An upsurge in costs was mostly forecast by

Lithuanian companies, of whom 61 per cent were expecting it, while the respective figure was 53 per cent in Estonia and 48 per cent in Latvia. The need to cut costs was the highest in Latvia, where 23 per cent of businesses intend to do so; however, in Estonia, as many as 19 per cent of companies expect the cost base to rise by more than 3 per cent.

LT Sep-16 LV Sep -16 EE Sep -16

0% 20% 40% 60%

Other

We are not planning any innovation activities

We are changing our business model

We are investing in the development and training of our staff

We are planning product or service innovation

Sep-16 Sep-16 Sep-16

Lithuania Latvia Estonia

12% 14% 19%

49%34%

34%

21%

29%27%

5% 18% 13%13%

5% 7%

a decrease more than 3%

a decrease up to 3%

expenses will stay flat

an increase up to 3%

an increase more than 3%

Baltic CFO Outlook

11october 2016

Macroeconomic outlook for the Baltics 2015–2016

Estonia

Economic growth remained weak in the first half of 2016, with GDP expanding by only 1.1 per cent. Private consumption continued to be the main driver of growth.

After declining for eight consecutive quarters, gross fixed capital formation surged in Q2 2016 by 5.4 per cent, fuelled by increased capital spending by both households and the corporates. As is the case with the other Baltic states, public investments have been hampered due to the delay in EU financing.

Luckily, exports have returned to growth. In Q2, exports of goods and services jumped by 4.1 per cent, up from 0.2 per cent in Q1. Exports were driven by robust growth in the the production of wood products and prefabricated houses, which again is supported by

strong demand in Sweden. Export growth has been cancelled out by an even higher increase in imports.

The situation on the labour market remains tense. Unemployment has bottomed out at 6.5 per cent, well below the estimated NAIRU. At the same time, growth in employment and labour market par-ticipation has continued. As a result, wage growth has intensified further, reaching 8 per cent in the first half of the year.

Looking ahead, Estonia’s economic outlook is cautiously positive. Next year, the economy is expected to grow by 2.4 per cent, fuelled by the increase in capital spending and growing external demand. In 2017, GDP growth is expected to accelerate to 3 per cent.

Latvia

In the first half of the year, GDP grew by 2.1 per cent. Weak growth is driven by a slump in export performance and the disruption in the flow of EU funding, resulting in low gross fixed capital formation.

Manufacturing shows signs of moderate acceleration, but growth in retail sales has been subdued. Meanwhile, construction is down by one- fifth, squeezed by the absence of major projects. Private consumption remains the primary growth engine.

The short-term export outlook is volatile, but will return to growth next year. The decline in foreign trade has been affected by the dec-rease in sales of machinery and electrical equipment, and mineral products.

Subdued consumer activity and low inflation is a headache for com-panies, as it is getting more difficult to meet employees’ demands for higher wages. Although wage growth has slowed somewhat, productivity growth has fallen behind. Unemployment is still an issue, especially in the regions. Unemployment will continue to fall at a gradual pace.

We see a relatively good outlook for the next two years, with GDP growing by 3.5 per cent, both in 2017 and 2018. The main drivers will be higher private consumption as well as capital spending and improved export performance. At the same time, downside risks predominate – among other things economic and political uncertainty related to Russia and Brexit.

Lithuania

The Lithuanian economy showed year-on-year GDP growth of 2.1 per cent in H1 2016. Although this was faster than the 1.8 per cent increase in 2015, it was slightly lower than forecasted. The drop in capital spending hampers GDP growth, but we foresee an upturn in private investments during the second half of the year, and a greater impact from upcoming public infrastructure projects starting next year.

Economic sentiment figures have improved, compared to the last autumn. However, relatively slow growth in the EU and the unclear consequences of the Brexit vote are forcing manufacturers to remain somewhat cautious regarding the future. The value of expor-ted goods has dropped so far this year, mainly due to lower prices. However, growth in the volume of exported goods will most likely

remain positive this year and increase slightly next year. Contrary to goods, exports of services are expanding at a rapid pace, a record one in Q2 2016, based on solid figures for the export of transport services.

The decrease in unemployment, the shortage of skilled labour and sharp increases in the minimum wage had a positive impact on average pay, which is expected to increase by 7 per cent in 2016 and 6 per cent in 2017.

We forecast GDP growth of 2.5 per cent in 2017 and 3.0 per cent in 2018, due to continuing strong private consumption and strengthe-ning capital spending.

baltic cfo outlook - seb bankas · 2017-09-04 · b23765 cfo o17344fi 4 2372651 4fi08 the...

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