Country Report Latvia April 2009

Summary

A new five-party, centre-right government is led by Valdis Dombrovskis. The government is unlikely to survive until the election due in October 2010, and there is a significant chance of an early election.
The budget deficit will widen sharply as the economy contracts. With revenue likely to be below government targets, the Economist Intelligence Unit expects deficits of 8% of GDP in 2009 and 5% of GDP in 2010.
We now expect real GDP to contract by 15% in 2009 and by 4% in 2010, down from our previous forecast owing to a marked worsening of key indicators in January-February. There is a high risk of a sharper contraction.
Average annual inflation is forecast to fall from 15.4% in 2008 to 2.5% in 2009 and -0.5% in 2010 as sharp rises in commodity and food prices come to an end, and as the economic recession generates deflationary pressures.
The current-account deficit will narrow from 12.8% of GDP in 2008 to 4% of GDP in 2009 and 3.5% of GDP in 2010, initially as the fall in domestic demand slashes import growth, and later as exports strengthen.

The president, Valdis Zatlers, announced on March 31st that he would not follow through on a threat to initiate a referendum on dissolving the Saeima (parliament) and holding an early election.
The Saeima has approved a new director for the Corruption Prevention and Monitoring Bureau (KNAB). It has also passed the "anti-mafia law", which will make prosecution in corruption cases easier by allowing plea bargaining.
The IMF has held back a 200m (US$270m) tranche of funding due to be released in late March under Latvia's stabilisation programme while it waits for progress on fiscal consolidation.
Parex Bank, which was nationalised in November 2008, reached agreement with creditors in March to refinance two syndicated loans worth 775m, which removes some potential short-term pressure on the state finances.
GDP data for 2008 show a deepening and broad-based recession, and indicators for January and February 2009, including retail trade, industrial output and foreign trade, suggest that the pace of contraction has increased.
Exports have collapsed in recent months. In January they fell year on year for a third successive month, and the rate of decline accelerated, to 25.3%. However, imports fell even more sharply, by 36.1% in January.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48
NAICS Code: 517