Executive Summary• CFOsofLithuanianbusinessesremainedthemostpositiveassessingboththecurrentfinancialpositionandtheexpectedchangesinbusinessconditionsintheupcomingmonths,despitetheslowesteconomicgrowththisyear.

• LatvianandEstonianbusinessesalsomaintainedapositiveattitude(althoughnotsoaggressiveastheLithuanians)towardbusinessconditionsinthenext6months.

• ThelackofaqualifiedlabourforceandfastgrowthoflabourcostsgainedthemostattentionasagreatconcernamongBalticcompaniescomparedtolastyear’ssurvey.

• ThemeofRussiansanctions–themaintopicinlastyear’ssurvey,fadedoutanditisalreadyclear,thatthesanctionshadanegativeimpactonlyonalimitednumberofcompanies.

• AlmosthalfofthesurveyedCFOsintheBalticsconsiderthefactorofimprovingemployeeengagementtobethemostrelevantconditionforlong-termsuccess.

• AssessmentoflendingattitudeoffinancialinstitutionstowardthecompanyhasgreatlyimprovedamongLithuanianandLatvianCFOs.

OCTOBER2015

Baltic CFO Outlook

Tadas PovilauskasSeniorAnalystABSEBbankasTel.+37052682521tadas.povilauskas@seb.lt

BalticCFOOutlookisbasedonasurveyconductedbySEB:

• 239largestBalticcompanies participated• Respondents–CFOsofthecompanies• Hottopic:Factorsmostlyrelevanttolong-termsuccess

2

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

Inautumn2015,themostpositiveattitudetowardthebusinessconditionsremainedamongLithuanianbusinessesagain,asmorethan57percentofrespondentsexpectedfavourableorveryfavourableconditionsfortheirbusinessactivitiesintheperiodofthenextsixmonths.Only8percentofbusinessesnamedtheexpectedshort-termconditionsasnegative.ThehighestgrowthofoptimismwasidentifiedamongEstonianbusinesses.Thenumberofthose,whopredictfavourableorveryfavourableconditionsincreasedfrom23percentto36percent.ThedistributionofanswerstructureofLatvianbusinessesdidnotchangenoticeably,exceptofaslightincreaseintheshareofthoseexpectingconditionstoworsen.

Assessment of the overall financial position of the company

CFOsofLithuanianenterprises,whowerethemostpositiveabouttheircompanies’financialpositionlastautumn,becameevenmoreconfidentaboutitthisSeptember.Just2percentofthetotalrespondentsinLithuaniaassessedthefinancialpositionofenterprisesasunfavourableorveryunfavourable.InLatvia,theproportionofsuchbusinesses,whichconsidertheirfinancialsituationasfavourableorveryfavourableslightlyincreased.InEstonia,anysignificantchangesintheassessmentssincelastautumnwerenotidentified.Certainly,theseanswersmightbesomewhatbiasedtakingintoaccountthefactthatthesurveyiscarriedoutbythebank.

Expected changes in cash flow of the company over the next 12 months

Itisobviousthattheanswerstothefirstquestionoftheexpectationsforbusinessconditionsshouldcorrelatewiththeanswersofthethirdquestionregardingthechangesincashflowexpectationsinthecompany.ThetheorymatchestherealityandLithuanianandEstonianbusinessesarethemostpositiveaboutcashflowoutlook.Besides,theirexpectationsimprovedcom-paredtolastautumn.58percentofrespondentsinLithuania(5percentagepointsmoreyear-on-year)and51percentinEstonia(6percentagepointsmoreyear-on-year)expecttheincreaseincashflow.However,Latvianbusinessesarelessconfidentaboutcashflowimprovementsandmorerespondentshopethatcashflowwillnotchangeatall.Positiveexpectationsofcashflowchangesusuallyleadtoeitherplanningofcashdistributionforthedebtreductionortodividendpaymenttoshareholders,ortocapitalexpenditures,ifexpansionprojectsareexpectedtobringprofits.

