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MACROECONOMIC REVIEW OF LATVIA SEB Latvijas Unibanka Research December 2005
Main Macroeconomic Indicators 2002‐2006 2002 2003 2004 2005 Period 2005 F 2006 F 6.4 7.2 8.5 10.1 I‐IX 10.0‐10.2 7.5‐8.5 5690 6320 7430 6370 I‐IX 8800‐8900 10100‐10200 1.9 2.9 6.2 6.8 XI 6.8 5.6‐6.0 ‐2.3 ‐1.6 ‐1.1 3.1 I‐IX ‐1.0‐1.1 1.0‐1.5 Current account balance (% of GDP) ‐6.7 ‐8.2 ‐13.0 ‐11.4 I‐IX ‐11.2‐11.4 10.0‐11.0 Foreign direct investment flow (mn LVL) 160 170 380 300 I‐IX 350‐370 350‐450 Cumulative foreign direct investment (mn LVL) 1630 1780 2360 2730 IX 2850‐2880 3450‐3550 Foreign trade balance (% of GDP) ‐20.9 ‐22.8 ‐22.2 ‐20.8 I‐IX ‐21.0‐21.5 ‐20.0‐20.5 State debt (mn LVL) 760 850 980 910 XI 900‐910 950‐1050 Total state debt (% of GDP) 13.4 13.4 13.3 ‐ ‐ 10.1‐10.2 9.5‐10.5 Foreign debt (% of GDP) 8.2 6.6 7.5 ‐ ‐ 5.7‐5.8 5.0‐6.0 Manufacturing output growth (% yoy) 6.2 7.9 6.2 6.0* I‐X 6.0‐6.5 7.0‐9.0 Retail trade turnover (% yoy) 12.4 13.5 12.1 21.1 I‐XI 21.0‐21.2 15.0‐17.0 Unemployment rate (%) 8.5 8.6 8.5 7.5 XI 7.4‐7.5 6.7‐7.0 Job seekers rate (%) 12.0 10.6 10.4 8.7 VII‐IX 9.2‐9.3 7.8‐8.3 Real wage and salary index (%) 6.0 7.8 2.5 9.8 I‐IX 9.5‐10.5 8.0‐10.0 Exchange rate, LVL per EUR (period average) 0.58 0.65 0.67 0.7 X 0.7 0.7 Standard & Poor’s long‐term credit rating BBB+ BBB+ A‐ A‐ V ‐ ‐ GDP growth (%) GDP at current prices (mn LVL) Consumer prices index (% annual average) Fiscal deficit, surplus of the Government consolidated budget (% of GDP) * Provisional data. Sources: Central Statistical Bureau of Latvia, Bank of Latvia. SEB Latvijas Unibanka forecast for 2005, 2006. In the 3rd quarter economy of Latvia showed a strong 11.4% growth, in the 9 months reaching a record high 10.1% upturn. The fastest increase was observed in the services and the building industries, a slightly slower growth ‐ in the manufacturing industries and agriculture. The ratings agency Moody’s repeated the previous credit rating for Latvia (A2). Current account deficit exceeded 11% of GDP in nine months of 2005. The CPI grew by solely 0.3% in November due to the decline of fuel prices. Annual inflation is steady above 7%. In October exports increased by 27%, but imports surged by 33%, compared with the situation a year before. In the 10 months exports rose by 34% but imports – by 26%. In October retail trade turnover surged by 22%, output of the manufacturing industry added 6%. In the 3rd quarter unemployment shrank to 8.7% but the number of the employed grew to its highest peak of recent years. Cargo transhipment volumes increased by 3% in the 11 months of the year, cargo volumes transported by rail were up by 6%. As was already expected, the government did not balk the traditional hefty expenses of the last weeks of the year. Therefore fiscal deficit of the government total budget will, most likely, close at roughly 1% of GDP. Towards the November end commercial bank assets soared by 35%, deposits – by 20%, but expenses – by 57%. 1
Macroeconomic Review of Latvia
In the 3rd quarter economy up by 11.4% In the 3rd quarter economy of Latvia gained %
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11.4%, maintaining the previous fast rate of 20
development. We would like to stress that in the 2nd quarter GDP was up by 1.4% but in total in 18
the 1st quarter the growth accounted for 7.3%. In 16
the 9 months economic development enhanced by 10.1%, rebuffing the most optimistic 14
forecasts. At the beginning of the year most 12
financial analysts tended to believe that annual 10
growth in economy would be roughly 7‐7.5%, by mid‐year the forecast stopped at 8‐9%, but 8
now the forecast is close to 10% or upwards. 6
High growth in gross domestic product is expected also in the 4th quarter, because all 4
industries have reported high growth, 2
manufacturing industry, too, might have taken a run towards the close of the year. 0
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In the 3rd quarter the highest upswing was -2
observed in the services and the building Commercial serv ices
Manuf acturing
industries. Transportation and communications Transport, communications
Trade
Source: CSB
GDP in total
Construction
