Latvia tagged most improved emerging market

RIGA - Buoyed by economic reforms and strong growth Latvia pushed ahead of its Baltic neighbors and 100 other developing countries in 2001 to grasp the title of country with the most improved risk rating.

This plaudit comes from the Economist Intelligence Unit - an economic think tank linked to the Economist Group - which each year sorts 100 developing countries from Taiwan to Argentina into winners and losers.

Also taking the badge of honor for best improvement in economic policy risk, Latvia was praised for its gains in the banking sector, solid gross domestic product growth and for its movement toward joining the European Union.

"Latvia made fast improvement in EU accession and has closed 23 chapters to date," said Leyla Butt, an editor at the intelligence unit's Eastern European division.

"There is also better political stability - this is the longest a government has been in power in the last 10 years."

The current three-party coalition, which includes Latvia's Way, the People's Party and For Fatherland and Freedom, has been in power since April 2000.

The unit highlighted Latvia's 6 percent GDP growth and low inflation alongside what it called "prudent" fiscal policy.

A high level of foreign ownership of Latvian banks, substantial central bank reserves and one of the lowest debt-service ratios in an emerging market were also flagged as moves forward.

But while praise from the Economist Intelligence Unit is cause for celebration and may attract the attention of foreign investors, improvement in 2001 is no guarantee of success in 2002, said David Anthony, the unit's director of country risk alerts.

"If there is a sharper than expected slowdown in Europe, it could affect Latvia and the Baltics," he said.

"Latvia has to keep up with reforms and broaden its industrial base."

Roberts Remess, an economist with the Economists' Union in Riga, agreed that for Latvia's economy to remain strong it would have to continue to buck the worldwide economic slump.

"We know from history that in years of structural change countries grow between 8 and 9 percent, and it is important to keep this rate of growth," he said.

Instead of being concentrated in one area, such as transportation, growth needs to be spread across different industries and geographically.

"It shouldn't be concentrated in Riga and Ventspils, but in the whole of Latvia," Remess added.

For now, export growth is keeping Latvia strong despite financial woes elsewhere, but that could change as economies continue to stutter.

Remess acknowledged Latvia's success following the Russian crisis of the late 1990s in re-orienting its exports from the Commonwealth of Independent States toward the EU - roughly 60 percent of the country's exports now head for EU countries and 20 percent for the CIS.

But what such raw figures don't show, Remess said, is exactly what is being exported.

"When we look at what Latvia exports to the EU there is a big share of raw materials, especially wood products, textiles and metal which make up three-fourths of exports, though in exports to the CIS there is a bigger share of manufactured items and machinery."

Companies, and the country, profit more when value-added items such as machinery, clothing or tables are exported than when the materials they're made of - metal, textile, wood - are exported, he pointed out.

But while the CIS' exports may not impress the West, Latvia too must boost the quality of its products in order to compete.

"Latvian industry still has to restructure to compete with EU finished goods," said Remess.