LATVIA’S GDP: Slow road to recovery.
RIGA - The last 6-10 years in the Baltics have been described amusingly as a “massive party with a huge hangover.” After seeing Chinese-style economic growth, the collapse that followed and started a domino effect around Europe and the world is now finally stabilizing. To what extent will the current measures governments are taking succeed is still uncertain, while the question remains: “What’s next?”
Things do seem to be looking up. Just last week the International Monetary Fund (IMF) reported that the recovery plan for Latvia appears to be working. Unemployment might be high, but the economy has grown for three quarters. Also last week, the country’s credit rating was raised by Standard & Poor’s, a sure sign of something positive to come.
However, there seems to be a balance in the Baltics between progress, and regression - a sort of one step forward and one step backwards approach to economic renewal.
Ilmars Rimsevics, governor of the Bank of Latvia, took the aforementioned party metaphor a bit further by explaining that the crisis was not a surprise, and it was even something that they tried to stop from happening. “It is like a party where, if the central bank were the policemen that came in… it’s very difficult to stop a party already going on.”
Many analysts back in the beginning of the crisis in 2009 had speculated, and almost demanded, that the currencies of the Baltics, and especially the lat, be devalued. While devaluation would have set Latvia back several years on the path to the euro, some experts assumed that devaluation would be the only way to get things back on track. Oliver Weeks of Morgan Stanley Research said at the time that: “We continue to think that devaluation in Latvia is eventually almost inevitable.”
While some experts, such as Tomas Andrejauskas, head of Swedbank Markets Lithuania, have emphatically suggested that the euro be adopted as soon as possible, many are skeptical that moving towards such a solution would only create more instability. Economist and author Nathan Lewis told TBT his thoughts on the matter, and what has to be done in order to ensure that another crisis does not rear its ugly head, as many may fear.
“Adopting the euro is not a solution to all monetary problems. Unfortunately, the euro itself is at some risk of problems, due to various difficulties with Portugal, Spain, Italy and the like. Of course, if Latvia adopts the euro, these would also become Latvia’s problems. However, there is not an obvious better solution at this time, and Latvia is already on that course so I suggest completing it as soon as possible. This is the ‘Stable Money’ part of the plan,” explained Lewis.
“As for low taxes, Latvia has generally been a good example in this regard, adopting a ‘flat tax’ system, even if at a rather high rate,” said Lewis.
“Unfortunately, the recent trend has been toward higher taxes, with the VAT rising from 18 percent to 22 percent. This will cause additional economic difficulties, and will probably not raise tax revenue as a percent of GDP, despite various projections suggesting otherwise,” Lewis elaborated.
“I suggest lowering the VAT immediately back to 18 percent, and implementing a personal income tax cut to perhaps 18 percent, from 26 percent today,” Lewis recommended.
The IMF role
While many have been quick to laud the presence of the IMF in Latvia, some analysts are less enthusiastic. “The standard IMF practice worldwide is to loan money to the government, which the government then pays to foreign bankers to cover their losses. This is exactly what has been happening in Ireland. Of course, this is simple thievery. Where is the IMF money going? You will find that it is going directly to foreign bankers, leaving debts for Latvian citizens to pay,” explained Lewis.
However, despite the harsh previous two years of cuts and budgetary reworking, did the IMF make all that much of a difference? Liva Melbirde of Lavia’s business daily Dienas Bizness doesn’t think so. “I can’t say the IMF made a huge difference from previous times.”
However, Melbirde added that any frustration on the part of Latvian citizens was directed not at the IMF, but at the government. Despite all this, the GDP of the country is expected to grow at least three percent this year, a sign of recovery for some.
However much help the role of the IMF may have played in the recovery process, streets and stores are devoid of local customers and beggars are still growing in numbers. The extent to which the situation has grown is evident in the recent human interest story of one “Jason Ruddick,” a 21-year old Latvian who traveled to London specifically to be a squatter in a multi-million dollar vacant home with others who traveled from the Baltics for specifically that same reason. While the laws on squatting may be lax in the U.K., the idea that people are not only homeless in their countries, but are willing to go to such great lengths to be essentially beggars in other countries is a sign of something much greater.
