IMF warns Latvia of overheating economy

RIGA - Latvia's rapid economic growth last year has caused concern among foreign experts, who are openly worried that the economy could overheat.

International Monetary Fund officials were particularly concerned that Latvia might experience the same downturn that hit Estonia's churning economy in the mid 1990s.

In their annual assessment of Latvia's economy, the IMF was concerned with the rapid expansion of private sector credit, particularly at very short terms, and urged Latvian authorities to prepare to tighten its monetary policy to compensate for souring bank loan portfolios.

Latvia boasted a GDP growth of 7.4 percent last year and a more than 50 percent jump in lending.

"Rapid credit growth should be expected, but 50 percent is a bit too high," said Adalbert Knobl, the IMF's senior representative in Estonia and Latvia.

But local bankers argue that lending figures here are not applicable to more advanced economies, though they are often compared in the same light.

"It is a typical mistake among foreign experts," said Teodors Tverijons, the president of the Latvian Association of Commercial Banks.

Tverijons said that the lending growth of 51.6 percent posted by the Latvian banking sector last year would be disastrous for Western economies where no reforms are needed and growth is more gradual.

"In Latvia lending growth is expected for more than one year because additional resources are required for further economic development. As banks grow in strength, opportunities to get these resources improve," Tverijons said.

Lending growth in Latvia could remain at 50 percent and above in the future, he added.

Uldis Cerps, the head of the state's Finance and Capital Markets Supervisory Committee, said that commercial banks predict continued growth in lending this year.

Tverijons also noted that credit quality in Latvia was improving. The share of standard loans regarded as absolutely safe increased to 95.8 percent in 2001 from 93.3 percent in 2000.

Loans requiring supervision fell from 2.11 percent in 2000 to 1.4 percent in 2001. Substandard loans also shrank, from 2.5 percent to 1.7 percent. Dubious loans dropped from 1.1 percent to 0.7 percent and lost loans fell from 1 percent to 0.4 percent.

The Latvian banking sector also saw deposits grow 25 percent.

Direct investment in Latvian enterprises' equity capital in 2001 has increased twofold compared to 2000, according to the Latvian Enterprise Register.

Foreign investment comprises 23.8 percent of the statutory capital of Latvian companies.

The IMF admits that its alarm bells regarding overheating might be a bit premature.

"There's a need for strong investment in a transition economy. Savings are too small to finance this need," Knobl said.

He stressed that a large part of the growth was being financed by direct investment, which was not creating debt.

In Estonia, credit growth was 70 percent to 80 percent per year in 1996-1997.

"We don't have those kinds of big worries here," said Knobl "There's certainly a difference between 80 percent and 50 percent growth.

"In Estonia, credits were financing the stock market boom. The markets went up 100 percent per year. You certainly do not see it here."

The first signs of the Estonian economy overheating came as early as 1994, when the GDP growth was 6 percent.

"In Latvia, the warning signal will come from the current account deficit. If that widened sharply from the current 7 percent that'd be a signal there's something wrong," Knobl said.