Population 2.042 million
GDP 27.188 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
-0.3 |
5.5 |
5.1 |
4.5 |
|
Inflation (yearly average) (%)
|
-1.1 |
4.4 |
2.3 |
2.8 |
|
Budget balance (% GDP)
|
-7.3 |
-3.1 |
-1.3 |
-1.9 |
|
Current account balance (% GDP)
|
3 |
-1.3 |
-3 |
-3.7 |
|
Public debt (% GDP)
|
39.9 |
37.8 |
37.4 |
40.6 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Fastest growing per capita income in the EU until 2007
- Pivotal position in east-west trade
- Development of commercial and financial services
WEAKNESSES
- Dependence on foreign finance
- Rigidity of foreign exchange regime
- High private foreign (mainly bank) debt
- Households and businesses highly exposed to exchange rate risk
- Significant risk of poverty
Risk assessment
Household consumption will drive growth in 2013
After several years of strong growth (10% on average over 2003-2007), Latvia was the country in the region most affected by the crisis with a contraction in GDP of more than 20% over 2008-09. In 2012, as in 2011, Latvia had the highest growth rate in Europe, despite the numerous austerity measures adopted after the conclusion of a 3-year assistance agreement with the IMF (2009-2011). For the first time in 4 years, the government succeeded in getting its 2013 budget passed independently of the conditions imposed by the IMF. This provides for an easing of the austerity measures. In particular, it provides for a rise in civil service pay and pensions, which will prompt higher household consumption in 2013. Moreover, unemployment, which exceeded 20% in 2010, continues to fall and stood at 13% in late 2012 (still far from the average unemployment rate of 8% over 2003-2008). In relation to the improvement in disposable income and consolidation in the banking sector, consumer credit in local currency will increase in 2013. Moreover, as in 2012, Latvian exports will withstand the contraction in European activity. Latvia’s main trading partners achieved the best economic performances in the economic region (Russia, the Baltic countries, Germany and Sweden). Moreover, the fall in labour costs after the 2008 crisis and the decline in the real exchange rate favour investment, contributing significantly to growth. Investment will also benefit from Latvia’s scheduled joining of the eurozone in January 2014. Inflation is expected to increase slightly in 2013, in a context of dynamic domestic demand. Nevertheless the stabilisation of oil and food prices reduces the risk of high inflationary pressure.
Latvia has managed to reassure the markets
Because of internal adjustments linked to the 2008 crisis, the current account deficit fell from -22% of GDP to 23% in 2012. In 2013, wage rises will result in higher imports, which will impact slightly on the current account balance. Transfers from expatriate workers will remain unchanged. Moreover, the deficit will be covered by foreign direct investments, espacially in the energy and manufactured goods sectors. Furthermore, Latvia has put pressure on its European partners by threatening to use its right of veto, not to be at a disadvantage in the 2014-2020 budget negotiations,. As a matter of fact, to date the country has received the lowest agricultural subsidies per hectare in Europe. Relative political stability and the very probable adoption of the euro from 2014 (all the convergence criteria for the currency being met) favour capital inflows. A highly successful $1bn Treasury bond was issued in February 2012. To meet its commitments to the IMF and the European Union, bond issues amounting to $5 billion will be issued in 2013 and 2014. Despite these good results, foreign exchange reserves seem weak compared to the short-term debt to be covered, wich means that an external shock could significantly impact Latvia’s recovery.
Consolidated banking sector
After the collapse of the Parex Bank in 2008, the vulnerability of the Latvian banking sector, particularly in terms of governance, was evidenced by the nationalisation of the Snoras Bank in November 2011 (the country’s fifth largest bank). However, several improvements were noticeable in 2012 and are likely to continue in 2013. First, the proportion of non-performing loans has fallen steeply, down from 19% in June 2011 to 12.5% in June 2012 in line with the bursting of the property bubble, while over the same period, the sector’s profitability has risen. Finally, the Latvian banking system, up to 80% held by Swedish banks, has been relatively spared from the spillover of the eurozone crisis.
Continuation of reforms against a background of social tension
The early parliamentary elections of September 2011 were followed by the creation of a new centre-right government coalition led by the Prime Minister, Valdis Dombrovskis, already in office since 2009. Although it seems taken for granted that Latvia will adopt the euro in January 2014, the government has a weak majority of 6 seats, which does not give it much room for manoeuvre. Despite the economic adjustment initiated 2 years ago, Latvia remains the least developed country in the region According to a study published by Eurostat in November 2010, 40% of Latvians are at risk of poverty or social exclusion against 38% in 2010. Only Bulgaria has worse results in Europe. These figures underline the social risks related to the austerity measures instituted by the IMF in 2009. Popular dissatisfaction aroused by fiscal austerity and the resurgence of ethnic tensions (large Russian minority in Latvia) could lead to temporary economic hold-ups.