industry and trade soared by 18%, building industry added 16%, hotel and restaurant services – 15%, financial services – 14% to their earlier gains. Growth in the manufacturing industry was higher than in the first half of the year (9%). The rate of development in this branch of industry, however, is slightly lower than in the national economy on average. The number one conclusion is that all branches of economy have shown growth. Although the main driving force of economy is the unflagging domestic consumption, we should not forget a laudable growth in the exports sector. Integration into the EU has given our manufacturers a takeoff and in the nearest future industry of Latvia is expected to take good strides, which, unfortunately, may be halted by shortage of workforce. Obviously, also in 2006 economic growth will be fast enough, as there are no indications that any of the key industries could start to skid. Considering that GDP basis will have grown substantially, a 10‐11% growth is hardly likely to come off, yet a 7.5‐8.5% upswing ought to be reached. In the first half of the year we will see, whether our economy is able to cope with the overheated situation, which is characterized by a fast growing demand for goods and services on the domestic and foreign markets, growth of costs and wages and shortage of workforce. But let us not forget that Latvia is still steadily taking a place at the bottom of the economic development table of the EU, which nurtures hopes that a fast economic upswing will not leave us also in the future years. GDP Grow th by Sectors (%, yoy)
Current account deficit – 11.4% of GDP The final data on current account deficit of the balance of payments collected for the 3rd quarter proved worse than the operating monthly results. Instead of the projected deficit of roughly LVL 260 million, the deficit grew to almost LVL 300 million. In the 3rd quarter, wherewith, its volume against GDP grew to 12.7%. In the 9 months of 2005 current account deficit reached LVL 725 million, or 11.4% of gross domestic product. Compared with last year, the situation has improved, yet forecasts of the first half of the year expected better results. Impact of the negative trade balance is still strong. What good of the hefty growth of exports, if the fast economic upswing demands growing increase of commodities imports, largely from the countries of the EU. At the same time the positive services balance is stagnating, covering only one fifth of the negative commodity balance. Compared with last year the positive balances of the Capital account and the Finance account grew. As before, the negative balance of the payment account was covered by long‐term capital. 2
Macroeconomic Review of Latvia
It is most evident that neither in 2005 nor henceforth a substantial decrease of current account deficit is possible. We doubt, whether last year it would have been below 11%, in the current we expect it to finish below 10% of GDP. Last year Latvia made a success in the attraction of foreign direct investments. In the 3rd quarter Latvia received LVL 125 million (EUR 180 million) in the form of foreign direct investments, the total amount received as of the beginning of the year was LVL 300 million Current Account Deficit and Foreign Direct
(EUR 430 million). The fastest rise by Investm ents
industries was observed in financial and LVL mn
400
commercial services, manufacturing and power industries. In total of all accrued 200
investments the lump amount was placed in commercial services (22%), in the finance 0
sector (17%), trade (15%), manufacturing 2000
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2003
2004
2005 F
2006 F
(14%) and transportation and -200
communications (13%). Sweden made the largest expansion in the economy of Latvia -400
(14% of the accrued investments), followed by Germany (15%), the Netherlands (9%), -600
Estonia (9%) and Russia (7%). In the 9 months -800
foreign direct investments covered 41% of current account deficit. This level has been -1000
stable for a longer period of time. Foreign direct investment stock makes up 4.7% gross -1200
domestic product, which is one of the best Source: Bank of Latvia
CAD
FDI
indicators in the newly integrated countries of the EU. Inflation in November lower Consumer prices grew by 0.3% in November, %
which is a smaller rise than in the same month 8
a year before. It was an expected milestone, because one of the price‐growing factors, fuel 7
prices, fell by 6%. Inflation would have been 6
even lower but for the rise of some food product and thermal energy prices. 5
Telecommunications tariffs declined. Over the 12 months consumer prices grew by 7.4% but 4
annual average inflation reached 6.8%. It must be reminded that the EU requires that for the 3
introduction of the euro inflation be pushed down to 2.2‐2.5%. It means ‐ down for more 2
