Country Report Latvia May 2009

Outlook for 2009-10

• The 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 6% of GDP in 2010.
• We forecast that real GDP will contract by 15% in 2009 and by 4% in 2010 as private consumption falls sharply and exports weaken. There is a high risk of a sharper contraction if domestic demand falls by more than expected.
• Average annual inflation is forecast to fall from 15.4% in 2008 to 2.5% in 2009 and -2% 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 2% of GDP in 2009 and 1.5% of GDP in 2010, initially as the fall in domestic demand slashes imports, and later as exports strengthen.

Monthly review

• Elections to the European Parliament and municipal councils on June 6th will provide a barometer of support for the governing parties. New Era is polling well, but low voter turnout could lead to some surprises.
• Several senior politicians, including a former transport minister, Ainars Slesers, are aiming to become the mayor of the Rigaa contest of considerable significance, given the economic weight in the country of the capital.
• The government is preparing a revised budget for 2009 for approval in June, with substantial spending cuts to keep the budget deficit to 7% of GDP. Indications are that the IMF and the EU will agree to the new deficit limit.
• The government is also preparing structural reforms for healthcare and education, which are vital to boost Latvia's competitiveness and to meet fiscal targets. However, these are likely to arouse substantial opposition.
• Year-on-year consumer price inflation fell to 8.2% in March. Recent increases in indirect taxes have delayed the progress of disinflation, but rapidly imploding domestic demand still points towards deflation later in the year.
• The banking sector continues to retrench as banks seek to consolidate their balance sheets ahead of expected large losses from the deep economic downturnthe stock of outstanding loans fell again in the first quarter.

Source: Country Report

This report covers the following industry codes:
SIC Code: 48;70;15;49;60;10
NAICS Code: 517;72;23;22;52;212