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Latvian economy: from heavy landing to the first signs of growth Valdis Dombrovskis Prime Minister of Latvia January 19, 2011 Economic Trends and Macroeconomic Indicators 2 Historical experience (% pret iepr.gadu) IKP 1991-2012 1991-2012 GDP (% against previous year) 15 10 Ekonomikas Change modeĜa period of the maiĦas economic model periods Globālā Global krīze crisis + +local vietējie factors faktori 5 0 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 -5 -10 -56% 1991-1993 Accession ES to the Iestāšanās EU Banking crisis Banku krīze -15 +33% 2004-2007 crisis GDP ~0% Russian crisis Krievijas krīze -20 -25 -25% 2008-2010? -30 -35 3 “Full speed ahead!” 2004 2005 2006 2007 7.3 7.6 6.9 14.1 Budget expenditure, m LVL 2150 2620 3420 4210 Retail turnover growth, % 12.4 21.3 20.1 18.8 Gross wages growth, % 9.6 16.5 22.8 32.0 Import of goods, m LVL 3810 4870 6380 7782 Current account deficit, % of GDP 12.8 12.5 22.5 22.3 Credits of commercial banks, m LVL 4380 6960 10870 14920 Annual inflation, % 4 Economic trends at the time when the new Government took office: dramatic fall in GDP Changes in GDP by years 15 10,6 10 6,5 7,2 8,7 12,2 Forecast 10 3,3 5 4 3,9 0 0 -5 -4,2 -10 -15 -20 -18 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 5 Recession is over Changes in GDP by quarter (seasonally adjusted, % against the previous period) 6 4 2 0 -2 -4 -6 -8 -10 -12 III II 2010'I IV III II 2009'I IV III II 2008'I IV III II 2007'I -14 6 Economy resumed growth in the second half of 2010 GDP growth by quarter (%, against respective period of the previous year) 7 Liquidity of accounts of the State Treasury was fully assured TOTAL RESERVE at the Treasury`s accounts at the end of corresponding period (incl. resources earmarked for banking sector support measures) mLVL 1 600 1 400 1 200 EU 3rd tranche EU 2nd tranche 1 000 IMF 2nd tranche 800 WB 1st tranche IMF 3rd tranche IMF 4th tranche EU 4th tranche WB 2nd tranche 600 400 EU 1st tranche 200 0 Jan 09 Feb 09Mar 09Apr 09 May Jun 09 Jul 09 Aug Sep 09 Oct 09 Nov Dec 09Jan 10 Feb 10Mar 10Apr 10 May Jun 10 Jul 10 Aug Sep 10Oct 10 Nov Dec 10 09 09 09 10 10 10 8 International support International Assistance Loans Available and Disbursed (millions of EUR) Received Year 2008 European Commission 2009 2010 Available 2 200 700 200 3 100 1 800 1 800 100 100 100 400 200 200 Nordic (SE, DK, FI, NO,) EE 200 The World Bank 100 Czech Republic EBRD Total 100 100 Poland 100 100 IMF 600 200 300 600 1 700 Total (EUR) 600 2 700 1 100 3 100 7 500 ▌ In 2011 borrowings within the International Assistance Program planned from the World Bank in the amount of €100 million ▌ The agreement signed with Nordic countries on ensuring loan facility 18 9 Cyclically adjusted budget balance of the consolidated state budget 4 2 1,9 2 0 -0,1 -0,1 % no IKP -2 -1,7 -4 -3,4 -3,4 -3,4 -4,5 -6 -6,5 -6,8 -8 -8,5 -10 2005 2006 Cyclically adjusted budget balance (% of GDP) 2007 2008 2009 2010 Cyclically adjusted budget balance (against previous year in % points of GDP) 10 Net external public debt declines 11 CHANGES IN FINANCIAL INDICATORS 12 Credit to private sector (y-o-y; %) 13 Credit default swap (CDS) rates have fallen substantially 24 Data source: The Bloomberg. 14 Latvia has overcome capital outflow Exchange rate of the lat and interventions of the Bank of Latvia Data source: Bank of Latvia 15 Backing of the monetary base with foreign reserves exceeds 200% Net foreign assets and Monetary base (millions LVL) Data source: Bank of Latvia 16 Improvement in macroeconomic indicators and decline in government spending increases the confidence in the financial system of Latvia Money Market Indexes RIGIBOR Data source: Bank of Latvia 17 EXPORT, IMPORT,MANUFACTURING INDICATORS 18 Export and import External trade (LVL million) Export Data source: CSB Import Balance 19 Export shows rapid growth Manufacturing turnover and export of goods (December 2007 = 100) Export Data source: CSB Manufacturing 20 Rapid growth in exports is affected by the price level 1400 2500 Export (nominal) Import (nominal) Import (in prices of 2002 Q1) 1200 Export (in prices of 2002 Q1) 2000 1000 1500 800 600 1000 400 500 200 0 0 I III I III I III I III I III I III I III I III I III 2002 2003 2004 2005 2006 2007 2008 2009 2010 Data source: CSB I III I III I III I III I III I III I III I III I III 2002 2003 2004 2005 2006 2007 2008 2009 2010 21 Decrease in costs improves competitiveness: effective exchange rate of the lat is decreasing Real effective exchange rate of the lat (Jan 2000/Q1 2000 =100) 135 135 