RIGA - Over the past two years, the Latvian economy has become better balanced and more flexible, its competitiveness restored, and investors’ trust has returned, reports Nozare.lv. Therefore, as the economy has become more attractive to foreign investors, foreign direct investment continues to increase and could reach 4 percent of gross domestic product this year, says a Swedbank Baltic Sea region report that was presented to the Latvian public on Oct. 19 by Swedbank chief economist in Latvia Martins Kazaks and Swedbank senior economist Lija Strasuna.
Exporting companies have still more opportunities in Latvia, because domestic consumption will be growing slower than GDP in the short term, explained Strasuna.
Nevertheless, the economists believe that there is still room for new players on the local market, because profitability has increased in not only the exporting sectors, but also in domestic trade.
“Unit labor costs have reduced significantly, making production and services less expensive and more efficient. The economic and business environments have improved; support for small and medium-sized businesses has increased; the insolvency procedure has been improved; income tax breaks have been introduced for large investments. The availability of financial resources has also improved as the banks are becoming increasingly active,” said Strasuna.
In the Swedbank Baltic Sea Region index, Latvia’s rating has improved from 6.3 points a year ago to 6.7 (out of ten points) now. This means that, from a business’ viewpoint, Latvia’s environment has become more transparent and systematically more competitive as compared to other world countries, explained Strasuna. Most improvements are observed in the financial market and infrastructure. Moreover, Latvia has passed Lithuania in the index, whose rating is currently 6.6 points.
While Latvia should be pleased with these improvements, the country should ask itself what its ambitions are, Kazaks added. Latvia’s GDP per capita still is lower than in Estonia, Lithuania, Russia, Poland. “To give a comparison, back in 2007, the income level per resident in Latvia was higher than in Russia and Poland. The economic growth pace of Latvia is still lower than those of Estonia and Lithuania. In the Baltic Sea Region index, Latvia’s marks are below the region’s average and below Estonia’s marks, in almost all areas,” said Kazaks.
“The window of opportunity for the reforms that must be carried out is still open, but the gap is much narrower than a year ago. The Latvian economy needs a push to escape the slow-growth, or “trudging,” scenario; urgent action is needed in the welfare and pension system, education, tax policy in order to solve demographic, labor market and shadow economy problems, as well as competitiveness challenges. The global environment is very unsteady at the moment, but competition among countries is increasing. The stronger the economy, the easier it is for it to withstand negative shocks,” stressed Kazaks.
The report continues, forecasting 4.2 percent growth this year for the country, an increase of only 3 percent in 2012, with 3.9 percent growth in 2013. Previously, Swedbank predicted that the Latvian economy would increase 3.5 percent in 2012.
According to Swedbank predictions, the Latvian economy will be growing faster than the average growth projection for the Baltic region, where a 3.6 percent growth is forecast for this year, 2.6 percent for 2012 and 2.9 percent for 2013. Yet, Latvia’s growth projections are lower than those for Estonia: 7.6 percent this year, 3.2 percent next year and 3.8 percent in 2013, as well as for Lithuania: 6.3 percent this year, 4.2 percent in 2012 and 4.2 percent in 2013.
According to Kazaks, the economic growth of Latvia continues, however, the global economic development pace is decelerating and competition among countries is increasing - factors that hinder Latvia’s growth.
“Although the risk of recession has increased, the largest developed countries of the world can avoid a repeat recession yet, and Swedbank’s base scenario does not provide for a repeat recession. If the cooperation between financial markets and economic policy shapers is successful, if European Union politicians act swiftly and correctly, the EU still has a good chance of avoiding an economic recession,” stressed Kazaks.
Since this past August, when Swedbank’s Economic Research Department presented its previous forecasts, the global environment has become more insecure, explained Kazaks, adding that back in August a repeat recession was considered a 30 percent possibility, whereas now the figure has increased slightly.
“The uncertainty and the risk of recession have increased in the world’s developed countries. Nevertheless, ‘trudging on’ still remains the base scenario, and Swedbank economists believe that the world can avoid a new global recession similar to the crisis caused by the Lehman Brothers bankruptcy,” said Kazaks.
As for what politicians should be doing now, Kazaks said that at the moment politicians are too slow in responding to questions posed by the financial markets, making the financial markets self-confident and aggressive. “Politicians must react swiftly and take bold decisions. First, they must be cautious when drawing up the state budget. Banks in the large EU member states - Germany, France, Italy and Spain - must be recapitalized, sufficient capital must go into these banks so they could survive the debt crisis. The euro area must reach agreement on a harmonized fiscal policy. If the fiscal policy is not coordinated, some countries may go bankrupt. The reason for the current crisis is, to a great extent, the belief that bankruptcies are impossible in the eurozone,” warned Kazaks.