Latvian Economy: development scenarios and challenges Ilmārs Rimšēvičs Bank of Latvia Governor...
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Transcript of Latvian Economy: development scenarios and challenges Ilmārs Rimšēvičs Bank of Latvia Governor...
Latvian Economy: development scenarios and challenges
Ilmārs RimšēvičsBank of Latvia Governor
Riga, November 2011
Latvia successfully recovered from the crisis, we predict this year’s GDP growth at 4.8%
2004 2005 2006 2007 2008 2009 2010 2011* 2012*-20
-15
-10
-5
0
5
10
15
8.710.6 12.2
10.0
-4.2
-18.0
-0.3
4.8
2.5
GDP growth, %
* - GDP forecast according to forecast base scenario
In the third quarter, GDP growth remained high
GDP growth (%)
2010 I II III IV 2011 I II III-6
-4
-2
0
2
4
6
8
+5.7%
Latvia has already implemented sizable fiscal consolidation
Breakdown of budget consolidation measures, % of GDP
Latvia has quickly regained its cost competitiveness: wage-productivity gap has narrowed considerably
Real hourly wage and labour productivity per hour (2005 Q1 = 100, seasonally adjusted)
2004 Q1
Q2
Q3
Q4
2005 Q1
Q2
Q3
Q4
2006 Q1
Q2
Q3
Q4
2007 Q1
Q2
Q3
Q4
2008 Q1
Q2
Q3
Q4
2009 Q1
Q2
Q3
Q4
2010 Q1
Q2
Q3
Q4
2011 Q1
Q2
80
90
100
110
120
130
140
150
Labour productivity Real wage
Competitiveness and export growth fostered recovery; countries with fixed exchange rate are European leaders in
terms of export growth
Goods exports in 2010, % y/y
Estoni
a
Lithua
nia
Ruman
ia
Czech
Rep
ublic
Nether
lands
Hunga
ry
Germ
any
Slovē
nia
Belgiu
m
Finlan
d
Portu
gal
Franc
e
Greec
e
Luxem
bour
g-5
0
5
10
15
20
25
30
35
With economic recovery, unemployment has dropped. Employment growing in almost all branches
Registered unemployment, %
I 201
0
II III IV V VI VII VIII IX X XI XII I 201
1
II III IV V VI VII VIII IX X10
11
12
13
14
15
16
17
1817.3
11.5
Global economic prospects are unfortunately beginning to deteriorate; growth predictions for Latvia’s main
trading partners are being reduced substantially
GDP forecast for euro area in 2012, % (JP Morgan, time axis- moment of making forecast)
Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11-1.0
-0.5
0.0
0.5
1.0
1.5
2.0
2.5
1.9
2.32.2 2.2 2.2
2.01.8
0.9
-0.5-0.3
The European Commission has admitted: recession – a drop in production and services volumes possible.
On10 November, Commissioner Oli Rehn warned of possible“repeated recession" in Europe, when announcing the EC forecasts for EU countries, which point to an expected drop in growth.
“The future outlook is unfortunately gloomy. This forecast is the last wake-up call. The recovery in the EU has come to a standstill and there is a risk of a new recession unless decisive measures are taken.”
The resolution of the European debt crisis will not be fast, speculations and fluctuations in the financial
markets will continue 2009 2010 2011 2012 2009 2010 2011 2012
Greece 127.1 142.8 157.7 166.1 -15.4 -10.5 -9.5 -9.3Italy 116.1 119.0 120.3 119.8 -5.4 -4.6 -4.0 -3.2Belgium 96.2 96.8 97.0 97.5 -5.9 -4.1 -3.7 -4.2Ireland 65.6 96.2 112.0 117.9 -14.3 -32.4 -10.5 -8.8Portugal 83.0 93.0 101.7 107.4 -10.1 -9.1 -5.9 -4.5Euro area 79.4 85.3 87.7 88.5 -6.3 -6.0 -4.3 -3.5Germany 73.5 83.2 82.4 81.1 -3.0 -3.3 -2.0 -1.2France 78.3 81.7 84.7 86.8 -7.5 -7.0 -5.8 -5.3EU27 74.4 80.0 82.3 83.3 -6.8 -6.4 -4.7 -3.8Austria 69.6 72.3 73.8 75.4 -4.1 -4.6 -3.7 -3.3Netherlands 60.8 62.7 63.9 64.0 -5.5 -5.4 -3.7 -2.3Spain 53.3 60.1 68.1 71.0 -11.1 -9.2 -6.3 -5.3Finland 43.8 48.4 50.6 52.2 -2.6 -2.5 -1.0 -0.7Slovakia 35.4 41.0 44.8 46.8 -8.0 -7.9 -5.1 -4.6Slovenia 35.2 38.0 42.8 46.0 -6.0 -5.6 -5.8 -5.0Estonia 7.2 6.6 6.1 6.9 -1.7 0.1 -0.6 -2.4Great Britain 69.6 80.0 84.2 87.9 -11.4 -10.4 -8.6 -7.0Hungary 78.4 80.2 75.2 72.7 -4.5 -4.2 1.6 -3.3Poland 50.9 55.0 55.4 55.1 -7.3 -7.9 -5.8 -3.6Latvia 36.7 44.7 48.2 49.4 -9.7 -7.7 -4.5 -3.8Denmark 41.8 43.6 45.3 47.1 -2.7 -2.7 -4.1 -3.2Lithuania 29.5 38.2 40.7 43.6 -9.5 -7.1 -5.5 -4.8Czech Republic 35.3 38.5 41.3 42.9 -5.9 -4.7 -4.4 -4.1Romania 23.6 30.8 33.7 34.8 -8.5 -6.4 -4.7 -3.6Sweden 42.8 39.8 36.5 33.4 -0.7 0.0 0.9 2.0Bulgaria 14.6 16.2 18.0 18.6 -4.7 -3.2 -2.7 -1.6
Public debt, % of GDP* Budget balance, % of GDP*
*highlighted=non-compliance with Maastricht criteria; data source: European Commission (forecasts accordingly unchanged as per political scenario)
Recent experience shows: those countries that manage to straighten their finances are more successful in
staying above the water
GDP annual growth rate; 2nd quarter, %
-10.0
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
Still much to do to straighten out state finances: budget deficit implies higher interest payments and
increased debt
* Bank of Latvia forecast, ** along with FISIM
General Government debt and interest payments (EKS’95 methodology)
2007 2008 2009 2010 2011* 2012*0
5
10
15
20
25
30
35
40
45
50
0
50
100
150
200
250
300
350
General government debt Interest payments** (right axis)
% o
f G
DP
mil.
