RIGA - Two of Latvia's top financial institutions have written counter-arguments to the mounting concern that the Baltic state's economy, the fastest-growing in Europe, is surging toward an imminent implosion. The newest rhubarb in the "dismal science," it would appear, is occurring in the Baltics.
Hansabanka, the nation's largest bank in terms of assets, and Parex Bank, the third largest, recently issued reports addressing the increasing number of alarm bells being sounded by reputable international economists 's in particular by The Economist, the U.K.-based magazine, and the World Bank.
Parex was particularly feisty in its defense of Latvia's economic performance, and seemed to suggest the one thing overheating was journalists' appetite for pessimistic forecasts. "Journalists are searching for something to shout about, and Latvia is a very grateful topic," the bank wrote in a separate note dedicated to the spreading fear of overheating.
The phrase was echoed in the report's conclusion: "Every journalist with a minimal understanding of economics can find a series of convincing arguments why Latvia might be heading for a crash."
No doubt it is unpleasant when a doomsayer comes along and rains on someone's parade. But if Latvia's economy 's which expanded by approximately 11.5 percent last year, the highest rate in the EU25, while inflation galloped along at 6.8 percent and the current account deficit grew to a historic high 's isn't about to overheat, what is the argumentation?
While not defending Latvia per se, Hansabanka, in its "Baltic Outlook" report released Feb. 1, asserts that the economy will cool down substantially in 2007, with GDP growth settling in the 8.5 's 9.5 percent range. As the bank explains, this will occur primarily due to capacity constraints, as the labor market continues to experience a dearth of working hands.
To be sure, the bank's analysts raise many warning flags but don't seem to offer much in the way of specific evidence that would assuage fears of an economic burn-out. Indeed, they do not rule out a hard-landing scenario if 1) the shortage of capacity is not addressed, 2) domestic consumption isn't stemmed, and 3) fiscal policy is not tightened.
"Although continued rapid growth and strengthening overheating risks have raised the risks of a faster slowdown, our current analysis suggests that the soft-landing scenario still has a considerably higher probability than the negative one," Hansabanka wrote.
Parex Bank, by contrast, goes for broke. The bank picks apart six commonly used arguments that Latvia's economy is overheating and, while admitting that the situation is not flawless, tries to prove that there is a string of "overly active propaganda" working against the Baltic state.
Parex's analysts argue that Latvia's position 's a post-Soviet market economy that recently joined a mammoth economic club 's is unique and deserves to be measured by a different measuring stick than one used to gauge developing economies.
In four of the six indicators 's GDP, wages, credit and external debt 's Parex essentially argues that rapid growth is due to the fact that Latvia started from a low base and the Baltic economy is simply catching up. Relatively speaking, Latvia still lags behind its European peers when measured by classic ratios such as loans to GDP or external debt to GDP, the bank's analysts stress.
In terms of inflation, Latvia is the victim of three mainly external factors 's global energy prices, administrative prices and tax harmonization 's and that core inflation in Latvia last year was 3 percent.
The bank, however, glides over the fact that the same external factors affect all countries 's e.g., Lithuania, where average annual inflation last year was 3.8 percent.
Parex states that the most pressing problem is the yawning current account deficit. However, the bank believes that, thanks to EU funds and remittances from Latvians working abroad, the Baltic state "will avoid serious problems with financing the current account deficit and thus also pressure on the lat."
Hansabanka claims that the current account deficit will remain a very serious problem. "The rapid expansion of lending, the expansive fiscal policy and the excessive optimism of Latvian companies and consumers do not raise hope that Latvia's current account deficit might narrow in the near future," the bank's analysts wrote.
