Country Report Latvia November 2009

Outlook for 2010-11

• The 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 still some chance of an early election.
• The recession has slashed revenue, and despite large spending cuts, the budget deficit is forecast to remain large, contracting from an estimated 9.8% of GDP in 2009 to 8.9% in 2010 and 6.3% in 2011.
• We estimate that real GDP fell by 16.9% in 2009 and expect it to fall by 2.9% in 2010 as private consumption and investment fall sharply. Recovery will begin in mid-2010, with GDP rising by 3% in 2011.
• Average inflation is estimated at 3.6% in 2009, but consumer prices are forecast to fall by more than 3% in 2010 as the recession generates deflationary pressures. Prices will be broadly stable in 2011.
• The authorities are committed to keeping the lat within its current narrow band against the euro. However, Latvia's payment position remains weak and there is a high risk that the government will eventually devalue the currency.
• We forecast that the current account, which recorded a deficit of 13.2% of GDP in 2008, will post a surplus of around 6% of GDP in 2009-10 as weak domestic demand limits imports. The surplus will fall in 2011.

Monthly review

• The government is increasingly confident that the 2009 budget deficit will meet the target of 10% agreed with the IMF and the EU.
• After initially proposing a more limited fiscal tightening, the government proposed a draft budget for 2010 in line with its commitment to the IMF to cut spending and raise revenue by LVL500m (US$1bn).
• The government appears to have secured the votes needed to push the budget through parliament. However, the prime minister has recently expressed doubts as to the longer-term stability of the governing coalition.
• According to the official flash estimate, real GDP fell by 18.4% year on year in the third quarter, little changed from the second quarter, but slightly stronger than the Bank of Latvia (BoL, the central bank) was expecting.
• Latest figures for exports and industrial production suggest that output in the export-oriented parts of the economy has stabilised and may now be growing. However, sectors focused on the home market continue to be weak.
• Consumer prices in October were 0.9% lower than a year earlier, the first time that there has been a year-on-year fall in prices since Latvia began to publish its own consumer price index in 1991.

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