RIGA - Bank of Latvia President Ilmars Rimsevics went on a public relations offensive last week, disbursing rumors of a possible overheating in the national economy and giving a show of support to the inflation-curbing plan adopted by the government last month.
Rimsevics, who has found himself in the eye of a hurricane of speculation over the integrity of the Latvian currency, the lat, said he believed international rating agencies would give the Baltic state a positive outlook once the plan was adopted.
For this reason he issued a veiled warning to the government that it wasn't enough to adopt a plan and said international banks and agencies would closely monitor implementation in coming months.
"Rating agencies, seeing that the plan is being implemented accurately, might give a positive outlook to Latvia in the future," said Rimsevics.
The government's plan includes balancing the budget this year, regulating bank lending and taxing real estate operations.
In the meantime, Rimsevics hotly denied that Latvia's economy, which grew 11.9 percent last year and registered a staggering current account deficit of 21.1 percent 's both numbers the highest in the EU 's was threatened by the contagion that brought down Asian economies in 1997 and Portugal's in 2000.
"Tension over the rate of the lat, which arose at the end of February and beginning of March, is not evidence that Latvia has gone down the path of Portugal, Japan and other countries of Southeast Asia," he said in a statement. In his words, the situation in those countries was "several times worse."
Rimsevics said Latvia's credit and monetary policy would remain the same. While admitting there was no way to predict the future, he said there were no reasons to believe that the lat would collapse, despite the sizable current account deficit.
"Swedish banks perceive Latvia as its own internal market, and this gives additional comfort in terms of economic stability," the banker said.
Indeed, the argument that Swedbank and SEB, which control the two largest banking groups in the Baltics 's Hansabank and Unibank 's would have the most to lose from a devaluation and therefore will act to prevent such a scenario has been widely used in recent weeks as debate over Latvia's currency intensified.
Still, the lat, which is pegged to the euro and is traded in a fixed corridor, came under considerable pressure in March. On April 2 the Bank of Latvia announced that it sold 71 million euros on the foreign exchange market during the previous week, while on March 26 the bank announced it had sold a staggering 195 million euros during the week March 19 - 23.
With so many banks and rating agencies now speculating over a currency collapse not only in Latvia, but in Estonia and other East European economies, one can't help but wonder if the rumors will trigger a self-fulfilling prophesy.
Moody's Investors Service issued a report last week in which it supported Rimsevics' opinion that the comparison with Asia of 1997 is unjustified.
"The problems which could affect Bulgaria, Romania and the Baltic countries of Estonia, Latvia and Lithuania reflect some of the growing risks to be expected in the new European Union members," Moody's analyst Kenneth Orchard wrote.
"Emerging Europe has been undergoing a rapid transition that has caused large imbalances, and while the possibility of a quick correction via a hard landing is a real one, a more likely scenario is economic stagnation with a gradual unwinding of imbalances," stressed Orchard.
The fact that the fundamental creditworthiness of the governments remains strong, despite deterioration in their short-term economic outlooks, is most important, the analyst wrote.
"The credit ratings for the Baltic states, Romania and Bulgaria are supported by low levels of national debt, especially when compared to neighboring countries and countries in the same rating categories. Risk testing indicates that the governments of these countries could all absorb significant economic shocks without causing major strain to their balance sheets," the analyst noted.
On the bright side, Bank of Latvia spokesman Martins Gravitis stated last week that foreign direct investments grew 2.5-fold in 2006 and comprised 8.1 percent of GDP (compared to 4.5 percent of GDP in 2005), enough to cover more than one-third of the current account deficit.