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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