RIGA - Bank of Latvia chief Ilmars Rimsevics has hailed the recent increase in exports, saying exports were becoming the main driving force in the country's economy, which is currently undergoing a dangerously rapid slowdown.
"The signs of an economic slowdown in Latvia have become stronger amid falling domestic demand, slower lending and budget revenues falling behind target, but for the time being exports have taken over the role as the main driving force in the economy," Rimsevics said.
In April, exports jumped 24.7 percent compared with the same month a year ago, while imports rose just 9.7 percent. Rimsevics and private sector analysts agree that as domestic demand sinks, the key to keeping the economy afloat will be support for a robust export sector.
"So far the slowdown that can be seen in the global economy has not reduced demand for Latvian exports. It means that even given the effect of increased prices, for the time being exports successfully become the key driving force of the Latvian economy," Rimsevics said.
First quarter GDP grew by 3.3 percent 's the slowest level in recent years 's and most economists agree that the remaining three quarters will see even lower results, possibly even negative.
The economic downturn was mostly affected by decreased growth in manufacturing, agriculture and trade (by 4.1, 2.8 and 0.8 percent respectively).
The situation in the manufacturing industry, Rimsevics said, slightly improved in April, according to statistics.
Rimsevics said it was essential to ensure the sustainability of Latvian exports with a view that external demand could also fall in the future as domestic costs continue to rise.
In the central banker's opinion, the government needs to implement export and competition-boosting measures that it has worked out. Business costs, such as wages and energy, have climbed rapidly as of late, and they are starting to affect companies' revenues, including in manufacturing, Latvia's main export industry.
"How successfully we will manage to regroup investment from the non-tradable sector (construction, retail and real estate) to the tradable sector will determine to a large extent the success of dealing with the consequences of the economic overheating and resume balanced growth," Rimsevics concluded.
Meanwhile, analysts continue to be leery of predicting what could happen to GDP growth for the year given the economy's high volatility.
Martins Kazaks, chief economist at Hansabanka, said a slower than expected rise in exports could fail to compensate for the drop in domestic demand. "And so we may experience a negative GDP growth in the second half of the year," he said.
"It seems, however, that even though full 2008 growth will still remain positive, it will be quite close to zero, but most likely, in the 'positive territory' 's let's say, between 0 and 2 percent," Kazaks said.
The Central Bank has yet to revise its previous estimate that GDP will grow 5 's 6 percent this year, which many analysts would now agree is overly optimistic.