Country Report Latvia January 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.
• 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 4% of GDP in 2010.
• We expect real GDP to contract by 1.8% in 2008, by 8% in 2009 and by 1% in 2010a deeper and longer-lasting recession than earlier forecast, reflecting a worsening export outlook and the impact of Latvia's IMF programme.
• Average annual inflation is forecast to fall from an estimated 15.7% in 2008 to 5% in 2009 and to 3.5% in 2010, as large commodity and food price rises 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 6.5% of GDP in 2009 and to 5.5% of GDP in 2010, initially as the fall in domestic demand slashes import growth, and later as exports strengthen.

Monthly review

• The governing parties have united behind measures needed to ensure IMF assistance, and some opposition parties are also co-operating with the government. However, the political consensus looks weak.
• The government secured a significant victory when it succeeded in pushing through a vital reform consolidating Latvia's local government structure, despite opposition from one of the governing coalition parties.
• The government completely overhauled the 2009 budget in response to the economic crisis. The new budget targets a deficit of 4.9% of GDP. Value-added tax (VAT) is to rise, and wide-ranging expenditure cuts are being undertaken.
• The Bank of Latvia (BoL, the central bank) has introduced additional lending rates, which make it progressively more expensive for banks to borrow from the central bank, in order to help defend the lat against speculation.
• The IMF has agreed a massive multilateral stabilisation package for Latvia, also backed by the EU and others. Given Latvia's large imbalances, an especially stringent adjustment package has been required.
• Real GDP contracted by 4.6% year on year in the third quarter. Indications are that the rate of decline in key sectors accelerated in the fourth quarter.
• Consumer price inflation slowed sharply in November, to 11.8% year on year, from 13.8% a month earlier. Domestic demand pressures are weakening.

Source: Country Report

This report covers the following industry codes:
SIC Code: 37
NAICS Code: 336

This report covers the following industry codes:
SIC Code: 37
NAICS Code: 336