Country Report Latvia February 2009

Outlook for 2009-10

• The four-party, centre-right government is led by Ivars Godmanis. Popular discontent with the government is high, and it is unlikely to survive until the election due in October 2010. There is a good chance of an early election.
• The budget deficit will rise sharply as the economy contracts. With revenue likely to be below government targets, the Economist Intelligence Unit expects deficits of 6% of GDP in 2009 and of 5% of GDP in 2010.
• Real GDP fell by 4.6% in 2008, on preliminary data, which is a worse result than expected. We now expect the recession to be deeper than earlier forecast, with real GDP contracting by 12% in 2009 and by 2% in 2010.
• Average annual inflation is forecast to fall from an estimated 15.4% in 2008 to 3% in 2009 and to 2.5% in 2010, as sharp rises in commodity and food prices come to an end, and as domestic demand pressures weaken.
• The current-account deficit will narrow from an estimated 14.2% of GDP in 2008 to 5% of GDP in 2009 and to 4.5% of GDP in 2010, initially as the fall in domestic demand slashes import growth, and later as exports strengthen.

Monthly review

• Latvian politics has been in complete disarray in recent weeks. Mr Godmanis survived a vote of no-confidence in the Saeima (parliament) in February, but the political crisis remains far from resolved.
• Support for the governing parties has collapsed, so that all are polling below the level of 5% support needed to enter the next Saeima. Moreover, Latvians' confidence in the country's politicians in general appears to be very low.
• The government has faced criticism over its slow response to the escalating crisis in the economy. The Bank of Latvia (BoL, the central bank) has called for funds from the IMF-led bail-out to be distributed urgently to boost lending.
• The BoL has made changes to interest rates in an effort to revitalise bank lending, announcing in January a cut in the rate for commercial banks' deposits at the BoL to 2% from 3%.
• The economic downturn continues to deepen. Real GDP contracted by 10.5% in the final quarter of 2008 on a preliminary estimate, following a contraction of 5.2% in the previous quarter.
• In December the volume of industrial production was down by 13.8% year on year, as the domestic economy contracted and exports fell.
• The banking sector is retrenching, and lending activity has fallen dramatically. Banks’ lending to non-financial corporations and households declined in December, and deposits fell markedly in the final quarter of 2008.

Source: Country Report

This report covers the following industry codes:
SIC Code: 60
NAICS Code: 52