Looming election clouds recovery forecast

RIGA - Latvia’s GDP is expected to fall by about three percent this year, says head of the Central Statistical Bureau Aija Zigure, reports Nozare.lv. Despite the difficulties in accurately predicting future economic performance, she said the “Trends show that the economic free fall has ended, and we now must stabilize and move ahead.” Zigure added that a better picture of the economy will come at the end of the second quarter.

GDP for 2009 dropped 18 percent, based on seasonally-unadjusted data. In the fourth quarter of 2009, compared to the fourth quarter of 2008, GDP was down 16.9 percent. The drop was “led” by decreasing activity in retail (down 31.4 percent, which is 14.1 percent of the economy), transportation/communications (down 10.3 percent, 11 percent of GDP), processing industries (down 9 percent, 11 percent of GDP), construction (down 38.5 percent at 6.1 percent of GDP).

Purchase volumes for final private consumption continued to fall. Government final consumption expenditures decreased by 14.3 percent, but expenditure on gross capital formation fell by 38.4 percent. Export of goods (72.9 percent of total exports) grew by 6.0 percent, with exports of services falling by 28.5 percent. Meanwhile, the volume of imports of goods (84.4 percent of total imports) decreased by 25.7 percent, while the volume of imports of services fell by 33.8 percent.
Compared to 2008, private final consumption expenditure on food decreased in 2009 by 16 percent, on alcoholic beverages and tobacco, by 19 percent, on transportation by 25.1 percent, on restaurants and hotels by 43 percent, and on clothing and footwear by 44.7 percent.

Government spending continues to be constrained by austerity measures to cut the budget deficit, as required by the IMF-led group of international lenders. Latvian elections this autumn threaten to hamper further efforts to push through measures vital to its international bailout plan, threatening the country’s credit rating, Fitch Ratings said, reports Bloomberg.
A parliamentary election scheduled for October “weighs on the rating, the uncertainty that comes with the election, and I think there might be resistance to removing the negative outlook because of that risk,” said Fitch credit analyst Eral Yilmaz. Fitch rating agency rates Latvian debt as ‘junk.’

Prime Minister Valdis Dombrovskis has pushed through the toughest austerity package in the EU to comply with the terms of the IMF-led rescue. Fitch, which rates Latvia’s debt BB+, wants to see sustained signs of recovery before considering an upgrade, Yilmaz said. “Cuts may become politically more difficult from now on as the public may want to see the results of the fiscal belt-tightening in an economic recovery that results in job creation,” she said.
The jobless rate stands around 20 percent.

The country’s euro peg has obliged policy makers to push down prices and wages to stay competitive, resulting in almost half a year of deflation, with consumer prices slipping an annual 4.2 percent last month. Wages declined an annual 12.1 percent in December, compared with pay growth in excess of 30 percent during the economic boom two years earlier.
“We need to see that the internal devaluation is working, that the government is more comfortable in being able to implement the plan that’s been laid out” before the outlook can be lifted to stable, Yilmaz said. “In a way, the worst part is over now that the economy has some signs of recovery and at least the external environment is looking less bad than it was so there is some hope of an export led recovery.”

The government has passed budget cuts equal to about 10 percent of GDP in an effort to comply with the terms of its bailout.
At the peak of the turmoil, the 3-month Rigibor lending rate hit 29.8 percent on concern the country would be forced to devalue its currency. The Rigibor fell to 2.33 percent on March 9. The drop in rates has allowed the Treasury to sell 2-year T-bills, which it did on Feb. 24, the first time since May 2007 it’s sold maturities longer than one year.

“We’ve seen wages fall, we’ve seen an adjustment in the current account deficit, and some of that is related to the trade balance, although it is also related to imports falling so sharply due to private consumption collapsing,” Yilmaz said. “I think there might still be more to go, but I think a start has definitely been made.”

Standard & Poor’s raised Latvia’s outlook on its BB rating to stable from negative on Feb. 12. Moody’s rates the country Baa3, its lowest investment grade, with a negative outlook.