125 125 REER_CPI 115 REER_ULC_manuf 105 115 105 95 85 85 75 75 2004 I IV VII X 2005 I IV VII X 2006 I IV VII X 2007 I IV VII X 2008 I IV VII X 2009 I IV VII X 2010 I IV VII X 95 Data source: Bank of Latvia 22 Positive turning-point starting from Q1 2010 Output in industry, construction and retail trade 2007 Q1 = 100, seasonally adjusted data Data source: CSB 23 2010 shows increase in some sectors Volumes in main industry sectors December 2007 = 100, seasonally adjusted data 150 Food industry 140 Wood processing 130 Chemical industry 120 Production of metals 110 100 90 80 70 60 I III 2008 Data source: CSB V VII IX XI I III 2009 V VII IX XI I III 2010 V VII 24 IX Export growth and decrease in imports have contributed to the current account surplus Balance of Payments (Principal items) % of GDP 15 10 5 0 -5 -10 -15 -20 -25 2007 I II III IV 2008 I Regular transfers Data source: Bank of Latvia II Income III IV 2009 I II Goods and services III IV 2010 I II III Current account 25 Effects of economic downturn • Fall in GDP in two years amounted to 25% • S&P credit rating has declined from A- to BB • Tax revenues in 2009 decreased by 30% and in 2010 decreased by 5,8% • Budget consolidation for the period 2008 - 2011 amounts to 16.3% of GDP • Wage fund decreased by 35% • Tax increase (VAT, PIT, Real estate tax, Excise, Social security contributions) • Housing prices fell by 70% compared to peak of 2007 and bottomed out in mid 2009 • Non-performing loans in banks in Q3 2010 amounted to 19% 26 Unemployment indicators Registered unemployment level (%) Data source: NVA 27 Budget for employment measures in 2009-2011 35 000 000 30 000 000 Measures for education of unemployed persons (professional training, increasing self-competitiviness, measures for startup and self-employment) 25 000 000 20 000 000 Measures for unemployed persons (complex support, measures for definite groups, paid temporary jobs) 15 000 000 10 000 000 5 000 000 2 6 6 7 4 0 5 1 0 6 5 7 5 5 5 1 6 6 7 2 9 4 7 8 2 1 6 2 0 3 6 1 1 3 2 3 4 0 0 9 7 3 3 6 6 3 3 3 7 1 0 5 1 9 7 2 3 2 2 6 4 4 7 2 Other measures (Career consultation, promotion of mobility) 0 Expenditures by 2009 Expenditures by 2010 Planned expenditures FY (LVL) FY (LVL) by 2011 FY (LVL) Data source: NVA 28 Unprecedented challenges for the Government Main economic indicators of Latvia, 2000-2012 (%) 20,0 15,0 10,0 5,0 0,0 -5,0 -10,0 -15,0 -20,0 -25,0 2000 2001 GDP, y-o-y, % 2002 2003 2004 2005 Current account, % of GDP 2006 2007 2008 2009 Unemploymentrate, % 2010* 2011* 2012* CPI, y-o-y, % 29 Prices signal about economic growth Price indices (2005=100) Data source: CSB 30 Productivity increases Hourly wage and productivity index (Q1 2005=100, seasonally adjusted data) 240 220 200 180 160 140 Productivity Darba ražīgums Data source: CSB Real wage alga Reālā 2.cet. 2010 1.cet. 4.cet. 3.cet. 2.cet. 2009 1.cet. 4.cet. 3.cet. 2.cet. 2008 1.cet. 4.cet. 3.cet. 2.cet. 2007 1.cet. 4.cet. 3.cet. 2.cet. 2006 1.cet. 4.cet. 3.cet. 2.cet. 100 2005 1.cet. 120 Nominal wage alga Nominālā 31 Confidence indicators have recovered Points Data source: Bank of Latvia 32 Achievements of Latvia in economic recovery are recognized Moody's (long term foreign currency rating) Rating scale A/ A2 Standard&Poor's (long term foreign currency rating) A-/ A3 Fitch Ratings (long term foreign currency rating) BBB+/Baa1 BBB/Baa2 Moody's outlook STABLE BBB-/ Baa3 STABLE NEGATIVE Fitch Ratings outlook STABLE BB+/Ba1 STABLE STABLE NEGATIVE NEGATIVE Standard&Poor's outlook STABLE BB/Ba2 STABLE NEGATIVE 2006 2007 Data source: State Treasury 2008 2009 2010 2011 33 Activities of the Cabinet of Ministers – through the prism of three pillars 34 Promotion of national competitiveness Economic growth Measures of the Social Sector Efficiency of Public Administration Budget and structural reforms, incl. implementation of Letter of Intent (IMF) and Memorandum of Understanding (EC) 35 Economic growth: implemented government actions in 2009-2010 ▌ Expenditure side stimulus: ▌ speeding-up the allocation of EU structural funds, ▌ increasing government co-financing for EU projects ▌ Increasing resources for high value-added projects, new product support programs, energy efficiency projects ▌ using revenue from emission trading schemes for energy efficiency and insulation projects ▌ Reducing administrative burden ▌ Expanding export credit guarantees ▌ Establishing “The Coordination Council for Large and Strategically Important Investment Projects” to focus on large-scale investment projects ▌ Introducing tax reduction for large investments ▌ Beneficial tax regime