The past year has been another test for the Latvian economy, its businesses, and its citizens. Just when it seemed that one crisis had been overcome and we had learned to live in a post-pandemic world, the next one arrived, the scale of which is still difficult to grasp. Russia's war in Ukraine, the energy crisis, and the rapid rise in inflation are making Baltic business leaders more pessimistic than they were a year ago about economic development globally and in the Baltic region, yet they maintain optimism regarding the prospects for their own companies. Business leaders see the need for change and are thinking about the steps required to implement it, according to the recently conducted PricewaterhouseCoopers (PwC) research "PwC 2023 Baltic CEO Survey", which involved 323 top-level managers in Latvia, Lithuania, and Estonia.

According to the "flash" estimate published by the Central Statistical Bureau in January, Latvia's gross domestic product increased by 1.8% in 2022 compared to 2021. Furthermore, the European Commission forecasts that the EU economy will avoid a recession and that growth will reach 0.8% in 2023. More than half of the surveyed business leaders in the Baltic states (51% in Latvia and Estonia, 55% in Lithuania) predict that the global economy will experience a downturn over the next year. Forecasts regarding the development of their own national economies are similar – an economic contraction this year is predicted by 63% of surveyed leaders in Latvia, 62% in Estonia, and 40% in Lithuania. Admittedly, business leaders in Europe and globally are even more skeptical – in the Central and Eastern Europe (CEE) region, 74% of leaders predict an economic downturn, in Western Europe 75%, while the global figure has reached 73%, which is the most pessimistic forecast in the last ten years.¹

Despite the geopolitical situation and economic shocks, Baltic business leaders remain confident about an increase in their company's turnover in the next 12 months, as indicated by 46% of those surveyed in Latvia, 53% in Lithuania, and 45% in Estonia. At the same time, business leaders in all Baltic states remain confident in their ability to overcome challenges and predict stable turnover growth for their companies over the next three-year period (80% in Latvia, 89% in Lithuania, 83% in Estonia), whereas in CEE countries, only 50% of those surveyed were confident of this.

Biggest threats

When evaluating the biggest threats that could negatively affect business over the next year, Baltic business leaders highlighted three:

• geopolitical conflict (indicated as the most important threat by leaders in Latvia and Lithuania);

• inflation (the main risk in Estonia);

• energy crisis.

Last year, these risks were far less prevalent, and the lack of available labour dominated as the primary challenge, but this year 80% of entrepreneurs in Latvia, 82% in Lithuania, and 50% in Estonia are concerned about the threats posed by geopolitical conflict.

To mitigate these threats, business leaders plan to diversify the goods and services they offer (42% in Estonia, 37% in Latvia, 25% in Lithuania), improve cybersecurity and data privacy (41% in Estonia, 35% in Lithuania, 28% in Latvia), and seek and develop new sales markets (40% in Lithuania, 32% in Estonia, 25% in Latvia).

A third of the surveyed business leaders in Latvia (31%) and Estonia (32%) believe that in ten years their companies will not be economically viable if they continue in their current direction, while in Lithuania this opinion is held by nearly half of the surveyed top-level managers (47%). Entrepreneurs in the Baltic region are aware of the situation and, to prevent this, are prepared to take action accordingly by investing in the automation of processes and systems, upskilling the workforce, introducing new technologies, and more. Globally, entrepreneurs are more pessimistic than in Latvia or Estonia. For example, in the CEE region, 45% (similar in Lithuania – 47%) believe that their companies will not be economically viable in ten years.

Solutions – price hikes, cost reduction, new products and services

Regarding specific steps already taken or soon to be taken to mitigate potential problems, business leaders in all Baltic states mention raising prices (more than half of entrepreneurs have already done so, and about a third plan to) and cutting costs (46% in Latvia, 54% in Lithuania, and 39% in Estonia have already done so, and about a third plan to). Business leaders also indicate that they are trying to diversify their product and service offerings (42% have already decided to do so in Latvia, while 32% are preparing to).

As for evaluating the most important export markets, for Baltic entrepreneurs, these are neighbouring Baltic countries, as well as the Nordic countries, Poland, and Germany. The surveyed Latvian business leaders consider Estonia (33%), Lithuania (32%), Germany (22%), Sweden (16%), and Finland (14%) to be their most important markets. For Estonian entrepreneurs, the most significant markets are Finland (30%), Latvia (29%), and Lithuania (22%). For Lithuanian entrepreneurs, the clear leader is Latvia (42%), followed by Estonia (29%) and Poland (26%).

No large-scale layoffs planned

As a positive factor, it should be stressed that entrepreneurs are not planning to carry out large-scale staff layoffs – 77% of surveyed Latvian business leaders indicated that they do not plan to do so over the coming year. 83% of respondents state that they also do not plan to reduce salary levels. It should be emphasised that attracting labour has long been one of the biggest challenges for Baltic companies. In 2023, 52% of business leaders in Latvia, 55% in Lithuania, and 43% in Estonia mention this as a problem (acknowledging that it has become harder to attract employees). True, this indicator has decreased in all Baltic states compared to 2022. Similar to last year, the majority of surveyed leaders in the Baltics foresee salary increases within the range of up to 10% over the next 12 months.

Government tasks – competitive taxes, national defence and security

As the main government priority for the next 12 months, business leaders in Lithuania and Estonia much more frequently mentioned strengthening national defence and security (62% and 66%), whereas it is less important in Latvia (45%). For the fourth consecutive year, Latvian business leaders name the competitiveness of the tax environment as the top government priority for the next 12 months (68%, down from 71% last year), followed by improving the business environment (55%, compared to 61% last year), which has been ranked second for the past four years, while as the third priority, business leaders in Latvia highlight the reduction of public administration costs (55%, compared to 52% last year). Leaders in Lithuania believe that, in addition to the aforementioned national defence and security, the promotion of a competitive tax environment (56%, down from 64% last year) and responding to the energy crisis (51%) should be at the top of government priorities, whereas business leaders in Estonia also include responding to the energy crisis (51%) and the alignment of education policy with changes in the economic environment (43%, down from 55% last year) in their list of the top three priorities.

The Baltic business climate is currently characterised by uncertainty, rooted in complex and unclear geopolitical and economic conditions. However, there are positive signals indicating that leaders are looking for and finding opportunities to leverage the current situation to increase the efficiency of internal company processes and promote long-term growth.

More information and insights into the survey results:
https://www.pwc.com/lv/lv/about/case-studies/baltijas-uznemumu-vaditaju-aptauja-2023.html

About the survey

The PwC Baltic CEO Survey took place online from 28 November 2022 to 9 January 2023. It involved 323 respondents – top-level executives of Latvian, Estonian, and Lithuanian companies, 47% of whom were women and 49% men, while 5% of respondents did not wish to disclose their gender. The participants represent sectors such as trade, finance, construction, manufacturing, IT and telecommunications, healthcare, and transport.

Turnover of the companies represented by Latvian respondents in the past financial year:

• up to 5 million euros – 45%;

• 5–10 million euros – 8%;

• 11–20 million euros – 10%;

• 21–50 million euros – 9%;

• 51–99 million euros – 3%;

• 100–200 million euros – 6%;

• more than 200 million euros – 2%;

• 18% did not wish to disclose their turnover.

1. The PwC CEO Survey is conducted annually across the world. The latest PwC 26th Annual Global CEO Survey involved 4,410 top-level executives from 105 countries.