Lessons from Latvia’s internal adjustment strategy
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Transcript of Lessons from Latvia’s internal adjustment strategy
Lessons from Latvia’s internal adjustment
strategy
June 5, 2012
Ilmārs Rimšēvičs
Governor of the Bank of Latvia
Presentation outline
Overheating of Latvia’s economy
Expansionary consolidation
Lessons learned
Latvia on its way to euro
Latvia’s economy was on a fast track during 2004-2007
Latvia has lived through a boom-bust cycle: severe recession followed years of unsustainable
double digit growth
Real GDP growth (%)
7.2 7.6 8.9
10.1 11.2
9.6
-3.3
-17.7
-0.3
5.5
-20.0
-15.0
-10.0
-5.0
0.0
5.0
10.0
15.0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
Source: CSB
Over the past boom Latvia was running an enormous underlying fiscal gap
General Government budget balance (ESA’95), % of GDP
Source: Eurostat, F – Bank of Latvia staff estimation
-18.6
-14.1
-5.6
-2.7 -3.3
-6.4
-8.5 -7.5
-5.5
-2.2
-0.8
-20
-18
-16
-14
-12
-10
-8
-6
-4
-2
0
2005 2006 2007 2008 2009 2010 2011 2012F
Consolidation effort Actual (targeted) balance
Fiscal gap Structural budget balance
Many suggested devaluation as a
way out of the crisis.
Why devaluation was not an
appropriate solution?
To be or not to be, was the question
in 2008
One size does not fit all!
Small vs large economy
Open vs closed economy
Resource rich vs resource importing
economy
Euroized vs domestic currency
dominated economy
etc
Latvia lost market access already at the outset of the recent crisis and the fiscal gap had to be closed quickly
by a massive consolidation
Breakdown of budget consolidation measures, % of GDP
Source: Ministry of Finance; Bank of Latvia staff calculations
How Latvia managed to accomplish what initially was said to be impossible?
Speed
A speedy consolidation can be compared to a timely
pruning of an apple-tree – harvests are earlier and richer
How Latvia managed to accomplish what initially was said to be impossible?
Ownership
How Latvia managed to accomplish what initially was said to be impossible?
Commitment
How Latvia managed to accomplish what initially was said to be impossible?
Solidarity
Latvia has regained competitiveness: wage-productivity gap has been closed
Real hourly wage and labour productivity per hour (seasonally adjusted), 2005 Q1 = 100
90
100
110
120
130
140
150
20
04
Q1
Q3
20
05
Q1
Q3
20
06
Q1
Q3
20
07
Q1
Q3
20
08
Q1
Q3
20
09
Q1
Q3
20
10
Q1
Q3
20
11
Q1
Q3
20
12
Q1
Labour productivity Real wage
Source: CSB; Bank of Latvia staff calculations
Despite loud ex-ante warnings of protracted recession risks under internal adjustment scenario,
a strong “V” shaped recovery followed
Real GDP growth, %
5.5
-20
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011
Source: CSB
Latvia, other Baltic countries have clearly benefited from getting through the internal adjustment at an early stage
GDP growth in 2011, % y-o-y
Source: Eurostat
-8.0
-6.0
-4.0
-2.0
0.0
2.0
4.0
6.0
8.0
Est
on
ia
Lit
hu
an
ia
La
tvia
Po
lan
d
Sw
eden
Slo
va
kia
Au
stri
a
Ger
ma
ny
Fin
lan
d
Ro
ma
nia
Ma
lta
Bel
giu
m
Bu
lga
ria
Cze
ch R
epu
bli
c
Fra
nce
Hu
ng
ary
Net
her
lan
ds
Lu
xem
bo
urg
Den
ma
rk
Un
ited
Kin
gd
om
Irel
an
d
Sp
ain
Cy
pru
s
Ita
ly
Slo
ven
ia
Po
rtu
ga
l
Gre
ece
Despite problems in many European countries, GDP growth even accelerated in Latvia (the fastest
growing economy in Europe at the beginning of 2012)
GDP growth in Latvia, % y-o-y
Source: CSB
+6.8%
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2011 I II III IV 2012 I
Exports already well above the pre-crisis peak level;
Latvia ranges among the export leaders in Europe
85
72 71 71
55 53
44 44 43 43 42 38 35 34 34 33 33 32 31 30 29 29
26 23 21
10
2
0
10
20
30
40
50
60
70
80
90
Est
on
ia
Bu
lga
ria
La
tvia
Lit
hu
an
ia
Ro
ma
nia
Gre
ece
Cze
ch R
epu
bli
c
Ma
lta
Sw
eden
Cy
pru
s
Slo
va
kia
Po
lan
d
Hu
ng
ary
Un
ited
Kin
gd
om
Po
rtu
ga
l
Slo
ven
ia
Net
her
lan
ds
Ger
ma
ny
Sp
ain
Au
stri
a
Bel
giu
m
Ita
ly
Fin
lan
d
Fra
nce
Den
ma
rk
Irel
an
d
Lu
xem
bo
urg
Merchandise export revenue growth (2011 over 2009, %)
Source: Eurostat
General government gross debt, % of GDP
Source: Eurostat; Bank of Latvia staff estimation
Latvia has managed to stabilize debt at a moderate level and to avoid a debt explosion, expected initially
19.8
36.7
44.7 42.6 43.4
0
5
10
15
20
25
30
35
40
45
50
2008 2009 2010 2011 2012F
What are the lessons
learned?
