Download Macroeconomic review for Taipei Mission in Latvia

Macroeconomic review for Taipei Mission in Latvia
Key Macroeconomic Indicators
Indicator
Reporting
period
Data
Data of corresponding
period of previous year
Real GDP (year-on-year; %)
2007 IV-VI
11.0
11.1
Registered unemployment (%)
2007 X
4.9
6.6
Current account deficit (in millions
2007 IV-VI
of lats)
795.6
517.7
Current account deficit to GDP (%) 2007 IV-VI
23.5
19.2
Foreign direct investment in Latvia
2007 IV-VI
(in millions of lats)
400.1
237.2
External debt (% of GDP)
4.6
5.8
2007 VI
Source: The Bank of Latvia
Different views on of economic growth in Latvia – soft landing scenario
Moody’s: Latvia’s country ceilings and the government’s foreign and local
currency bond ratings recognize the country’s successful economic transition over the
past decade, its low level of government debt and its strengthened financial system.
Latvia’s strong economic performance over the past decade bears testimony to both
the quality of the policy framework and dynamism of the private sector. The ratings
are anchored by the political consensus on the direction of structural reforms within
the context of EU and ERM2 membership. However, the ratings are presently
constrained by large domestic and external imbalances, which leave the economy
vulnerable to external shocks. The degree of risk is mitigated by a number of
reassuring factors, specifically the government’s strong balance sheet and the nature
of the financial system.
Source: Moody’s credit analysis, December, 2007
According to Latvian Financial and Capital Market Commission (FCMC)
head Uldis Cerps, there are people, who talk of growing instability, at the same time
there are banks increasing their exposure to Latvia, including the ones very critical
towards Latvia, like Danske Bank, as its subsidiary's Sampo Banka loan portfolio
grew by over 90 percent within 12 months. "So I do not know what to do – either to
listen to their words, or to look at their actions," FCMC head added.
There are no reasons for devaluation of lats and such decision would be absurd,
Uldis Cerps said in the interview to Latvian daily Neatkariga Rita Avize published on
21 November 2007. "My personal opinion is that the devaluation of lats would be
absolute stupidity and idiocy, and I do not see any reasons for doing so," Uldis Cerps
said.
Source: BNS
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At its 1 November 2007 plenary session, the Saeima of the Republic of Latvia
has confirmed the present head of the central bank, Ilmars Rimsevics, in his office as
Governor of the Bank of Latvia for another six-year-period to begin on 21 December.
"The re-election gives the Bank of Latvia the possibility to continue monetary policy
which will ensure the stability of the lats," Rimsevics said after the election.
Source: The Bank of Latvia
Governor of the Bank of Latvia Ilmars Rimsevics said there is ``no doubt'' that
the economy is heading for a ``soft landing'' as Swedish banks are cutting back on
lending to cool growth.
Source: The Bank of Latvia
Franciszek Rozwadowski, the head of the IMF mission to Estonia, said in
beginning of November saw no risk of currency devaluation in the Baltics.
Source: Bloomberg
The three Baltic countries, among the fastest-growing in the European Union,
are heading for a ”soft landing'' with help from their currency boards, JPMorgan
Chase & Co said. ``I don't see that a currency devaluation in the Baltics is likely and a
soft landing for these countries is our main scenario,'' Yarkin Cebeci, an economist at
JPMorgan Chase & Co., said in a telephone interview on 14 November 2007.
Source: Bloomberg
Steep economic growth decline started in the overheated economies of the
Baltics, but the devaluation of national currencies is not expected even in Latvia, the
international financial services company Morgan Stanley report shows. Morgan
Stanley experts do not expect mass unemployment, wide social unrest and devaluation
in Latvia, like it happened in Argentina, which could press the authorities to change
the present currency pegging policy, underscoring that Latvian situation does not look
close to Argentinean crisis several years ago. According to the experts, the Baltic
States will be able to avoid lending and liquidity crisis of Kazakhstan, yet, the
economic growth reduction, which has already started, seems to be inevitable in
Baltics and, while controlled, it is going to be long term.
Source: BNS
"As far as fundamentals are concerned, the economic development continues.
So I do not think now that the Baltic countries are heading for the hard landing
scenario", Darius Daubaras, vice-president of Credit Suisse investment bank, said in
an interview to the Lithuanian business daily Verslo Zinios on 3 December 2007.
Source: BNS
Inflation curbing measures
As inertia is typical for the inflation indicator, no steep drop in inflation rate
should be anticipated soon after the first signs of the economic recovery. Moreover,
new upward movements in administered prices (more costly heating services
projected for February and March of 2008, more expensive electricity) and a higher
excise tax on tobacco are to be expected in the near future. Therefore, inflation is
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likely to rise moderately in the next few months, with a drop in its annual rate likely
only next spring.
