RIGA - A new batch of data shows that Latvia's economy is continuing to cool, to the point that some policymakers and analysts claim that the slowdown of economic activity may be headed in the opposite direction.
The Bank of Latvia announced March 14 that the current account deficit declined to 19.6 percent 's still the highest in the 27-member EU 's in the fourth quarter last year, while lending dropped from January to February.
The bank's president, Ilmars Rimsevics, said weaker domestic demand in the second half of 2007 resulted in slower import growth. Export growth remained positive, which as a result significantly improved the trade balance, he said.
The nominal growth of imports in January grew 3.1 percent year-on-year, while exports expanded 18.1 percent, the bank said.
"Slower lending, weaker domestic demand and a reduction of import growth helped improve Latvia's balance of payment data," said Rimsevics.
Latvia's current account deficit in 2007 reached 3.2 billion lats (4.6 billion euros), up 30.6 percent year-on-year in nominal terms, according to the Bank of Latvia.
He said the government needed to promote exports "urgently" to maintain export growth in the future.
Growth of bank lending, however, fell to an annual rate of 29.3 percent in February from 31.8 percent in January, Rimsevics said. This is the lowest level since September 2000, the bank said.
The bank's council on March 13 decided to reduce the mandatory reserve requirement for banks by 1 percentage point to 6 percent to stimulate banks to lend more to the private sector.
"Taking into account the fact that buoyant economic growth is gradually becoming more balanced and, along with slower growth in lending, the banking sector's contribution to the rise in domestic demand is diminishing, it is possible to loosen the tight monetary policy framework for the financial market," said the bank.
It was the second reduction in the reserve requirement so far this year.
Speaking of lending, Rimsevics said annual growth would be 18-20 percent by the end of the year.
"This level of lending growth means a balanced slowdown of economic activity, but it should be followed carefully whether lending does not decline faster," said Rimsevics.
Meanwhile, a leading economist at Latvia's largest bank warned that too much pessimism could spark a drastic decline in economic growth.
"Even though optimism had to be lowered to stabilize the economy, a rapid turn to pessimismâ€¦could be exaggerated and cause an overly rapid and ungrounded drop in GDP growth," said Hansabanka chief economist Martins Kazaks.
He recommended that the government urgently adopt a stabilization plan that would promote exports.
Kazaks said the bank's GDP forecast for 2008 was 6 percent, but taking into account the national statistical data for the fourth quarter of 2007 and the latest data on January-February, this will be lowered.
Economic growth at the end of 2007 was lower than expected with domestic demand dropping to 3.7 percent in the fourth quarter. "Only the rapid growth of exports held GDP growth at 9.6 percent and 8 percent in the third and fourth quarters respectively," he said.
Kazaks said that wages are still rising and employees are using them for making deposits, which can be seen by growing term deposits by resident household at banks early this year.