The greatest concerns for the company in 2016

Anneli Aljas, MarkITHoldingASIncomparisontolastyear,wearemoreoptimisticabouttheoverallbusinessconditionsandthereforealsoaboutthefuturecashflowinourcompany.AsourbusinessisspreadingtootherEuropeancountriesoutsideEstonia,thegrowthisalsodrivenbytheothermarkets.

Tomas Tumėnas, FinanceDirectorofABLinasAgroGroupThewaycompaniesperceivefinancialstability,seefutureperspectivesareanimportantindicatorsofcountry’seconomy.Lithuania’sbusinessprospectsareseeninapositivelightandthisgivesmoreoptimismaboutthefuture.Afterall,largecompaniesplayanimportantroleincountry’seconomybeingthelargesttaxpayers,andemployers.

LastyearwhentheBalticCFOOutlooksurveywascarriedout,GDPgrowthforecastfortheyearof2015wasasfollows:forLithuanianeconomyat3.2percent,forLatviaat2.7percentandforEstoniaat1.3percent.Theactualfiguresbecameoppositesofar:thegrowthsloweddowninLithuaniato1.4percent,inLatviato2.3percentandinEstoniatheforecastwasexceededandthegrowthaccountedto1.8percentinthefirsthalfof2015.ThesanctionsfromRussianFederationandtheeconomicslumpinCIScountrieshadnegativeeffectsontheBalticstates,neverthelessthegrowthwasstillobserved.Buttheoptimismofbusinessesdidnotdisappearandevenmanagedtogetstronger.Itwasalsointerestingtoseethatthemoodandtheassessmentofbusinessesconditionsweredistributeddifferentlyamongthecountries.AlthoughGDPgrowthinLithuaniawasthelowestone,theCFOswerethemostpositiveintheBalticsagain.

3

Expected changes in the number of the company employees in the next 6 months

Theindicationsoffurtherunemploymentleveldropinthenext6monthsareprevailinginallthreeBalticcountries.Theratiobe-tweenthosebusinessesplanningtoincreaseandthoseplanningtodecreasethenumberoftheiremployeesremainedabove1.TheratiowasthehighestinLithuaniaandthelowest–inLatvia.However,theratiowentdowninallcountriessinceOctober.Theplanstoreducethenumberofemployeesshouldnotbejudgedonlynegatively–morecompanieswillbeattemptingtoreduceworkforceastheconsequenceofinvestmentsleadingtotheneedofhigherproductivity.Besides,suchrapidgrowthoflabourcostsinallBalticcountriesalsoencouragesthecompaniestofindwaystocuttheworkforceandincreasetheoutputatthesametime.

The lending attitude of financial institutions toward the company

ThemajorshiftduringthelastyearoccurredinthestructureofLatvianbusinessesattitudetowardlendingbyfinancialinstitu-tiontothecompany.InSeptember2015,82percentofrespon-dentsclaimedthatfinancialinstitutionshaveafavourableorevenveryfavourableattitudetowardtheircompanies,i.e.,by22percentagepointsmorecomparedtolastyear’ssurveyresults.Thatsomewhatcontradictswiththesurveyanswersaboutthecurrentfinancialsituationofcompanies.However,acombinedsumofthoseclaimingthattheattitudeisveryfavourableorfa-vourable,oraverageremainedalmostunchanged,meaningthatperhapsCFOsbecamemoreself-confidentandassessthebanks’willingnesstolendmorepositively.Changesintheanswerstruc-tureregardingLithuanianandEstonianbusinesseswerelesssignificantlandthenumberofcompaniesassessingtheattitudeoffinancialinstitutionstowardthemasunfavourableaccountto

