Long road ahead for Latvia's recovery

  • 2009-08-27
  • Staff and wire reports
RIGA - Another International Monetary Fund (IMF) mission could arrive in Latvia in the second half of September, says Prime Minister Valdis Dombrovskis (New Era), reports news agency LETA. The prime minister said that the IMF board will decide on releasing the next 200 million euro tranche, corresponding to the July 27 agreement signed by Latvia's government, at the end of August.

Latvia's economy faces few short-term risks, though, after it received international loans and global markets have improved, says Pacific Investment Management Co. Europe head of portfolio management Andrew Bosomworth, reports news agency bbn.ee.
"The international community has signed, sealed and disbursed some of the loans to Latvia so the immediate risks are gone, or substantially reduced," he added.

The government has cut spending and raised taxes to meet the terms of a 7.5 billion-euro loan package. "Latvia's euro peg obliges the government to force through the austerity measures… to keep the Baltic economy competitive," he says.

"The extent to which the government has been able to push through wage cuts in the public sector is entirely unthinkable, you'd have a revolution in France if that would be proposed there," Bosomworth said.

"What I am surprised about is the flexibility of the economy," he observes, adding that the measures "have protected the country's currency peg by keeping bailout funds flowing in. The European Commission has signaled it remains committed to helping Latvia avoid a collapse and is the biggest contributor to the country's bailout package." 

"They view it as: putting out a small fire is worth doing in order to prevent a bigger fire in the region," Bosomworth said. "It's better to be generous on this one right now, and avoid having to do the same in Lithuania, Estonia and Bulgaria, and even more in Hungary for example."
The economy still faces a difficult path to recovery, Bosomworth said. "I would not underestimate the time that is needed to re-engineer an economy away from a non-tradable sector to an export sector," he added. "I think it is a process that goes beyond 2010."

Voters may take out their anger over the scope of spending cuts and higher taxes,as the country moves closer to general elections in October 2010. "The longer the adjustment takes, the larger the political risks become; I'd expect some elements of society not to be unanimous in standing behind existing policies," said Bosomworth.