RIGA - Latvia's GDP will contract by 25 percent by the middle of 2010, compared with the highest point it reached at the end of 2007, says chief economist at Swedbank Martins Kazaks, reports news agency LETA. In the latest 'Swedbank Economic Outlook,' Kazaks says that by the middle of the next year, Latvia's economic output will have dropped to the same level as in 2004.
For 2009 the country will register a 17 percent to 19 percent GDP fall, will shrink by another three percent in the first half of the next year and will only gradually resume positive growth in the second half of 2011, suggests the economist. For all of 2011 growth could reach between two to five percent.
By the end of last year and in the beginning of 2009, GDP contraction was triggered by the steep fall in domestic consumption and exports. With shrinking revenues and growing unemployment, domestic consumption is expected to continue its drop. Kazaks says that this process will help to achieve a healthier consumption level, as consumption was previously too high, driven by unsustainable growth in credit, when compared to the stock of available assets in Latvia.
Exports, though down sharply year-on-year, have been stabilizing since spring, though at a much lower level than during the economic boom. Coinciding with recovery in the global economy, "Latvia's exports are expected to resume growth in the beginning of next year," Kazaks added.
The rate of collapse in domestic consumption "has slowed since spring, whereas exports have been stabilizing and, in some areas, even increasing," said Kazaks. Further development may be unsteady, but if domestic consumption keeps shrinking faster than exports increase, the Latvian economy will continue to contract both this year and at the beginning of next year.
Even though the future outlook on the global as well as the Latvian economy has become more positive, a lot still depends on the decisions that the Latvian government soon must make, he cautions. Risks remain on "work on the 2010 state budget, and on the government's decisiveness and consistency in implementing its decisions and reforms," Kazaks noted.
Although structural reforms have been launched this year, for instance, in public administration, education and healthcare, and the national economy is becoming more competitive, Kazaks says that "It is important that structural reforms do not stop halfway through, and that implementation of these reforms is well thought out and timely, the reforms must also be explained to society."
An internal IMF study just released says it has helped 15 emerging market countries "weather the worst of the turmoil" through a mix of increased resources, policy flexibility, and more focused conditionality on support financing, reports news agency AFP.
In its report 'Review of Recent Crisis Programs,' the IMF said the fund-supported programs were delivering the kind of policy response and financing needed to help cushion the blow from the worst financial crisis since the 1930s Great Depression. "What this study tells us is that, with IMF support, many of the severe disruptions characteristic of past crises have so far been either avoided or sharply reduced," said IMF managing director Dominique Strauss-Kahn.
Strauss-Kahn highlighted that serious challenges remained, particularly in restoring sustained economic growth and higher employment, but he also said there were "encouraging signs of stabilization."
The economists compared the typical economic and financial effects of past crises and analyzed why those outcomes had been avoided so far in most cases, including in Latvia. Key factors for the improved results included the fund's rapid mobilization of large financing packages for countries hit by the global financial turbulence of late 2008 that followed the collapse of Wall Street investment bank Lehman Brothers, in mid-September.
Almost all the financing packages provided access beyond the normal limits to fund resources, with more front-loaded disbursements. Other key factors were "the front-loading of financing to sectors facing the tightest financing constraints; emphasis on protecting the financial sector from liquidity squeezes; and fewer conditions on financing."
The IMF report cautioned that the exit from crisis and fund programs may be prolonged, with current account deficits still needing to adjust in some cases, and the possibility that balance sheet problems of banks, companies and households could intensify during the process of stabilization.
"Countries like Latvia, where policies are limited by the choice of the currency regime, face the greatest challenges going forward," reported the Washington-based institution.