“Economic recovery or not, there are still serious problems that will remain with this country for many years to come,” says Liene Karklina, a banker in Riga’s Old Town. And indeed the labor force leaves something to be desired.
World Bank President Robert Zoellick, after visiting Latvia last year, commented on the unskilled laborers continuing to work tough jobs for very little pay, “Those gentlemen are doing pretty tough work for 100 lats (142 euros) a month and I thought it was an excellent sign about the will of people in Latvia to work to try to earn a living for their families.” And while the will to survive is something that has been engrained in the Latvian people for centuries, it is clear that the people don’t wish to merely ‘survive,’ but begin to ‘thrive.’
Some of the most poignant stories of the crisis come from average families, students and most of all, pensioners, who could no longer afford necessary staples after pensions were decreased. “If you come here to visit, you see a nice place, but if you read about what it is like in the news or in a textbook, some would think we live in a third world country that does not care about its people,” said economics student Karlis Ritmanis, 22.
“People make so little money here that of course you want to go to school so you can leave and go earn more money abroad. The funny thing is that you can make more money away from Latvia and spend much less on food,” Ritmanis continued.
Indeed, he has a point. Prices for food, energy and other commodities have grown as the demand for products has gone down, since the average Janis can no longer afford much of what he became accustomed to during the so-called “Baltic party.”
Governor Rimsevics announced on Jan. 14 that, surprisingly, in the second half of 2011, prices for food may even go down, despite the moderate rise at the beginning of the year. The factors influencing this switch are many, but the focus seems to be on the high rate of unemployment and the low demand for goods that will cause these inflated prices to decrease.
As can be expected with the on-going “brain drain” of intellectuals leaving to seek their fortunes abroad, Latvia is left with many unqualified residents seeking to enter the job market. Rimsevics points out that the Latvian economy has moved from being largely dependent on real-estate development, to an export based economy. In fact, foreign demand for Latvian exported goods has grown 14 percent in the last year, according to the Bank of Latvia. While at the moment it remains to be seen whether Rimsevics’ predictions will come true, it can be asserted that at least the price for services has gone down 2.1 percent. However, goods still saw a nearly five percent rise in 2010.
Exports seem to be the direction the country’s economy is banking on (literally), but with tangible success. The first ten months of 2010 yielded an unprecedented 28 percent increase in exports over 2009, according to Eurostat. Lithuania and Estonia have also gone the way of exports and each reported a 30 percent increase from 2009.
However, despite the positive press given to Estonia for becoming the newest eurozone member, the country saw the EU’s second largest increase in the price of consumer goods (5.4 percent), year-on-year.
What is it that these nations export so well, one might ask. Bloomberg financial has recently reported that automobile exports to Ghana and other nations are seeing a steep rise. These are not however, new cars made in Latvia. In a crafty move, Latvia is exporting cars that have been used as collateral by bankrupt borrowers. The value of these exported vehicles last year was $174 million, certainly nothing to sneeze at.
There are smaller, less-known exports as well, for example dairy products and cheese. It is a little known fact that much of the English cheddar on U.K shelves is actually made in Latvia and only packaged in the U.K. Latvia supplies about 86,000 kg of the cheese to the British market.
According to Bank of Latvia economist Daina Pelece, “Ferrous metals, plastics, mechanisms and mechanical appliances as well as wood pulp posted the greatest annual increases in goods exports.” A rise in global demand of Latvian exports is also expected in the coming year, with mineral-fuel products having posted the greatest growth in the last year. Not necessarily the most exciting export, but certainly something to be a bit more proud about than repossessed automobiles.
Another sign of recovery is, of course, renewed purchasing power and the return of customers to the stores. While such is not the case on a primary level, it was reported by Latvian Authorized Automobile Dealers Association President Andris Kulbergs that new car sales in Latvia were up 32.9 percent in 2010; however, many of the cars were sold to legal entities and not private persons. While these figures may sound positive, it must be noted that in 2001, new car sales were 26 percent higher than in 2010.
Another sign of growth and possible recovery this year is the rising star of the stock market stage: “Nasdaq OMX Baltic” was one of the fastest growing stock indexes in the world in 2010, and the fourth fastest in Europe. Will this lead to more investors in the future? A return of skilled workers? Only time will tell for sure. For now there is only speculation.
(continued next issue)