RIGA - If up to now they have been restrained by either internal regulations or political correctness, Latvia's bankers and analysts have recently suddenly become more vocal about the state of the economy, which increasingly resembles a dragster roaring at top speed but unable to release its braking parachute.
At the beginning of the year there was a palpable rift between the international investment community and local analysts over how the two sides perceived Latvia's economy. If the former prophesied gloom, and a bit of doom, the latter painted a more optimistic picture on the Baltic state's short- and mid-term prospects.
This was not unexpected and perhaps, for the sake of the debate, was welcomed. Besides, Latvia's analysts have the distinct advantage of working on home turf, while economists in London and Frankfurt have to juggle a portfolio of numerous and diverse countries.
This month, however, the two groups have begun to sound like they're singing from the same song sheet. Latvia's economy, which grew 11.1 percent in the first half of the year, is now plagued by double-digit inflation (see story on Page 12), and now everyone is equally concerned.
Zigurds Vaikulis, chief market analyst at Parex Bank, told the "900 Seconds" news program on Sept. 5 that devaluation 's an unholy word in the Latvian lexicon 's was a 50-50 possibility.
"Without a doubt, since February, when a devaluation of the lat was first mentioned, the anxiety has diminished; however, in reality these risks [of a devaluation] have remained, if not increased," he said.
The same day analysts at Nordea Bank issued a report saying that a devaluation of the currency was unlikely but still plausible if inflation continues to increase and the current account deficit does not come down from its current pinnacle.
At present Latvia has the highest inflation and current account deficit in the EU. These, together with skyrocketing wages, are undermining the nation's competitiveness.
On Sept. 5, the Association of Commercial Banks of Latvia released an overview of the economy that provided stinging commentary on the government's incipient 's and half-hearted 's attempts to control inflation.
The association's president, Teodor Tverijons, criticized the government's fiscal policy, which is bloated with large construction projects that are exacerbating the inflationary problem.
"The ministries seem not to understand that they are also responsible for inflation," he told a press conference.
Martins Kazaks, chief economist at Hansabanka, said that a budget surplus of 0.2 percent of GDP was not an adequate policy response to Latvia's inflationary spiral and that the surplus should be increased dramatically.
The main analyst at SEB Unibanka, Andris Vilks, criticized the government's anti-inflation plan, adopted in March, as a piecemeal approach that won't balance the economy over the long-term.
The bankers did admit, however, that the government's program has managed to curb growth in consumer borrowing dramatically from April to July. Indeed, third-quarter GDP data could arguably be the first real reflection of results of the government's anti-inflationary plan.
Still, after the Central Statistics Department on Sept. 7 announced first-half 2007 GDP results 's up 11.1 percent 's analysts had more cause for concern.
"As the rate of economic development is decreasing very gradually, speaking about any kind of stabilization is still premature," Olga Ertuganova, chief analyst at Krajbanka Investment, told the Diena daily.
"The growth is such that it is too rapid and does not testify to balanced economic development, particularly taking into account the vastly different situation in the nation's economic branches."
To be sure, bankers have stepped forward with more than just exasperation and have offered a few solutions to Latvia's dangerous predicament.
The Bank of Latvia, which for years has appealed to the government to restrain its voracious appetite, suggested on Sept. 10 that ministers work harder on deregulating certain sectors of the economy to foster competition and to tackle the deficit of working hands.
The construction industry, for example, needs urgent deregulation and an immediate injection of foreign labor to keep the growth in wages down.
For its part, the commercial banks' association proposed that the government approve a budget with a significantly larger surplus, freeze several ambitious state-funded construction projects and link future pay increases with gains in productivity.
Another key component of any anti-inflation plan should be to encourage Latvians to save more and spend less, the association said, adding that raising the value-added tax, currently at 18 percent, should not be ruled out.
Bankers also believe the government should adopt a series of measures to help boost local industry and revive exports, which have begun to suffer as a result of internal economic imbalances.