RIGA - Latvia's first quarter current account deficit increased 2.2 times compared with the same period in 2006, underscoring a strengthening of overheating risks despite international criticism and the government's incipient attempts to bring consumption back down to earth.
According to the Bank of Latvia, the current account deficit reached 761.6 million lats (1 billion euros) in the first three months of 2007, expanding by 423.6 million lats, or 125 percent. In March alone the deficit was 185.9 million lats, or 2.9 times larger than in March 2006.
Latvia had the largest current account deficit in the EU for 2006 's 21.1 percent of gross domestic product. Exports grew last year by 13.1 percent, while imports, fueled by domestic consumption, soared almost 30 percent.
The Bank of Latvia also announced last week that loan saturation in the Baltic state had reached average EU levels. Bank President Ilmars Rimsevics said May 17 that Latvia has nearly reached the average EU indicator of loans versus GDP. Loan growth was 60 percent last year, enabling Latvia to top the list of East European nations and reach West European peers.
Analysts believe that cheap, easy loans are largely to blame for the spending boom taking place in Latvia, while virtually tax-free investments in real estate have fostered massive property speculation.
Rimsevics said that data in the first months of 2007 have shown there's been no slowdown in economic activity. For instance, growth in the retail sector, the central bank chief said, was 30 percent year-on-year.
What's more, according to preliminary data, Latvia's GDP grew 10.7 over the first quarter of 2007.
Thus the risks of an economic overheating 's fraught with the hard-landing scenario 's persist.
Rimsevics also gave warnings about life in a high-inflation economy.
"High inflation decreases the profitability of companies exporting their products abroad. So the high domestic demand and the inflation pressure caused by it hinders the development of Latvia's export potential, which is the main prerequisite for the sustainability of state economic development," he said.
He said that exports have increased at a pace twice slower than imports, while the rise of imports exceeded 36 percent, a record in recent years.
"What ensured such a boom in domestic demand in recent years? No doubt, an important role in the process was the low interest rates in Latvia's financial market, which were in turn determined by low interest rates on international financial markets, as well as freely available foreign financial resources to the Latvian banking sector, often in the form of funding by the parent banks," Rimsevics said.
In all, by the end of March some 4.8 billion lats (6.8 billion euros) in loans had been issued to Latvian households, data from the Finance and Capital Market Commission show.
Parliament played its part last week, adopting legislation aimed at curbing out-of-control loan growth.
According to one requirement, Latvian banks will be able to lend large sums to individuals only after the borrowers have submitted statements of income from the State Revenue Service. The requirement will affect loans exceeding 100 minimum monthly salaries, or 12,000 lats (17,074 euros).
Also, under the same provision a borrower must be able to cover at least 10 percent of the price of the loan in the form of a down payment.
In the real estate sector, lawmakers passed amendments that will charge Latvians a 25 percent income tax on property transactions.
The tax will not apply to revenues earned from properties that the sellers owned for at least five years and have been declared as their place of residence for at least a year.
Sellers will be exempt from the tax until 2010 if their properties have been registered in the land book before the new bill takes effect or if the property in their possession is registered in the land book by the end
Finally, the Bank of Latvia's council decided on May 17 to raise the refinancing rate by 0.5 percentage points to 6 percent. Spokesman Martins Gravitis said the decision was made on the basis of macroeconomic trends and to support the government's plans to combat inflation.