Latvia posts record surplus, but hard-landing scenario still plausible

  • 2008-01-30
  • By TBT staff
RIGA - Latvia posted a 0.7 percent budget surplus in 2007, a fiscal finish that impressed bankers and analysts and established the trend of using budget policy to combat the country's overheated economy.
"I would say it is an excellent result and very necessary at the current stage of national economic development," said Bank of Latvia President Ilmars Rimsevics. "In a way it is also a historic result considering the deficit of 1.4 percent initially planned...We wish the government to continue the job and achieve similar success with this year's budget," he said.

The consolidated budget last year posted a surplus of 94 million lats (133.7 million euros), or 0.7 percent of GDP, the State Treasury announced.
In a press statement, Finance Minister Atis Slakteris said there were two reasons for the higher-than-expected surplus: tax revenues were over-fulfilled 's at 102 percent 's and the ministries trimmed spending.
"Government expenditures reached just 96 percent of those [originally] planned," he said.
At the same time municipalities were negligent in tightening their belts. "Local authorities created a significant deficit in their budget despite the adopted economy measures, and this is a very negative trend whose continuation I do not support," Slakteris said.

Latvia's economy is the fastest growing in Europe, but is troubled by high inflation, a high current account deficit and a lack of workers. Economists agree that the economy overheated in 2006 - 2007, which led to the government's anti-inflation package adopted last summer.
Slakteris said this year's budget called for a 1 percent of GDP surplus 's of 163 million lats 's a target that must be met "at all costs." 
In the interim, inflation will continue to dog Latvia, analysts said.
Nordea, a foreign-owned bank, said inflation would soon hit 15 percent 's not surprising after the consumer price index reached 14.1 percent in 2007.

"We expect growth of the base inflation. As we do not expect the overheating to decline in the nearest future, we estimate the interest rates to remain high," the bank wrote in a report.
"Due to economic imbalances, the pressure on currency in the corridor set by the Bank of Latvia will persevere," the report said.
The bank said that the rate of growth in the economy would decline, and that the fall could be steep.
A hard-landing cannot be ruled out, the bank added.
"Lending growth has reduced, and real estate prices are falling. The lending volumes have actually fallen so steeply that a risk of a relatively hard-landing exists," the report said, adding that a devaluation of the lat was highly unlikely.