Challenges and Priorities for Baltic SMEs in 2023: Inflation, Energy Prices, and Local Market Focus

In the economy of the Baltic States, the most difficult period of challenges could be behind us, however, there is no great confidence in the improvement of the situation among small and medium-sized enterprises, according to a survey conducted by “SEB banka”. On the contrary, the mood has worsened and the proportion of pessimists has increased. The biggest pessimists are in Latvia and Lithuania, although economic forecasts promise the biggest challenges for Estonia.

2023 will still be no less challenging for the Baltic economies than 2022. The biggest risks will continue to be related to high inflation and especially possible fluctuations in energy prices, interest rate increases and challenges in export markets. The labor market will remain relatively stable as wage growth continues. As inflation continues to decrease, purchasing power can be expected to recover in the second half of the year.

On average, a quarter (25%) of Baltic small and medium-sized enterprises (SMEs) are pessimistic and expect a drop in turnover this year, while one in ten expects turnover to increase by more than 15%. Meanwhile, the overwhelming majority of Baltic SMEs maintain moderate optimism and predict a stable turnover or a slight increase in turnover.

The biggest challenges are inflation, electricity prices and the tax burden

In all three countries, the main challenges are related to rising costs. Estonian and Lithuanian SMEs highlight the high inflation, electricity prices, increase in wage costs and tax burden as the most pressing, while among Latvian entrepreneurs, high electricity prices, still high inflation, tax burden, as well as the increase in the prices of raw materials are mentioned as the most important challenges.

At the same time, despite the challenges related to cost increases, most SMEs do not plan to increase the prices of goods and services. In general, 61% of Baltic SMEs will maintain unchanged prices for the final consumer, while approximately a quarter or 24% of companies plan to even reduce them. At the same time, 14% of Baltic SMEs admit that they will cover the increase in costs at the expense of consumers, increasing the final prices of their goods and services this year.

The focus is cost optimization, operational stabilization and focus on the local market

For the majority (59%) of Baltic small and medium-sized companies, the priority this year will be stabilization of operations, followed by cost optimization, which 57% of SMEs indicated as the most important.

It is positive that cost reduction will not happen at the expense of the workforce. The majority of SMEs in the Baltics (74% on average) plan to keep the number of employees unchanged, while 18% of respondents indicate that they even plan to hire additional employees this year – Lithuanian companies are the most active in this plan, but slightly less – Latvian and Estonian small and medium-sized companies.

At the same time, entrepreneurs continue to think about improving the range of goods and services provided by companies, that is, about a third or 34% of Baltic SMEs have indicated the development of new products and services as a priority for this year.

The local market is still the main goal of Baltic SMEs, but Lithuanian businessmen most actively plan to enter new markets – their number has increased by 10 percentage points during the year.

Lithuanian and Latvian SMEs have a more modest view of the local market and plan their development mainly in the existing markets. Estonian SMEs will place greater emphasis on local market research. The cautious approach to export markets is an untapped potential for growth, which nevertheless points to the need for state support to encourage such a trend.

There is still a long way to go in bringing sustainability principles to life

Companies have an important role to play, focusing not only on economic success, but also saving the environment, social aspects and management culture. The relevance of these principles or ESG issues on the agenda of Baltic SMEs has not significantly increased in recent years.

In general, when thinking about sustainable activities, Baltic SMEs have most often tried to reduce the amount of printed documents, implemented responsible business activities, preferred partners who implement responsible commercial practices, and also tried to treat the environment responsibly, although this factor is more pronounced in Lithuania, but less common Among Latvian and Estonian SMEs.

Responsible business is important not only for the achievement of the company’s goals, but also for its reputation and the sustainable well-being of society as a whole. Survey data show that the evaluation of the relevance of ESG issues among Lithuanian SMEs is higher than in Latvia and Estonia. This indicates that, in general, there is still a long way to go for the implementation of these principles in both Latvia and neighboring countries.