ThemainconcernsofBalticbusinessesgreatlyreflectthetrendsbeingobservedinmacroeconomicdataofseveralcountries.Theconcernaboutashortageofskilledworkersandincreas-inglabourcostsarebecomingmoreandmorerelevanttothesurveyedbusinesses.InallthreeBalticcountriestheanxietyre-gardingthelackofskilledlabourhasincreased.ThelargestjumpoccurredinLithuanianandLatvianbusinessenvironmentandthatmightbeexplainedbythestatisticalfiguresdemonstratingquiterapiddropinunemploymentlevelandstillslowdropoflong-termunemploymentintheabove-mentionedcountries.Estoniaencounteredthisproblemslightlyearlierandthereforetheincreasewasrelativelylower.However,thelattercountrydidnotsolveitandthatresultedinrapidlygrowinglabourcosts.Thesurveypreciselydemonstratedthatmorethan40percentofCFOsnameditasagreatconcerninSeptember2015.Lithuanianbusinessesalsoarefacingtheproblemofadramaticjumpinla-bourcostsandonlyLatvianbusinessesstilldonotassesslabourcostsasagreatproblemforawhile.

Theconcernaboutchangesindemandwithinthefollowing6monthsremainedthemostimportantissueofcompaniesinallthreeBalticcountries.TheaboveconcernonceagainincreasedinLithuanian,butdroppedamongLatvianandEstonianbusi-nesses.DomesticconsumptionhasbeengrowingsolidlylastyearinallthreeBalticcountries(thelargestgrowthofretailtradewasinEstonia,thelowest–inLithuania).Thetendencieswillremainthesameinthefollowingmonths,andthusthedemandindomesticmarketsperhapsisnotthemainconcern.BiggerproblemsshouldberelatedwiththeglobaleconomiesandthemainexportmarketsoftheBalticstates.Russianeconomykeepsonshrinkingandtheeuroarea’sgrowthrecoverywilllargelydependonChina’sfurtherdevelopment.

Concernsaboutchangesincostsofrawmaterialsinthenext6monthssharplyrecoveredinLatviaandEstonia,whileremainedalmostunchangedinLithuania.PerhapsthebusinessesbecamelessoptimisticaboutthepotentialdropinpricesaftersuchdownfallofcommoditypricesinglobalmarketsfromSeptemberof2014.Suchworriesarenatural,buttherealizationofthemwillcertainlydependontheglobaleconomicdevelopmentintheshort-term.

Accesstocapitalisurgenttoalownumberofbusinessesandittoagreatextentshouldberelatedwiththeanswerstothesecondsurvey’squestionregardingcompanies’financialposi-tion.Thebankingsystemclearlyindicatesitswillingnesstolendmoneytofinanciallystablecompaniesandtheproblemsofaccesstocapitalremainmostlyforthecompanieswithpoorfinancialconditionsandlessfavourableoutlook.

Themajorityofbusinessesdonotnameapotentialriseininter-estratesastheproblemintheshorttermtoo.Althoughthereisverylowprobability,thattheinterestrateswoulddropevenmore,andthepossibilitytoseenoticeablereboundininterestratesnextyearislow.Therefore,thelatterissuewillprobablybeirrelevantinthenextyear’ssurvey.

Jaan Tiido, ASViljandiAkenjaUksWeexpectthenumberofouremployeestoincreaseinthenearfutureandtothebestofourknowledgetoday,wecanexpectatleast10%increaseinthenumberofemployeeswithinthenextthreeyears.Thegrowthisdrivenbytheincreaseinthevolumeofoutputanddemandforemployeesresponsibleforproduction.

Jurgita Musulienė, FinanceDirectorofUABTopoGroupThereareafewchallengesintodayslabormarket.Firstofall,employ-eesexpectationsareincreasing,especiallythoseofyoungergenera-tion,despitethefactthatinsomecasesexpectedrewardismuchbig-gerthanpersonalcompetence.Inaddition,openlabormarketcausesemigrationandbraindrainsinceLithuaniancompaniesarenotalwaysabletocompeteinglobalmarkets.Therefore,higherlaborcosts,lackofemployeecompetence,whichinturndecreaseefficiency,createlessaddedvaluetobusiness.Tosolvethissituationbusinessshouldcooperatemorewitheducationalinstitutionsandlaborexchangeof-fices,createclearlydefinedassessmentprocedures,optimizebusinessprocesses,andreducestaffturnover.

