SEB: Latvia's inflation woes likely to continue into 2005

  • 2004-10-13
  • By TBT staff
RIGA - SEB, the Swedish financial group that controls some of the largest Baltic banks, said in a report last week that Latvia would have difficulties reining in inflation next year and that Lithuania's economy risked overheating due to exorbitant consumer crediting.

In its survey of Baltic economies Baltic Outlook, SEB warned that inflation in Latvia could continue in 2005 and that the government's hopes to curb price growth were too optimistic.

Government and central bank 2005 forecasts that inflation will decrease to 4 percent or 5 percent are too optimistic since officials are attaching too much importance to one-off effects - e.g., EU accession - that would not change next year's numbers. Only a fraction of the price growth this year could be attributed to administrative costs and tax changes after accession, analysts said, stressing that growing food prices, which could not be seen as a temporary phenomenon, were exerting pressure on overall inflation.

SEB analysts also pointed out that the Bank of Latvia so far has not succeeded in curtailing lending since a large part of Latvian loans are denominated in foreign currencies, which the central bank can't influence.

For these reasons it will be very difficult for the government of Prime Minister Indulis Emsis and the central bank to reduce inflation. The government may even have to change taxes and duties to keep inflation below 3 percent in 2006, thus acquiring the right to introduce the euro in 2008.

According to the Maastricht criteria that every country must meet for euro-introduction, inflation should not exceed 1.5 percentage points above the average of the three eurozone countries with the lowest annual inflation in the previous year - or approximately 3 percent.

In Latvia annual inflation, measured from August to August, was 7.8 percent.

SEB analysts predicted that inflation this year could decrease to 6.6 percent and would comprise 5.5 percent in 2005.

Lithuania's economy is seeing a rise in the current account deficit and rapid growth in consumer crediting, which poses a threat to economic stability. Analysts recommended stricter economic policy to combat the runaway credit growth, though they said the new government could increase spending in 2005.

SEB claimed a close link between Lithuania's economic growth and a rise in domestic consumption. However, exports have also contributed thanks to an increase in demand in the post-enlargement EU.

According to the Swedish group's estimations, Lithuania's economy will expand by 7.3 percent this year and slow to 7.1 percent in 2005, while annual inflation will amount to 2 percent in 2004 and grow to 2.5 percent next year.

Latvia's economy, meanwhile, is expected to grow 7.4 percent this year - the fastest in the Baltics.

Regarding Estonia, SEB analysts predicted that GDP would grow 5.8 percent this year and 6.1 percent in 2005.

SEB controls Vilniaus Bankas, the largest bank in Lithuania, Estonia's Uhispank and Latvia's Unibanka.