RIGA - Bank of Latvia President Ilmars Rimsevics has urged business and government leaders to restructure investments and boost exports so that the country can cope with the inevitable economic downtown.
"We should take care of developing exports and be aware that a drop in demand can be expected in the future, while costs will continue to increase," Rimsevics told a press conference on May 22.
"So we should implement the government's export promotion measures to ensure international competitiveness," he stressed.
The central banker said that the signs of the economic cooling are strengthening, with bank lending declining and budget revenues falling short of target.
According to preliminary data, Latvia's GDP grew 3.6 percent in the first quarter of the year, down from 9.6 percent in the fourth quarter last year. And analysts agree that first quarter growth is likely to be the "most robust" in 2008.
As Rimsevics explained, "The downgraded forecasts in industry, services, construction and consumer surveys in the first quarter show the more cautious attitude of businessmen and consumers on further development. The real estate market sees a gradual decline of prices and volumes, and demand for labor is lower."
On the bright side, Rimsevics pointed out that the slowdown in the world economy has not yet affected demand for Latvian exports 's where growth is outpacing imports. This, in turn, has the additional benefit of reducing the current account deficit, which in Latvia was the highest in the European Union for several years straight.
In March exports of goods rose 10.2 percent year-on-year, while imports dropped 4.6 percent. In the first quarter of 2008 the increase of exports (17.9 percent) considerably exceeded imports (3.1 percent).
Rimsevics also warned about the challenges of trying to boost industry in an environment when energy and labor costs are rising.
"We should take into account that costs related with laborforce and energy resources have risen considerably, and they gradually are reflected in reduced profits, including in the manufacturing industry, which is the chief export industry," he said.
Rimsevics said that the way business and government manages to restructure investments from the non-tradable sector [construction, retail, real estate] to the tradable sector will largely determine how successfully Latvia will manage to mitigate consequences of economic overheating and resume balanced growth.
He said that the manufacturing industrial output physical volume index dropped by 9.2 percent in March as compared to the same period last year, with the largest manufacturing sectors influencing the decline 's wood-pulp, wood and cork articles by 10.1 percent, and manufacturing of food products and beverages by 9.3 percent.
The steep drop in domestic demand has significantly impacted trade volumes. Retail sales, including sales of cars and car fuel, in March declined by 8.3 percent year-on-year, mainly pushed down by a decrease in sales of textiles, clothing, footwear and food products.