TALLINN - With economic activity weakening across the board in the Baltics, slowing domestic spending on imported goods is having the unanticipated benefit of helping to bring down Latvia's large and unwieldy negative current account balance.
Hansabank Market analysts expect that current and capital account deficits could fall to around 5.5 - 6 percent of the gross domestic product by 2009-2010, down from a 17.4 percent deficit at year-end 2007.
The drop is being driven by a strong improvement in the goods account, as exports are rising at a faster rate than imports or, in other words, consumer spending on imports is rapidly slowing. The services sector account surplus was unchanged compared with the previous May, as both exports and imports increased by 2 percent.
Latvia's current account deficit in 2008 could reach 15-16 percent of GDP, down from 23 percent in 2007, says Bank of Latvia President Ilmars Rimsevics.
He said that signs of Latvia's cooling economy have grown stronger, as reduced domestic demand was reflected in the fall of imports, strengthening the trend in the reduction of the current account deficit.
"Inflation has also reached its peak and its gradual reduction is expected. Due to these reasons, the growth in GDP will be comparatively slow in 2008-09, while growth of industry and exports will play a decisive role in overcoming the cyclic downward trend in the national economy, in turn stimulating a comparatively smooth return of the economy to a sustainable growth path," said Rimsevics.
He also stressed that this will require focused action by the designers of Latvia's economic policies, aimed at protecting competitiveness and the growth of exports, and which includes solutions for the labor market problems that would allow for balancing salary increases with productivity gains, as well as ensuring the retention of the budget surplus under the conditions of an unbalanced economy.
During the first quarter 2008, Latvia's current account deficit reached 19.4 percent of GDP, equal to a payments deficit of 666.1 million lats (947.9 million euros), this down from 765.4 million lats, or 26.6 percent of GDP, a year earlier.
According to the Bank of Estonia, meanwhile, Estonia's current account deficit was 2.1 billion kroons (134 million euros) in May, a drop of 23.4 percent from the same month last year.