GDP shrinks 2 percent as Latvia battles Russian crisis

RIGA - Although real GDP dropped 2.3 percent during the first quarter, compared to a 7.6 percent growth for the same period in 1998, the Central Statistics Bureau believes the country has shaken off the effects of the Russian financial crises and will see growth rates rise once again by the end of the year.

"We can't expect big growth," said Aija Zigure, Central Statistics Bureau head. "We could expect the year to end at around a 2 percent growth level."

Nonetheless, Latvia's present GDP has suffered the biggest drop recorded in the past 10 years in Central and Eastern Europe, according to a report in The Financial Times newspaper. Latvia's GDP is down 40 percent from 1989 to 1999, according to figures from European Bank for Reconstruction and Development.

Economic figures for the first quarter, released by the CSB on June 29, reveal that growth rates continue to feel the effects of the drop in Russian demand for Latvian-made manufactured goods.

The manufacturing sector, which makes up one-fifth of the country's economy, saw its total output drop 17 percent during the first quarter. There are 17,000 fewer people employed in this sector today as compared to the same time last year.

Particularly hard hit were food and beverage processors. Production of processed foods such as cheese and beer dropped by a quarter as food production firms struggled to find new markets in the West to make up for dwindling demand in Russia for their goods.

Latvia's all-important transit sector, which after the manufacturing sector makes the largest contribution to the country's GDP, also continued to suffer the effects of the financial troubles next door.

The volume of cargo shipped on the country's railroads dropped 15 percent while Latvian ports saw 6 percent fewer goods pass through them during the first quarter, mostly as a result of the collapse in Russian exports.

The 10-year figure for GDP reflects losses of sales markets in Russia after collapse of the Soviet Union in 1992 and Latvia's subsequent regain of its independence. Removal of Soviet rule took with it tourists from Soviet Union countries who liked to come to the Baltics for vacations and also Soviet spending on food from farm cooperatives. Factories abandoned at independence, especially in eastern Latvia, left whole communities of jobless workers.

But some sectors of the economy are showing signs of life. Clothes manufacturers, ship builders and construction companies all reported strong growth.

Most of the construction work -about 75%- took place in Riga where repairs of old buildings, and the completion of two major new projects, the Vernisaza entertainment complex and the Skonto office building, Valdemara Center, kept construction firms busy.

And retail sales remain strong. Sales of electrical appliances and other durable household items doubled this quarter. Car lots continue to report a brisk business in new and used vehicles.

The performance of these sectors helped make up for the difficulties in transport and manufacturing. Some analysts had predicted a first-quarter fall in GDP of as much as 5 percent.

"The fall (in GDP due to the Russian crisis) has slightly slowed," said Zigure, who pointed out the contraction in GDP during the first three months was smaller than during the third and fourth quarters of last year.

The statistics department predicts GDP growth will come in close to zero during the second quarter and will rise during the third and fourth quarters.

Although private sector analysts agree GDP rates will recover this year, most believe the increase will not be as much as was predicted by the statistics department.

"I think we have seen the worse (of the effects of the Russian crisis)," said economist Hans-Hermann Morrien of the German Landesbank. "There will be recovery this year, but I think 2 percent growth is on the upper limit, the most optimistic scenario."

GDP grew 3.6 percent last year and 6.5 percent in 1997.

Landesbank predicts in its latest quarterly report that GDP will rise this year in Latvia by 1 percent and will show a higher increase in the year 2000.

"We think there will be a recovery in the European business cycle. It is starting now and will accelerate in the second part of the year," said Morrien. "All the Baltic states will benefit from this."

All three Baltic states have seen their economic growth slow since the collapse of the ruble made their exports too expensive in Russia. Lithuania's gross domestic product contracted 5.7 percent in the first quarter of this year while Estonia saw its GDP drop 5.8 percent between January and March.

Meanwhile, Latvia's Finance Ministry continues to grapple with budget shortfalls and proposed budget cuts. That the resignation of Latvia's prime minister, Vilis Kristopans, will not delay budget resolution is the hope of Bank of Latvia. Central bank spokesman Edzus Vejins told Baltic News Service he hopes "these developments will still allow to solve the country's budget problems as successfully and rapidly as possible, and the next government will be elected soon."