than 4%. The situation in the last month of the year will 1
be similar and the inflation level will be roughly the same. Prices of food products will 0
grow and so will housing expenses but they X
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will be offset by the stable fuel prices and the ‐1
Season’s discounts. Hence, annual inflation is 12 mēnešu
Annual average
Mo nthly
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expected to close at 7.3‐7.4% but annual Source: CSB, SEB average inflation – at around 6.8%. Over the year inflation seems to have grown faster than a year before. The prices, however, are unlikely to fall drastically in the foreseeable future. On the contrary, the possible hike of the energy tariffs is on the doorstep. Whether politicians will be able to prevent, block and postpone it to a later period – the time will show. Apart from that the economic development rate in Latvia is so Consumer P rice Index
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Macroeconomic Review of Latvia
fast that it does not give us the possibility to see inflation at the average level of the EU soon. Presumably, due to lack of competition and consumer‐friendly environment, most businesses will not be ready to refuse the chance to make large proceeds and in the boom period will keep prices high. The government of Latvia have kept back the announcement about the postponement of the euro adoption plan to a later time. In line with this plan we still plan to introduce the euro in 2008 and accordingly are doing our euro‐introduction‐related home‐tasks. It is true, there are few believers. Unchanging trends in retail trade and industry The last few months in the given fields have 30
been similar. Growth of retail trade turnover keeps steadily above 21% but growth of industrial output is roughly 6‐8%. 25
Retail trade is reaping fruit from having put the industry in order, the fast economic 20
development, and growth of people’s income and expansion of lending. The most substantial increase was observed in supermarkets 15
supplied with a wide variety of goods, as well as in retail trade with wearing apparel and footwear, household goods and appliances, 10
pharmaceutical products and cosmetics. Growth in leasing volumes has created a real 5
boom in car sales. Growth in industry was less noticeable but it was higher and more solid than at the 0
beginning of the year. Upturn in the 04 I
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manufacturing industry stood at 9%. Industry
Retail Trade
Source: CSB
Unfortunately, the total data were curtailed by a slight downturn in power industry. Speaking about October, we must underscore the good production indicators in the two major industries, namely, food industry, which was up by 8%, and in timber and woodworking industry – up by 6.5%. Growth in many other industries is steadily hovering above 20%, textile industry, metalworking and manufacturing of building materials included. Upswing in industry is obvious. Foreign investors are taking a more active part in our economy. They are looking for suitable locations with a good infrastructure, logistics, and workforce. Their aim is to open new production units or to transfer diversiform production units from the West to Latvia. For the time being Latvia is not offered large, sizeable projects, nor production units, which would produce goods with a sizeable added value. There is a hope, however, that in the medium term Latvia will gain big strides also in these fields. Retail Trade and Industry (% yoy)
Cargo volumes in ports on the increase Towards the year‐end operating activity at the ports of Latvia gained ground, in the 11 months reaching a 3% growth, compared with the meagre 1% in the middle of the year. The result is promising, taking into account the severe competition in the drive for transit cargoes amongst the ports of the Baltic Sea countries, Russia, Poland and Finland. The negligible increase was achieved at the ports of Latvia through reorientation from the reducing liquid cargoes to loose bulk cargoes, which have increased by 15%. The most prospering port is the port of Ventspils with the cargo volume up 5%. The port is gradually recovering from the drastic shrinking of oil transit cargoes in recent years. At the end of the year the developing port of Liepaja, too, finally reported positive results. The port of Riga remains lethargic and has reached only a 1% upturn. In the 11 months transhipment by rail rose by 6%, which, in fact, meets our forecast. They are mostly transit cargoes. 4