This crisis has shown that
MORE is LESS and LESS is MORE
www.nowpublic.com
"One doesn't die from debt, one dies from not being able to borrow"
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General government gross debt, % of GDP
Rogoff & Reinhart
debt thresholds
for advanced and
emerging economies
Source: AMECO
"One doesn't die from debt, one dies from not being able to borrow"
0
50
100
150
200
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ece*
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Est
on
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2010
General government gross debt, % of GDP
Rogoff & Reinhart
debt thresholds
for advanced and
emerging economies
Source: AMECO
"One doesn't die from debt, one dies from not being able to borrow"
0
50
100
150
200
Gre
ece*
Irel
and
Ital
y
Po
rtu
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US
Bel
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Fra
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Fin
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General government gross debt, % of GDP
Rogoff & Reinhart
debt thresholds
for advanced and
emerging economies
Source: AMECO
Most Euro area countries suffering from high debt are still running large budget deficits
General government gross debt General government budget deficit
2000 2005 2010 2013 2000 2005 2010 2013
Greece* 104.4 101.2 144.9 198.5 -3.8 -5.6 -10.8 -6.8
Ireland 37.5 27.2 94.9 121.1 4.7 1.7 -31.3 -7.8
Italy 108.5 105.4 118.4 118.7 -0.9 -4.5 -4.5 -1.1
Portugal 48.5 62.8 93.3 112.1 -2.9 -5.9 -9.8 -3.2
Belgium 107.8 92.0 96.2 100.3 -0.1 -2.8 -4.2 -4.6
France 57.4 66.7 82.3 91.7 -1.5 -3.0 -7.1 -5.1
EU27 61.9 62.9 80.3 84.9 0.5 -2.5 -6.6 -3.2
Germany 60.2 68.6 83.2 79.9 1.1 -3.3 -4.3 -0.7
Spain 59.3 43.0 61.0 78.0 -1.0 1.3 -9.3 -5.3
Austria 66.2 64.2 71.8 73.7 -1.8 -1.8 -4.4 -2.9
Malta 55.0 69.7 69.0 71.5 -5.8 -2.9 -3.6 -3.6
Cyprus 59.6 69.4 61.5 70.9 -2.3 -2.4 -5.3 -4.7
Netherlands 53.8 51.8 62.9 66.0 2.0 -0.3 -5.0 -2.7
Slovenia 26.3 26.7 38.8 54.6 -3.7 -1.5 -5.8 -5.7
Finland 43.8 41.7 48.3 53.5 6.8 2.5 -2.8 -0.8
Slovakia 50.3 34.2 41.0 51.1 -12.3 -2.8 -7.7 -5.2
Luxembourg 6.2 6.1 19.1 20.3 6.0 0.0 -1.1 -0.9
Estonia 5.1 4.6 6.7 6.1 -0.2 1.6 0.3 -0.8
Euro area fiscal indicators, % of GDP
Source: AMECO
Latvia’s example shows that Speed, Ownership,
Commitment and Solidarity works
-20
-15
-10
-5
0
5
10
20
08
I
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IV
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I
II
III
IV
20
10
I
II
III
IV
20
11
I
II
III
IV
20
12
I
First large consolidation
implemented by Dombrovskis
government
Talks about
consolidation
and inability to
deliver
Real GDP growth, % y-o-y
Source: CSB
0.0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
4.5
IV 2
011
V
VI
VII
VII
I
IX
X
XI
XII
I 2012
II
III
IV
V
VI
VII
VII
I
IX
X
XI
XII
I 2013
II
III
IV
V
VI
VII
VII
I
IX
X
XI
XII
12 month average inflation in Latvia Mastricht criteria**
Latvia is well positioned to comply with the Maastricht criteria and qualify for EURO introduction in 2014
Maastricht criteria estimate forecast and 12 month average inflation, %
Source: Eurostat, EC and Bank of Latvia staff estimations; ** - negative inflations excluded
forecast EURO 2014:
measurement of
compliance
By introducing EURO in 2014 Latvia would bring positive experience for other European countries
Measure-
ment
EURO
Budget strategy
General Government budget balance (ESA95), % of GDP
Source: Eurostat, F – Bank of Latvia staff estimation, T – targeted budget balance
-0.4
-4.2
-9.8
-8.2
-3.5
-1.9 -1.4
-0.8
-12.0
-11.0
-10.0
-9.0
-8.0
-7.0
-6.0
-5.0
-4.0
-3.0
-2.0
-1.0
0.0
2007 2008 2009 2010 2011 2012F 2013T 2014T