Country Report Latvia September 2009

Outlook for 2009-10

• 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 budget deficit will widen sharply as the economy contracts. With expenditure likely to be above target, the Economist Intelligence Unit forecasts deficits of 11% of GDP in 2009 and of 9% of GDP in 2010.
• We forecast that real GDP will contract by 17% in 2009 and by 4% in 2010, as private consumption falls sharply and exports weaken. There is a risk of an even sharper contraction if domestic demand falls by more than expected.
• Average inflation will fall from just above 15% in 2008 to around 3% in 2009, with deflation of 2% forecast in 2010, as sharp rises in commodity and food prices come to an end, and as the recession generates deflationary pressures.
• The authorities are committed to keeping the lat within its current narrow band against the euro. However, there is a high risk of devaluation.
• We forecast that the current account, which recorded a deficit of 12.8% of GDP in 2008, will post a surplus of 2.5% of GDP in 2009 and of 2.7% in 2010 as the fall in domestic demand cuts imports.

Monthly review

• Public bickering between the ruling parties has continued over government spending plans, as the five coalition parties attempt to improve their standing among voters.
• On current poll ratings, only two of the five parties in the coalition would pass the 5% threshold required to enter parliament.
• The IMF has released the second tranche of funding as part of Latvia's stand-by arrangement. The Fund has increased the ceiling for Latvia's fiscal deficit in 2009 to 13% of GDP (on a cashflow basis), from 5% in the original agreement.
• Policy focus has begun to switch to the 2010 budget, which the IMF agreement stipulates should be no larger than 8.5% of GDP (on a cashflow basis). The 2010 budget is likely to involve tax increases.
• Real GDP contracted by 16.6% year on year in the second quarter, according to a flash estimate from the Central Statistical Bureau.
• Industrial output fell by 19% year on year in the second quarter, with textiles and machinery and equipment posting particularly large declines.
• The current account recorded a surplus of US$942m in April-June 2009, compared with a deficit of US$1.3bn in the same period of 2008. A narrowing of the trade deficit and a reversal of the income deficit were the main drivers.

Source: Country Report

This report covers the following industry codes:
SIC Code: 49
NAICS Code: 22