RIGA - Political uncertainty triggered by the walk-out of Latvian Prime Minister Valdis Dombrovskis’ (New Era) biggest coalition partner may lead to an “ineffective” government and a “negative” market reaction, said Danske Bank, reports Bloomberg. The prime minister, who took office a year ago during Latvia’s worst economic crisis in two decades and forced through the European Union’s toughest austerity program, is left heading a minority administration after the People’s Party quit on March 17 in protest over economic policies.
The People’s Party recalled its five Cabinet members after Dombrovskis refused to sign an agreement between the party and his own New Era group. The proposal called for delaying tax increases this year and next, and for fewer ministries. The premier now controls 44 seats in the 100-member legislature, with four unaligned deputies. A general election is scheduled for October.
Four People’s Party ministers - Foreign Minister Maris Riekstins, Health Minister Baiba Rozentale, Justice Minister Mareks Seglins and Regional Development and Local Governments Minister Edgars Zalans - handed in their resignations on March 22, leaving their posts in the government.
The fifth People’s Party minister, Minister of Culture Ints Dalderis, said last week that he would quit the People’s Party and stay on as the minister of culture, reports news agency LETA. The coalition now includes New Era, with 15 MPs, Greens and Farmers’ Union with 17, Civic Union with 7, For Fatherland and Freedom/LNNK with 5. There are indications that 3 additional MPs could support coalition policies, raising the total number of seats to 47
“Political risk and uncertainty are on the rise again,” said Violeta Klyviene, senior Baltic economist at Danske Markets in Vilnius. “This might disrupt confidence in the Latvian economy and bring renewed pressure to the financial market. The market reaction to this event might be relatively negative.”
Shares of Swedbank, the largest lender in the Baltics, fell as much as 0.5 percent, to 71.95 kronor (7.2 euros), on the news.
Dombrovskis appealed to the People’s Party for “political stability” to ease concern in the markets and ensure “fiscal stability.” He said that “A policy that is truly responsible for the country cannot be self-centered and categorical. One party cannot become a guarantee for political stability in a country where five parties are represented in the government coalition.”
JPMorgan economist Yarkin Cebeci said “We think that the remaining four parties will continue to support the coalition and the minority government will remain intact until the elections.”
Latvia turned to a group led by the European Commission and the International Monetary Fund for a 7.5 billion-euro rescue loan in 2008 after taking over its second-biggest bank, Parex. The government has passed budget cuts equal to about 10 percent of GDP in an effort to comply with the terms of its credit. “Recently, the IMF praised Latvia for its progress in meeting the terms of its bailout package,” wrote Klyviene. Still, the fund “warned of significant risks ahead and urged the government not to move to a fiscal easing option.”
The economy shrank a revised 16.9 percent last quarter after retail sales dropped by a third and the jobless rate approached 20 percent. Output slumped 18 percent for all of last year.
“No-one wants to bring this government down so it seems like it will stumble along until the elections,” said University of Latvia professor of political science Nils Muiznieks. “I would be very surprised if this government can adopt the budget, or take any serious steps” until “after the election.”
The ratings agency Moody’s played down the scope of political tensions in Latvia, saying they had no implication for credit quality and the Baltic state was better placed to tackle its fiscal problems now than a year ago. Moody’s analyst Kenneth Orchard said “They [the Latvian government] did a good job to ensure the most difficult decisions were out of the way ahead of the election campaign,” reports the Latvian Institute.
The People’s Party retreat from the coalition, nonetheless, has the business community worried over the economic outlook. Businessmen are said to have turned to Economy Minister Artis Kampars (New Era) in order to draw his attention to the damage done to foreign partners’ trust in Latvia by the People’s Party’s move, reports LETA. They say there is a feeling of expectancy and caution among foreign partners.
“The People’s Party’s public announcement has had a negative effect on foreign business with Latvia, and has temporarily slowed foreign investor activity in the country. Such action by one party in one day can fundamentally distort recent achievements, and weaken Latvia’s reputation abroad,” indicated Kampars. The minister expressed his regret that one party’s “unconsidered action” could not only negatively affect current activity by foreign investors in the country, but also temporarily “put the brakes” on the attraction of new investors. Similarly, providers of credit risk insurance for business are likely to choose to wait longer before beginning to again provide services to Latvian companies.
“International experts attentively follow events in Latvia, expressing their views on macroeconomic processes in the country. While in recent months Latvia had begun to win back the trust of foreign experts, receiving positive appraisals of the government’s ability to stabilize the country’s economic situation, now these experts will probably be more cautious in their predictions,” said Kampars.
In the minister’s view, the most important thing at present is to ensure political stability in the country, and preserve the government’s ability to act. Politicians should be making decisions based on these priorities.
The economy minister also stresses that People’s Party leader, Andris Skele, is mistaken in his opinion that Latvian exports are set to fall over the coming months. Macroeconomic indicators show that Latvian companies’ activity abroad is growing, and exports are set to recover as a result. Data show that exports of goods and services increased by 2 - 5 percent in the third and fourth quarters of last year, compared with the same period the previous year. Export volumes are continuing to grow this year, with January showing a 12 million lats (17.1 million euros) rise in export value year-on-year.