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Latvian Economy : development scenarios and challenges

A comprehensive analysis of the Latvian economy's recovery from the crisis, GDP growth, fiscal consolidation measures, competitiveness, export growth, unemployment, and the impact of the global economic prospects. Also, the resolution of the European debt crisis, state and local government debt, credit ratings, implications for the public and private sectors, steps towards a balanced budget, and inflation forecasts.

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Latvian Economy : development scenarios and challenges

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  1. LatvianEconomy: developmentscenariosandchallenges Ilmārs Rimšēvičs Bank of LatviaGovernor Riga, November 2011

  2. Latviasuccessfullyrecoveredfromthecrisis, wepredictthisyear’s GDP growthat 4.8% GDP growth, % * - GDP forecastaccording to forecastbasescenario

  3. Inthethirdquarter, GDP growthremainedhigh GDP growth(%)

  4. Latvia has already implemented sizable fiscal consolidation Breakdown of budget consolidation measures, % of GDP

  5. Latvia has quickly regained its cost competitiveness: wage-productivity gap has narrowed considerably Real hourly wage and labour productivity per hour (2005 Q1 = 100, seasonally adjusted)

  6. Competitivenessandexportgrowthfosteredrecovery; countrieswithfixedexchangerateareEuropeanleadersin terms of exportgrowth Goodsexportsin2010, % y/y

  7. Witheconomicrecovery, unemploymenthasdropped. Employmentgrowinginalmostallbranches Registeredunemployment, %

  8. Globaleconomicprospectsareunfortunatelybeginning to deteriorate; growthpredictionsforLatvia’smaintradingpartnersarebeingreducedsubstantially GDP forecastforeuroareain 2012, % (JP Morgan, timeaxis-moment of makingforecast)

  9. The EuropeanCommissionhasadmitted: recession – a dropinproductionandservicesvolumespossible. • On10 November, CommissionerOli Rehnwarned of possible“repeatedrecession" inEurope, whenannouncingthe EC forecastsfor EU countries, whichpoint to anexpecteddropingrowth. • “The future outlook is unfortunately gloomy. This forecast is the last wake-up call. The recovery in the EU has come to a standstill and there is a risk of a new recessionunlessdecisivemeasuresaretaken.”

  10. TheresolutionoftheEuropeandebtcrisiswillnotbefast, speculationsandfluctuationsinthefinancialmarketswillcontinue *highlighted=non-compliance with Maastricht criteria; data source: European Commission (forecasts accordingly unchanged as per political scenario)

  11. Recentexperienceshows: thosecountriesthatmanage to straightentheirfinancesaremoresuccessfulinstayingabovethewater • GDP annualgrowthrate; 2nd quarter, %

  12. Stillmuch to do to straightenoutstatefinances: budgetdeficitimplieshigherinterestpaymentsandincreaseddebt GeneralGovernmentdebtandinterestpayments (EKS’95 methodology) * Bank of Latviaforecast, ** alongwith FISIM

  13. In a shorttime, Latviahasbecome a countrywith a debtburden Totaldebt of stateandlocalgovernments (% of GDP, ESA’95 methodology)

  14. Totalexpenditure of stateconsolidatedgeneralbudgetishigherthanin 2007 p - predicted

  15. Latvia’screditratingsarelow! Thatmeans: fewerjobs, higherinterestpayments Standard&Poor’sratingagency’slong-termcurrencyliabilityrating A+ A+ A– BBB+ BBB+ BBB– BB+ BB+ BB–

  16. Whatdolowcreditratingsmeanforthepublicsector? Schedule of centralgovernmentdebtrepaymentbynominal, mil.lats

  17. Ifeuroisnotintroducedandcreditratingsarenotimproved, it maycostthebudgetanadditionalbillion lats ininterestpaymentsinthenext 10 years Additionalannualinterestpaymentsifeuronotintroducedandborrowingandrefinancingthedebtinthefinancialmarket, mil. lats In 10 years, wewilloverpaybyalmost 1 billion LVL

  18. Whatdolowcreditratingsmeanfortheprivatesector?Furtherdropinlendingandlimitedopportunities to financenewinvestments Loans to domesticbusinessesandhouseholds, annualgrowthrate(%)

  19. Statebudgetwillbethedecisivefactorthatwilldeterminefuturedevelopment of theeconomy • Determiningclear steps towardsthebalancedbudget • AdoptingtheFiscalResponsibilityLaw

  20. In 2012, budgetdeficitmustbeunder 2.5% andcontinue to shrinkinsubsequentyears Maximumpermittedbudgetdeficit (accg to ESA’95) levels, to stop theexcessivedeficitprocedureinstigatedagainstLatvia (willsubstantiallyimproveconfidenceinstatefinances; a preconditionformeetingtheMaastrichtcriterion): • in 2012 – 2.5% of GDP • in 2013 – 1% of GDP • in 2014 – balancedbudget

  21. Budgetmustbeconsolidatedindependently of eurointroductionplans. Yeteurochangeoverwouldbeanadditionaladvantage EURO Budgetstrategy Measure Budgetbalance (% of GDP)

  22. Wearepredictingthatinflationin 2013 willapproachtheMaastrichtcriterion. Yetifnegative risks materialize, inflationmayexceedthecriteria Forecast of inflationandMaastrichtcriterion, % Countrieswiththelowestinflationin EU * EC autumnforecastBoLcalculations

  23. It mustbenotedthat “thewindow of opportunity” foreurointroductionmayverypossiblybeshutafter 2014 InflationandMaastrichtinflationcriterion, %

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