4

Use of surplus cash in the next 6 months

Thewillingnesstoreducethedebtlevel,assumingcashsurplusposition,droppedduringthelastyearinallBalticcountries.Suchsituationisnormalinalowinterestrateenvironment,whiletheexpectationsofmoresignificantrecoveryoftheratesarestilllow.Besides,thedeleveragingprocessofbusinesseshadbottomedoutandthereisnoneedeitherfromthebanksorfromthebusinessestoreducethedebtlevelfurther.TherewasadivergenceinchangeinthenumberofcompaniesintheBalticcountrieswillingtopayoutdividendtoshareholders.LatvianCFOsweretheonesthatweremoreeagerthanoneyearagotopayoutdividendtoshareholders,whilesuchnumbersdroppedamongLithuanianandEstoniancompanies.However,Latvianbusinesseshadlessappetiteforstrategicinvestmentsintheircountry–31percentofrespondentspointedoutthisalternativeasthemostpreferableor11percentagepointslessthanoneyearago.However,LithuanianandEstonianbusinesseshavemoreinterestinstrategicinvestmentsinthedomesticmarkets.TheattitudetowardstrategicinvestmentsabroadremainedalmostunchangedinLithuaniaandLatvia,butitdecreasedinEstonia.Overall,thenumbersofbothstrategicandfinancialinvestmentpreferencesindicatethatbothcapitalexpendituresandthenumberofM&Adealswillkeeppaceinthefollowingmonths.

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

lessthan5percent.SuchanswersfromCFOsprovethattheyaregettingastrongerbargainingpowerwhendiscussingtheissuesoffinancingwithcreditinstitutionsandfeelthatcompetitionforthelatterinthemarketbecomesfiercer.

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

ThelargestlackofconfidenceinsolvencyofthebusinesspartnersremainedinLatvia.Althoughthenumberofbusinessesexpectingfinancialsituationoftheircounterpartstoworsendroppeddownquitesignificantly,Latviancompaniesremainedthemostconservativeaboutit.Thenumberofthoseexpectingsomeincreaseintheprobabilityofcounterpart’defaultfellinLithuaniaandEstoniaaswell,butataslowerpace.Suchfiguresrevealthatthecompaniesarenotexpectingtheincreaseinbadreceivablesandthatshouldsupporttradecreditsforbusinesspartners.

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

Comparedtothelastyear,thenumberofCFOs,predictingtheriseininterestratesinthenext12months,evidentlyincreasedThelargestjumpofsuchpredictorswasamongEstonianCFOs.Morethanonequarterofrespondentsbelievethatinterestratewillriseinthenext12months.Latvianbusinesseswerelessopti-misticaboutinterestraterise,butthenumberofthoseassessinggrowingprobabilityofhigherinterestrateisgoingup.Asmen-tionedabove,interestrateshaveprobablyreachedthebottomandtheprobabilityoffurtherdecreaseisverylow.However,themeasuresofquantitativemonetaryeasingpolicybyECBmightmaintaincurrentinterestrateatsimilarorslightlyhigherlevelintheupcomingyears.

Dana Abramova, ChiefAccountant,DPADPAwillcontinuetoinvestinitsdaughtercompanies.Ourplanforthenextyearistoreducetheoutstandingliabilitieswithcreditorsandadjustourcashflowtobeabletocovertherunningcostswithourcurrentrevenue.ThisyearwehavestartedtointroduceournewbrandandasaresultDPAGroupwillbere-brandedtoSQUALIOGroup.Weareworkingonnewbusinessdirectionsaswell-forexampleournewsoftwarelicenceonlineshop.Intermsofnextyear’sbudgetwearealsoworkingononeofourpriorities-toseparatethebudgetsofeachDPAGroupmembers.Thiswillmeanthateachbranchwillbeabletocoveritsowncostsandmakeisowndecisionsoninvestingindevelopment.

