Latvia Business Forecast Report Q3 2008

Publication Date	June 2008
Publisher	Business Monitor
Product Type	Report
Pages	52
ISBN Number	1750-2136
Product Code	BMI01209

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Summary

Working Off the Post-Boom Excesses in 2008 A prolonged period of rapid economic expansion has come to an end and the Latvian economy will have to endure several years of sub-par growth to work off the excesses accumulated over the past few years - currently reflected in double-digit inflation, high private sector indebtedness and a massive trade deficit. The pace of real output growth will probably be no more than 3% this year and there is an escalating risk that growth will stall rather than increase at all in 2009. The slowdown reflects a long-awaited adjustment in private consumption and residential investment, two of the main drivers of growth in recent years, and comes in response to a tightening of credit conditions, a correction in the real estate market and rising inflation.

Weak governance continues to blight Latvia's political landscape, with recent opinion polls con- firming the government's unpopularity. Most surveys conducted in Q108 (we reviewed four) put support for two coalition members, For Fatherland and Freedom/LNNK (TB/LNNK) and LLP/LC, below the 5% threshold for parliamentary representation. Union of Greens and Farmers (ZZS) was the most popular of the coalition parties with an approval rating of 7% while support for the People's Party (TP) averaged 5.7%. The main opposition party in parliament, New Era (JL), has failed to capitalise on the government's plight and is currently polling below 5%. The party has had leadership problems and lost direction, and party membership is declining.

The government is beginning to look at ways of softening the impact of the economic downturn.

However, a premature easing of policy could exacerbate macroeconomic imbalances and frustrate rather than help the economic adjustment process. Inflation is still very high and accelerated during the first four months of 2008 as core pressures associated with fast wage growth and high inflation expectations coincided with substantial increases in the prices of food and energy. A reversal of the recent modest tightening of fiscal policy at this stage could fuel domestic prices and wages, in turn undermining competitiveness and making it harder to return the current account deficit to sustainable levels.

Latvia's government has approved its largest privatisation after years of indecision. The privatisation of lMt, a mobile phone operator, looks set to come in the form of a share swap with teliasonera, a telecommunications provider in the Nordic and Baltic countries. TeliaSonera would receive the government's 51% stake in LMT, a mobile phone operator, and the government would receive TeliaSonera's 49% stake in lattelecom, a fixed-line operator, plus a payment of around LVL130mn (US$293mn). The government then plans to sell the 49% stake in Lattelecom to a private investor when the deal is completed as well as the other 51% stake it already owns in the next few years.

TeliaSonera has not yet said whether it will accept the deal, stating that further negotiations would be necessary.

Content

Working off The Post-Boom Excesses in 2008
A Prolonged Period of Rapid Economic Expansion Has Come to An End and The Latvian Economy
Will Have to Endure Several Years of Sub-Par Growth to Work off The Excesses Accumulated over
The past Few Years - Currently Reflected in Double-Digit Inflation, High Private Sector Indebtedness
and A Massive Trade Deficit. The Pace of Real Output Growth Will Probably Be No More than 3% This
Year and There Is An Escalating Risk That Growth Will Stall Rather than Increase at All in 2009. The
Slowdown Reflects A Long-Awaited Adjustment in Private Consumption and Residential Investment,
Two of The Main Drivers of Growth in Recent Years, and Comes in Response to A Tightening of Credit
Conditions, A Correction in The Real Estate Market and Rising Inflation
Weak Governance Continues to Blight Latvia's Political Landscape, with Recent Opinion Polls Con-
Firming The Government's Unpopularity. Most Surveys Conducted in Q108 (We Reviewed Four) Put
Support for Two Coalition Members, for Fatherland and Freedom/Lnnk (Tb/Lnnk) and Llp/Lc,
below The 5% Threshold for Parliamentary Representation. Union of Greens and Farmers (Zzs)
Was The Most Popular of The Coalition Parties with An Approval Rating of 7% While Support for The
People's Party (Tp) Averaged 5.7%. The Main Opposition Party in Parliament, New Era (Jl), Has
Failed to Capitalise on The Government's Plight and Is Currently Polling below 5%. The Party Has Had
Leadership Problems and Lost Direction, and Party Membership Is Declining
The Government Is Beginning to Look at Ways of Softening The Impact of The Economic Downturn
However, A Premature Easing of Policy Could Exacerbate Macroeconomic Imbalances and Frustrate
Rather than Help The Economic Adjustment Process. Inflation Is Still Very High and Accelerated during
The First Four Months of 2008 as Core Pressures Associated with Fast Wage Growth and High Inflation
Expectations Coincided with Substantial Increases in The Prices of Food and Energy. A Reversal of
The Recent Modest Tightening of Fiscal Policy at This Stage Could Fuel Domestic Prices and Wages,
in Turn Undermining Competitiveness and Making IT Harder to Return The Current Account Deficit to
Sustainable Levels
Latvia's Government Has Approved Its Largest Privatisation after Years of Indecision. The Privatisation
of Lmt, A Mobile Phone Operator, Looks Set to Come in The Form of A Share Swap with Teliasonera,
A Telecommunications Provider in The Nordic and Baltic Countries. Teliasonera Would Receive The
Government's 51% Stake in Lmt, A Mobile Phone Operator, and The Government Would Receive
Teliasonera's 49% Stake in Lattelecom, A Fixed-Line Operator, plus A Payment of around Lvl130mn
(US$293mn). The Government Then Plans to Sell The 49% Stake in Lattelecom to A Private Investor
When The Deal Is Completed as Well as The Other 51% Stake IT Already Owns in The next Few Years
Teliasonera Has Not Yet Said Whether IT Will Accept The Deal, Stating That Further Negotiations Would
Be Necessary