and easy start-up for micro companies 36 Social sector: activities in 2009 and 2010 ▌ Expanding eligibility period for unemployment benefits ▌ Increasing guaranteed minimal income (GMI) benefits ▌ Increasing government co-financing to municipalities for GMI and housing benefits ▌ Financing temporary job positions in public works (100 LVL program) ▌ Increasing compensation for medical expenses for low-income persons 37 Efficient public administration as part of national competetitivnes ▌ Introduction of systematic revision of public functions ▌ Results of expenditure reduction of functions are: ▌ total economy comparing the beginning of 2010 and the beginning of 2009 - LVL 719 million incl.: ▌ as a result of delegation of functions - more than LVL 5 million ▌ as a result of suspending the implementation of functions LVL 40 million ▌ as result of optimization of functions by reorganizing the public administration institutions and implementing other qualitative changes - economy of more than LVL 671 million 38 Wage reduction in state budget-funded institutions Average monthly salary (calculated by the MoF) in state budget institutions by month in 2010, LVL and %, and compared with average indicators of 2008 and 2009 LVL 585 (2008, average) - 17,26% 2010 Average salary of 2008 484 (2009, average) Average salary of 2009 Percentage decrease calculated against the average index of 2008 Data source: Ministry of Finance 39 Actual expenditures for reimbursement Expenditures for reimbursement in state and local government budget institutions in 2008, 2009 and 2010, LVL Million - 41,7% First half of 2008 First half of 2009 First half of 2010 Expenditures for reimbursement in November 2010 decreased by 41,7% comparing with November 2008 Data source: Ministry of Finance Number of employees in public administration has been significantly reduced Number of employees (calculated by MoF) in the state budget institutions by month in 2010, thousands and %, and compared with average indicators of 2008 and 2009, thousands 78,9 (2008, average) - 11,1 % 2010 70,1 (2009, average) Average 2008 Average 2009 Percentage decrease calculated against the average index of 2008 Data source: Ministry of Finance 41 Employees of the public sector (summary) ▌ In November 2010, there were 60 336 employees in state budget funded institutions (includes independent institutions, for example, State Audit, as well as the courts, but does not include information on derived public entities such as state-founded universities and scientific institutes) (decreased by 24% compared to average of 2008) ▌ In November 2010, there were 3 024 employees in central apparatus of the ministries (decreased by 21,2% compared to average of 2008) ▌ The number of employees in state companies in November 2010 according to data by the Ministry of Finance was 39 839 ▌ The average number of employees in September 2010 (data by CSB): ▌ In local governments and institutions subordinated to the local governments : 88 685 (decreased by 12,1% compared to Q1 2008) ▌ In businesses controlled and financed by local government structures: 10 421 (decreased by 30,1% compared to Q1 2008) 42 Changes in the number of public administration institutions ▌ Number of state agencies has declined by 53 % compared to January 1, 2009 ▌ Total number of institutions subordinated to the ministries (state agency and direct administration institution) has declined by 34% compared to January 1, 2009 Measures intended by the Government for 2011 and 2012 ▌ The objectives are: ▌ To develop competitiveness of Latvian enterprises: ▌ to ensure sustainable economic growth and employment; ▌ prepare the first Latvian Competitiveness Assessment; ▌ To provide social support by developing the social security network: ▌ consistent implementation of measures of the social security network; ▌ evaluating the social benefits and support for target groups to strengthen human security; ▌ To increase efficiency of public administration: ▌ aiming to establish a small, professional and client oriented public administration; ▌ in-depth revision of functions and services and reform of the existing civil service. 44 Thank you for Your attention! Valdis Dombrovskis, Prime Minister of Latvia 36 Brīvības blvd., Rīga, LV-1520 www.mk.gov.lv 45 LSE European Institute – APCO Worldwide Perspectives on Europe Series Latvia Turns the Corner Valdis Dombrovskis Prime Minister of Latvia Professor Janet Hartley Chair, LSE Latvian economy: from heavy landing to the first signs of growth Valdis Dombrovskis Prime Minister of Latvia January 19, 2011