RIGA - Latvia, recovering from the European Union’s deepest recession, must adopt a “credible” budget for next year before the country’s investment-grade credit rating is restored, says central bank Governor Ilmars Rimsevics, reports Bloomberg. “Latvia should accept the 2011 budget convincingly, transparently and understandably, without any delays so that the rest of the world understands how it is done and that it’s credible,” Rimsevics said in an interview in London.
Standard & Poor’s and Fitch Ratings cut Latvia’s rating to junk last year after the country turned to international lenders for a 7.5 billion-euro bailout program. Both companies raised their outlooks to stable this year. Moody’s Investors Service rates Latvia Baa3, its lowest investment grade, with a stable outlook.
Latvia is recovering after a debt-fueled property bubble burst, forcing the government to push through some of the EU’s toughest austerity measures. Prime Minister Valdis Dombrovskis (New Era), who won the Oct. 2 elections, needs to implement more deficit- cutting measures in the next two years to meet EU rules and achieve the country’s goal of adopting the euro in 2014.
The government should reduce the budget deficit by 395 million to 440 million lats (628.5 million euros) to reach its target of narrowing the shortfall to 6 percent of GDP next year, the EU said. The deficit will be about 9 percent this year, Rimsevics said.
Adopting the euro in 2014 “is realistic” if Latvia meets next year’s deficit target, said the central banker.
The Baltic state has already approved spending cuts and tax increases equal to about 14 percent of GDP to make the economy more competitive and meet the terms of loans from a group led by the European Commission and the IMF. Latvia turned to the lenders after it was forced to take over its second-biggest bank, Parex, in 2008.
How soon Latvia can wean itself off IMF funding “depends on how quickly it does these reforms and how quickly we reach a debt level which is sustainable and financeable,” Rimsevics said. “Latvia has to do its homework in 2011.”
Only then should Latvia tap international bond markets, for the first time since February 2008, he said. “I recommend doing this after the budget is accepted and Latvia improves its credit rating and markets are more positive about Latvia,” Rimsevics said.
Latvia’s credit-default swaps, which investors use to protect against default or to speculate on a borrower’s credit worthiness, surged to 1,193 basis points (11.93 percent) in March 2009. They fell to 287.2 basis points yesterday, below Greece, Ireland, Portugal, Romania and Hungary.
Rimsevics opposes tax increases as part of the next round of deficit-cutting measures. Instead, the government should overhaul the way it finances services such as health care, education and the municipalities, he said. “Latvia needs to continue structural reforms, it needs to evaluate all the functions and expenditures,” Rimsevics said.
“That would be the most important avenue where to look for extra resources rather than go the easy way, namely increase taxes, which would reduce the competitiveness of Latvian goods and services. You have to go item by item to see whether that’s a worthwhile expenditure or not,” he added.
The economy emerged from recession in the first two quarters of this year, growing 0.3 percent and 0.8 percent, after contracting 18 percent in 2009 on top of a 5 percent drop in 2008. While reiterating the central bank’s forecast for a 1 percent decline in GDP this year, Rimsevics said he “can’t exclude” that the result will be better, or the economy may even grow. “The Latvian economy regained competitiveness that had been lost in the earlier years,” he said. “The recovery has been much speedier than predicted before.”