5

Factors most relevant to the company’s long term success

Halfoftherespondentssubstantiatelong-termgrowthoftheircompaniesontheimprovingemployeeengagement.AnymaterialdifferencesbetweentheBalticcountriesregardingthisfactorwerenotspecified.ItisnaturaltoexpectthelackofskilledlabourintheBalticsinthelong-termduetodecreasingpopulationandhighercompetitionofbusinesses.Therefore,theincentivestoincreaseproductivityandimprovestaffloyaltyareofgreatimportance.TherewasaslightdivergencebetweenthepercentagesofrespondentsintheBalticcountries,whonamedtheminimisingenvironmentalriskasthemostimportantfactorfortheircompany’slong-termgrowth.IndustrialproductionmakesthelargestshareinLithuania’sGDP,thereforetheneedtominimiseconsumptionofenergyandothercommoditiesisalsocrucialtakingintoaccountthatsuchcostsusuallyrepresentthelargestshareinthetotalcoststructure.TherewasalsonotsosmallportionofanswersfromCFOspointingoutthatbettermanagementofgovernancerisksmightleadtothesuccessfullong-termgrowth.

TheoptimismregardingthegrowthofM&AmarketactivitieshasincreasedinLithuaniawithmorethanhalfofrespondentsbelievingthatthecorporateacquisitionsanddivestmentswillincrease.InEstonia,thenumberofCFOsexpectingthefurtherincreaseslightlydroppeddown,buttherewasalsoadeclineinthenumberofpessimistsbelievinginthedecreaseofM&Aactivities.InLatvia,thesituationchangedinsignificantly.Usually,thecycleofM&Aactivitiesmatchestheeconomiccycles,thusassumingapositiveoutlookofeconomicdevelopment,theanswersgoinlinewiththetheory.

The intentions of the companies to fix current low interest rate on funding within the next 6 months

Thepercentageofsuchbusinessesthathavealreadyfixedinter-estrateontheirfundingwasverysimilarinSeptember2015inallBalticstatesandaccountedtoabout15percentofthetotalnumberofrespondents.ThenumberofthoseCFOs,whogavepreferencetofloatinginterestrate,wastwicehigher.However,thenumberofindecisivebusinessesregardinginterestratefix-ingstillremainslarge.Perhaps,theytake“wait-and-see”positionaslongastheinterestratesarehistoricallylowwhereastheECBquantitativeeasingpolicyisexpectedtocontinue.

Considerations of raising capital from capital markets

AlmostoneofeightbusinessesinLithuaniaandLatviaconsid-eredtheopportunitiesofraisingfundsfromthecapitalmarketsinSeptember.ThenumberwastwicelowerinEstonia.However,thesenumbersstilllookpromising,assumingthatactivityintheBalticcapitalmarkets(bothlistedequityandbondsmarkets)isverypoorandtheneedofnewofferingsexiststhere.Thecapitalmarketsusuallyrecoverintheperiodsofeconomicgrowthwhenattractivegrowthalternativesoccur,butthepossibilitiestobor-rowmorefrombanksbecomelimitedduetopossiblystillhighlevelofdebtsandtheneedofnewequity.

Gatis Gaigals, CFO,VitaMarketsOursuccessinthelong-termwilldependonourabilitytoimproveemployeeengagement.Weareinalabour-intensiveindustrywhereemployeeproductivityisoneofthemainfactorsdeterminingourfinancialsuccessinthelongterm.Otherfactorsareimportantaswell,butinourcasetheycarrymuchlessweight.

6

LatviaAlthoughGDPgrowthinthesecondquarteracceleratedfrom1.9percentto2.7percent,furthergrowthwillremainmoderate.Latvia’seconomyhasthepotentialforfastergrowth,butvariousexternalriskssuchasacomplicatedinternationalenvironment,alimitedeuro-zonerebound,aswellasthelong-termeconomicandpoliticalproblemsofeasternneighbourscallforcautiousestimates.SEBanalystsforecastthatthisyear’sgrowthwillbe2.4percent,withaslightupturnto2.7percentin2016.

