EPC (ekonomiskās prognozēšanas centrs)

1. The impact of the global financial crisis on the industrial sectors of Eastern European countries and industrial change in Croatia The European Economic and Social Committee's Consultative Commission on Industrial Change (CCMI) Public Hearing The impact of the global financial crisis on the industrial sectors of Eastern European countries and the case of the Baltic States (Latvia) Acad. Raita Karnīte, EPC, Ltd Zagreb, April 27, 2009 EPC (ekonomiskās prognozēšanas centrs)

2. Main aggravating factors of the crisis • Possible solutions • CEE countries, Baltic countries, Latvia

3. CEE countries - selected indicators, 2007 Source: CEE Quarterly, UniCredit Group

4. Main aggravating factors of the crisis – input Massive money (loans) inflow since end 2003 Growing consumption (real estate, long-term household goods, cars) Main activity - real estate market (speculative demand) Consumption driven growth – 5 sectors (real estate, trade, banks, construction, building materials industry) provide 75% of GDP growth, 80% of growth on the basis of external money Growing prices in resource sector (labour, energy, row materials)

5. Main aggravating factors of the crisis – outcome Active markets (real estate and financial) saturate Loan activity of banks slows down (loan/deposits ratio more >2 in foreign owned banks, <1 in local banks) Declining financing – declining consumption Scale and contribution of main industries to GDP decline – negative GDP growth External market

6. Main aggravating factors of the crisis – industry SME dominate, subcontracting (SME promoting policies) Main exporters – wood processing, textiles, food industry - traditional products Finances – loans less available, rare proposals for EU structural funds Wage competition Productivity Internal consumption decline External markets

12. Exports and imports, miln. LVL

16. Theoretical solutions • Markets are the main factors – internal consumption, exports (state procurement) • Production capacity - confidence, availability of resources (labour - education, health care) • Competitiveness – inovations, equal competition • Specialisation, mobilisation of resourses to selected, most profitable directions (post-war renovation experience) • Good social and security services • Confidence of tax payers • More money for state • The role of the state increases in post-crisis period

17. Business is not pessimistic Arguments: Lower resource prices Less and better competition Business environment more predictable Time to mobilise for growth Time to start business Some worry about uncertain state policy, others do nat care

18. Real action

19. National level objectives : To fulfill requirements of international organisations State budget deficit less than 5% (7% is not allowed) Wage cut on 15%, 20% ... in four steps (recently 40% cut is under discussion) Economy in social expenditures (education and science 30-40% less, health care less, schools and hospitals closed) Reforms in public sector – what and why - capacity of public institutions in difficult period Implementation of memorandum is strongly controlled Is Latvia unique????

20. Priorities: Cut of costs, not devaluation of lats (CB reserves in foreign currency will not be published in future) In economics: Strenghtening of financial system (international aid (loan) to banks (36% of total) and state budget (35% of total plus 21% for refinancing of state debt plus 8% for loans from the state budget) Heating of economy through state procurements in infrastructure projects (housing) – budget?? Capacity rising of SMS companies – market ????

21. EU Structural funds – credit guaranty system Exports – export guaranty system (90% of export value, not more than 1 million EUR per deal, high requirements) No proposals in market development

22. Conclusion Market forces will be the main politician in the field of economic policy Industry development is not clear High level of free economic capacity but this need to be employed Social crisis may cause human crisis Better is slow recovery on the basis of industry than on the basis of “new” money – impact of local government elections The role of government is important International organisations

23. Thank You for attention !