Macroeconomic Review of Latvia
Unemployment rate falling fast, shortage of the workforce threatening Since Latvia became a member state of the EU unemployment has gone down noticeably. %
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Taking that a year and a half ago unemployment stood at 10‐11%, in the 3rd quarter of the current 13
year it had fallen to 8.7%, presumably, closing the year at a still lower rate. The officially 12
registered unemployment, too, has reduced similarly – down from 9% to 7.5%. Although the 11
decline is substantial, Latvia’s unemployment ratio remains one of the highest in the EU, 10
where leaders in unemployment are Poland (18%) and Slovakia (16%). The lowest level of 9
unemployment is observed in the countries with a more open economy and labour market, 8
namely Ireland (4%), Great Britain and Denmark. 7
Of f icial unemploy ment rate
Unemployment in Latvia is pulled down by the Jobseekers rate (unemploy ment rate by ILO)
fast economic upswing and the growing 6
demand for workforce as well as by the outflow 00 I VI
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of the workforce to Ireland and Great Britain. In Source: State Employment Service, CSB
the time, when employers are frantically hunting for workers, substantially raising wages, part of the population keep sinking into apathy and despair and, having lost the hope of a better life, continue their one‐day existence. The situation in rural areas is deplorable and they are the regions, which provide cheap labour for the EU states. At the same time in more active regions many people employed in the private sector have a much longer than 40 hours working week and feel overloaded and worn out. It is not only the EU, which is developing at two speeds, but Latvia, too, follows up and this speed and differences only pile up. The latest data on the distribution of gross national product by regions, most likely, will disclose a far wider gap between the Riga region and the regions of Eastern Latvia. Unem ploym ent
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Macroeconomic Review of Latvia
The Baltics, Main Macroeconomic Indicators Baltics Period 1.35 7.1 2005 I 6.9 10.6 LV,LT I‐IX EE VII‐IX 9060 14 900 6280 30 240 I‐IX CPI (% y‐o‐y) 7.4 2.8 3.9 XI Fiscal deficit of the Government consolidated budget (% of GDP) 3.1 ‐0.5 4.3 LV,EE I‐IX LT I‐VI Current account balance (mn EUR) ‐1030 ‐1030 ‐760 ‐2820 I‐IX Current account balance (% of GDP) ‐11.4 ‐6.9 ‐12.1 I‐IX Foreign direct investment flow (mn EUR) 430 590 2260 3280 I‐IX Foreign direct investment stock (mn EUR) 3880 5280 10410 19 570 I‐IX Foreign direct investment stock per capita (EUR) 1680 1540 7710 I‐IX Exports of goods (mn EUR) 3320 7640 5040 16 000 I‐X Exports of goods (annual growth, % y‐o‐y) 33.8 25.8 29.7 I‐X Imports of goods (mn EUR) 5510 9980 6650 22 140 I‐X Imports of goods (annual growth, % y‐o‐y) 25.7 23.2 21.3 I‐X Foreign trade balance (mn EUR) ‐2190 ‐2340 ‐1610 ‐6140 I‐X Foreign trade balance (% of GDP) ‐20.8 ‐13.5 ‐22.3 Latvia Lithuania Estonia LV LT EE Population (mn) 2.31 3.43 GDP growth (% y‐o‐y) 10.1 GDP (mn EUR, at current prices) I‐IX LV,LT I‐X EE X LV,LT I‐XI EE XI Industrial output (% y‐o‐y) 5.2 6.3 8.7 Retail trade turnover (% y.o.y) 21.1 14.4 14.0 14 690 11 460 11 470 37 620 XI 3.5 3.4 3.1 XI 9.7 6.5 5.8 XI Average gross monthly wage (EUR) 353 400 500 VII‐IX Official unemployment rate (%) 7.5 3.9 2.8 XI Job‐seekers rate (%) 8.7 7.2 7.0 VII‐IX State debt (% of GDP) 13.3 19.7 3.2 2004 A‐ A A 2004,2005 Assets of commercial banks (mn EUR) Average weighted annual interest rates on deposits in national currency in commercial banks (%) Average weighted annual interest rates on credits in national currency in commercial banks (%) Standard & Poor’s long‐term credit rating Sources: National statistics, Central banks, the ministries of the Baltic States, SEB Group banks. Market and Sector Research Andris Vilks Telephone: 7215597 e‐mail: [email protected]
A/S SEB Latvijas Unibanka Unicentrs, Ķekavas pagasts Rīgas rajons LV 1076 http://www.seb.lv © SEB Latvijas Unibanka, 2006 This edition is intended for general circulation only and does not constitute a personal recommendation. The information in this document was obtained from sources believed to be reliable, but its accuracy or completeness cannot be guaranteed. Any opinions expressed herein are given in good faith, but are subject to change without notice. 6