Maintainingthecurrentmomentum,averagewagegrowthwillremainstronginthecomingquarters.Nextyear,wagegrowthwillslowdownslightly,thoughatighteningsituationinthelabourmarketwillcontinuetopushupwages,especiallyinRiga.Ifthisyear’sgrosswagegrowthisabove6percent,nextyearitislikelytofalltoaround4.5-5percent.

Challengingsituationinthetransportandstoragesectorisobserved.Agreatriskoflowervolumesinthenextcoupleofyearsexists.ItresultsfromthestrainedpoliticalrelationsbetweenRussiaandtheEUandfromthedeclineinenergyprices,whichmayinfluencedemandforRussiancommodities.

EstoniaAfterasluggishfirstquarter,withGDPincreasingbyonly1.1percent,theEstonianeconomymanagedtogrowby2percentinthesecondquarterof2015.Previoustrendsseemtobecontinuing,withprivateconsumptionbeingthemaindriverofgrowth.Capitalspendingremainsstagnantregardlessoflowinter-estrates.Asaresultofpooreconomicperformanceandthedelayedrecoveryinexports,currentforecastofGDPbySEBanalystsis1.9percent.SEBremainsoptimisticaboutgrowthexpectationsfortheyear2016of2.7percent.

Whileexternaldemandhasbeenslug-gish,thehouseholdconsumptionisbooming.Theretailtradevolumeindexhasseenanaveragemonthlygrowthof8percentyear-on-yearin2015.House-holdshavebeenmoreeagertoconsume,duetorapidincreaseinrealwages.Asaconsequenceoffallingenergyandfoodprices,householdshadevenmoreroomtospend.

Fromanemployee’sperspective,thelabourmarketsituationremainsfavour-able.Togetherwithaveragewages,employmenthasclimbedtoarecordhighlevelof65percent.Theunemploy-mentrateof6.5percentremainshigherthanatthepeakofthe‘boom’in2007,indicatingthestructuralproblemsinthelabourforce.

Capitalspendingfellby3percentinthesecondquarter,whichwastheseventhstraightquarterofdeclining.Thisreflectsthefactthathighliquiditycannotoffsetweakexternaldemandandinvestmentdecisionshavebeenpostponeduntilthemarketsituationimproves.

Macroeconomic outlook for Baltics 2015-2016

LithuaniaEconomicgrowthsloweddowninthefirsthalfof2015,withGDPmakingonly1.4percenthigheryear-on-year.Adropinmerchandiseexportsandworseperformanceinthetransportandstoragesectorwerethemainfactorscontribut-ingnegativelytothegrowthrate.SEBanalystsforecastthatGDPgrowthwillreboundslightlyinthesecondhalfduetofurtherstrongdomesticdemand.Theeconomywillexpandby1.8percentin2015andby2.8percentin2016.

Privateconsumptionrose5.9percentinthefirsthalfof2015basedonhigherrealwages,lowsavingsandcontinuedratheroptimisticexpectationsabouttheeconomicprospects.Consumerconfidenceremainsstableandhigheronayear-on-yearbasis.Peoplearestilloptimisticabouttheeconomicoutlookandtheirownfinancialsituationinthenext12months.Nominalwagegrowthwillmake4.2percentin2015and4.8percentin2016.Suchgrowthwillexceedtheimprovementinlabourproductivityandwillputsomepressureonbusinessprofitability.Capitalspendinggrowthwillremainatasimilarpaceiftheglobaleconomicconditionsdonotdeteriorate.Loanstonon-financialcorporationsbot-tomedoutinMarch2015andsincethenhavestartedrecovering.

Webelievethatthisyear,thetotalnum-beroftransactionsinthehousingmarketwillbeslightlyloweryear-onyearandpriceswillbeslightlyhigher.Thistrendtowardsslowgrowthinpriceswillcon-tinuein2016-2017,fuelledbylowcostmortgagelendingandhigherrealwages,butatthesametimewillbeconstrainedbyanincreasingsupplyofnewdwellings.