Source: The Bank of Latvia
The government introduced a new anti-inflation plan in March 2007. In
contrast to past anti-inflation measures, which were somewhat superficial, the current
plan takes a comprehensive and rigorous approach to the problem. The plan seeks to
cool the housing market and reduce inflation through three broad instruments:
1) The government has committed to tightening fiscal policy, limiting public sector
wage increases, not introducing new tax reductions and increasing taxes on property;
2) New regulatory restrictions have been introduced on property loans and there are
new incentives to promote savings; and
3) Structural measures are planned to enhance competition, improve productivity and
make the labor market more flexible.
Source: Moody’s credit analysis, December, 2007
The inflation curbing measures and financial instruments implemented will
bear results in 2008, Latvian Finance Minister [former Finance Minister] Oskars
Spurdzins said at Latvian parliament budget and finance committee session on 16
October 2007. He told that the annual inflation could reduce effectively in mid 2008,
which will be facilitated by the surplus budget project for 2008 and slower salary rise.
"These are the instruments aimed at achieving lower annual inflation," Spurdzins said.
Source: BNS
Current account deficit and its financing;
Latvia's central bank Governor Ilmars Rimsevics attempted to allay investor
concern about an economic slowdown, saying foreign lenders remain committed to
the Baltic nation and will continue to finance the current account deficit. ``This is the
most crucial thing -- as long as the Swedish banks, German banks and Norwegian
banks are here and continue to finance it, I don't see any danger to the economy,''
Ilmars Rimsevics said in an interview to Bloomberg in Riga ob 6 December 2007.
Banks ``would lose a lot of money and their reputation'' if they left Latvia.
Source: Bloomberg
Stability of the banking system
Key banking sector indicators:
1997
32
1998
28
1999
24
2000
22
2001
23
2002
23
2003
23
2004
23
2005
23
2006
24
2007
Q3
23
banks
31
27
23
21
22
22
22
22
22
21
21
branches of
foreign
banks
1
1
1
1
1
1
1
1
1
3
2
178
183
160
184
193
199
206
202
215
224
*
Number of
banks*
incl.:
Number of
bank
branches
3
Staff
8414
8230
7786
7863
7943
8240
8895
9664
10520
11611
*
Number of
customer
accounts,
'000
-
1387
1298
1397
1651
2041
2207
2403
2912
3316**
3521
Number of
payment
cards, '000
-
207
328
635
893
1022
1176
1365
1711
2107
2336
-
238
374
643
791
842
868
875
878
957
1077
-
3390
4462
5381
6908
8326
10268
15170
18495
17571**
20106
Number of
ATM's
Number of
POSs
* no information
** data updated in July of 2007
- no data
Source: Association of commercial banks
Moody’s: The stable outlook and ratings for Latvian banks reflect their
improving credit quality, their efforts to grow market share and their good
profitability.
Source: Moody’s banking system outlook, November 2007
Moody’s: The profitability of Latvian banks has undergone a steady
improvement since the early part of the current decade, supported by the
strengthening economic environment, sector consolidation, a growing demand for
financial services and improved credit quality. At the end of 2006, all Latvian banks
reported a profit, although for a few of them the profits shrank. In particular, total
consolidated profits before tax for Latvian banks amounted to LVL307.4 million for
the whole of 2006 and LVL207.8 million for the first half of 2007, a 65% year onyear increase.
Source: Moody’s banking system outlook, November 2007
Future outlook.
IMF predicts significant cooling for Latvian economy. Latvia's GDP will
increase 10.5 percent in 2007, which will be the steepest growth in the so called
emerging Europe, but next year growth rate will become much more moderate and
drop to 6.2 percent, the International Monetary Fund (IMF) says in its latest global
economic outlook.
Source: BNS
According to the report that was presented to the government on 27 November
2007, in 2008 Latvia's current account deficit will be 21.6 percent of GDP, and will
decrease to 19.6 percent in 2009 and to 17.8 percent in 2010. "Exports will grow at a
slightly slower pace in the following years due to moderate foreign demand and
possible weakening of exporters' competitiveness amid rising labor costs. Since the
growth of domestic demand and lending is expected to slow down, import growth will
slow significantly and will increase at a slower rate than exports," the Finance
Ministry said.
Source: BNS
4
In September 2007, the Latvian Government revised the initial plan for the
adoption of the euro and decided to specify the target date at the latest 24 months
prior to the actual changeover to the euro when the three-year forecasts of Latvia's
Convergence Programme come close to the compliance with the Maastricht criteria.
According to the Ministry of Finance, Latvia's changeover to the euro might
tentatively take place in 2011-2013. The introduction of the euro in Latvia will be an
issue of the EU multilateral relations affecting common interests of all EU countries.
Source: The Bank of Latvia
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