lat
s
In a short time, Latvia has become a country with a debt burden
Total debt of state and local governments (% of GDP, ESA’95 methodology)
Latvia Estonia0
5
10
15
20
25
30
35
40
45
50
9.0
3.7
44.7
6.7
20072010
Total expenditure of state consolidated general budget is higher than in 2007
2005 2006 2007 2008 2009 2010 2011p0
1,000
2,000
3,000
4,000
5,000
6,000
7,000State consolidated general budget (ESA’95), mil. lats
Revenue Expenditure
mil
. lat
s
p - predicted
Latvia’s credit ratings are low! That means: fewer jobs, higher interest payments
Jan/
00
Jan/
01
Jan/
02
Jan/
03
Jan/
04
Jan/
05
Jan/
06
Jan/
07
Jan/
08
Jan/
09
Jan/
10
Jan/
11
Latvia Lithuania Estonia
Standard&Poor’s rating agency’s long-term currency liability ratingA+
A+
A–
BBB+
BBB+
BBB–
BB+
BB+
BB–
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 >=20220
200
400
600
800
1000
1200
1400 2.8 billion LVL
What do low credit ratings mean for the public sector?
Schedule of central government debt repayment by nominal, mil.lats
2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 >=20220
20
40
60
80
100
120
140
415
27
55
80 83 8593
103 103110
121
If euro is not introduced and credit ratings are not improved, it may cost the budget an additional billion
lats in interest payments in the next 10 yearsAdditional annual interest payments if euro not introduced and borrowing and refinancing
the debt in the financial market, mil. lats
In 10 years, we will overpay by almost 1 billion LVL
-15
-10
-5
0
5
10
15
I 20
09 II III
IV V VI
VII
VII
I
IX X XI
XII
I 20
10 II III
IV V VI
VII
VII
I
IX X XI
XII
I 20
11 II III
IV V VI
VII
VII
I
IX
%
Loans to domestic businesses and households, annual growth rate (%)
What do low credit ratings mean for the private sector?Further drop in lending and limited opportunities to
finance new investments
State budget will be the decisive factor that will determine future development of the economy
Determining clear steps towards the balanced budget
Adopting the Fiscal Responsibility Law
In 2012, budget deficit must be under 2.5% and continue to shrink in subsequent years
Maximum permitted budget deficit (accg to ESA’95) levels, to stop the excessive deficit procedure instigated against Latvia (will substantially improve confidence in state finances; a precondition for meeting the Maastricht criterion):
–in 2012 – 2.5% of GDP
–in 2013 – 1% of GDP
–in 2014 – balanced budget
2007 2008 2009 2010 2011 2012 2013 2014-12
-11
-10
-9
-8
-7
-6
-5
-4
-3
-2
-1
0
-0.3
-4.2
-9.7
-7.7
-4.3
-2.5
Budget must be consolidated independently of euro introduction plans. Yet euro changeover would be an
additional advantage
Measure
EURO
Budget strategy
Budget balance (% of GDP)
We are predicting that inflation in 2013 will approach the Maastricht criterion. Yet if negative risks materialize,
inflation may exceed the criteria
Forecast of inflation and Maastricht criterion, %
Countries with the lowest inflation in EU2011 2012 2013 III
Evaluation of Maastricht criterion
3.0 2.4 2.4
1st place IE 1.1 IE 0.7 GR 0.8
2nd place SE 1.5 GR 0.8 IE 0.8
3rd place CZ 1.8 ES 1.1 ES 1.2
I 2010
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2011
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2012
II III
IV
V VI
VII
VIII
IX
X XI
XII
I 2013
II III
IV
V VI
VII
VIII
IX
X XI
XII
-3.0
-1.0
1.0
3.0
5.02.4
2.2
Maastricht criteria*12 month average inflation in Latvia
* EC autumn forecast BoL calculations
2000
I III
2001
I III
2002
I III
2003
I III
2004
I III
2005
I III
2006
I III
2007
I III
2008
I III
2009
I III
2010
I III
2011
I III
2012
I III
2013
I III
2014
I III
2015
I III
2016
I III
-6
-3
0
3
6
9
12
15
18
Value of Maastricht inflation criterion and its forecast
Latvia's 12m average SPCI and its forecast
EU
RO
w
ind
ow o
f op
por
tun
ity
It must be noted that “the window of opportunity” for euro introduction may very possibly be shut after 2014
Inflation and Maastricht inflation criterion, %