Latvia's unpredictability scares off investors

RIGA - Latvia’s shaky economy, its unpredictable tax policy and swollen bureaucracy has made it unattractive for foreign investors. A possible tax increase, likely to be introduced after national elections in October, may scare away the rest of interested enterprises.

After the maligned Latvia’s 2010 budget adoption process, the international community drew a sigh of relief and temporarily stopped worrying about Latvia. The last report from the European Commission said Latvia should be able to meet fiscal targets in 2010 and is likely to achieve a 3 percent budget deficit in 2012 [which is a necessary condition to adopt the euro]. However, the new coalition can easily stultify this progress.

The government has to give a message to foreign investors that taxes are not going to be increased, Latvian Central Bank chief Ilmars Rimsevics told the parliament’s budget committee recently.
“It is clear that we have to reduce the 2010 budget deficit by 441.1 million lats (630.1 million euros) in order to fulfill promises given to the international donors. Nobody wants to say before the elections how the expenditures are going to be cut. I am afraid that the new parliament, which will be short of time, may choose the most simple way and raise taxes. In my opinion, this sum has to be realized by structural reform implementation,” said Rimsevics.

“Both investors and the Latvian people will continue to be skeptical about the Latvian economy if the government doesn’t promise to keep taxes at their current level,” he added.
However, if taxes are going to be increased, investors at least have to be aware of this measure in order to prepare for it. The first things foreign businessmen ask for are a clear development strategy for the country, stability of the legal environment and predictability of the tax system.

“Stability, predictability and quality criteria are more than ever at the top of investors’ immediate concerns. By choosing location, investors are giving priority to the particular country and want to understand how they would receive inputs and deliver products there. With today’s uncertainty more pressure is put on governments, which are asked to provide a clear route for their countries back to economic growth,” said Girts Greiskalns, Executive Director of Foreign Investors Council in Latvia (FICIL).

Up to now the government was doing quite the opposite to investors’ demands. Personal income tax was increased from 23 percent to 26 percent from this January; however, such measure was not promised to the international lenders and appeared a month before the budget adoption. In addition, real estate tax was implemented. Also, if the state budget revenue plan isn’t fulfilled, value added tax has to be increased from 21 percent to 24 percent.

“Investors need to know that the government really controls the situation and has a certain plan to defeat the crisis. Unfortunately, this is Latvia’s specific feature. As everything is about to calm down, suddenly a statement appears and the government [seems] about to tumble again,” said Olga Ertuganova, Latvijas Krajbanka senior analyst.
However, a sort of economic and political stability has taken place in Latvia and foreign investors have immediately recognized this. “There is a lot of money in the world now and investors are eager to take a risk. Latvia is quite an attractive place now due to cheap real estate and enterprises. There probably will be new investments if the government will not make any stupid mistakes,” the analyst said.