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LATVIA

 

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Area (sq.km) 
64,589

Population
2,348,784

Principal 
ethnic groups 
Latvians 52.0%
Russians 34%
Belarusians 4.5%

Capital 
Riga

Currency 
Lats

President
Mrs Vaira 
Vike-Freiberga

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Update No: 286- (28/10/04)

Fragmented polity
There are 60 parties in Latvia and there is always only coalition government. Moreover, the leading party is nearly always less than a year old when it assumes office, such as Einar Repse's New Era now leading the government, although he is no longer the prime minister.
What really matters in Latvia is who is running the economy and the one job that really counts is the chairmanship of the central bank, the post he held for most of the 1990s. It gave him an inclination for a dictatorial style that made him unpopular with his coalition partners. Hence his forced resignation last year and his replacement by the more emollient Premier Indulis Emsis.
But the rising power is held by the multinationals coming to town.

Manufacturing companies come to Latvia 
The European Union's 10 new member countries are attracting new manufacturing companies from across Europe. Latvia, which has seen its fair share of foreign investment since EU membership in May, has ambitions to become one of the most appealing destinations for producers-exporters. 
The Cabinet of Ministers in September approved an export development plan for 2005 - 2009. The main thrust of the plan is to give a boost to Latvian manufacturers' competitive edge and to help them find new markets for their products. To demonstrate the seriousness of the government's intentions, Prime Minister Emsis on Sept. 24 even toured Lavijas Finieris, one of Latvia's leading wood-processing plants.
In one of the biggest manufacturing-related investments this year, the US fibreboard company Jeld-Wen announced it would build a 40 million euro wood- treatment facility in Latvia, which management ultimately chose over Spain. The factory will produce fibreboard skins, 95 percent of which will be exported for use in Jeld-Wen factories across Europe. Latvia's membership in the EU significantly influenced the company's decision to stay in the Baltic country, says Ralfs Dakters, a client executive in the Latvian Investment and Development Agency's investment and trade promotion division.
"The first attraction for Jeld-Wen was EU criteria. They needed to build in the EU, as they will be exporting to the other Jeld-Wen factories in Europe," says Dakters. "The second attraction was the low corporate income tax, which is only 15 percent in Latvia. The third attraction was the natural resources. The type of wood fibre here suited their needs, plus it was of a high quality and quantity." Jeld-Wen, which was established in Latvia in 1994, is also aware of the country's cost-effective labour benefits. The average gross monthly wage in Latvia is approximately 200 lats (300 euros).
In another high-profile project, Germany's AKG, a manufacturer of vehicle radiators, teamed up with Russian automotive producer ZIL, to invest 20 million euros into a new factory that will create 250 jobs in Jelgava over the next three years.
As Dakters explains, "With accession to the EU - coupled with Latvia's geography of having the European market on the left and the CIS market on the right - Latvia has become a 'one-stop shop' for foreign investors." Indeed, Latvia ranks among the top 10 countries internationally in terms of business start-up time and length of bankruptcy procedures. According to a World Bank report, one can register a business in Latvia within two business days.
"We now have a good quality of projects coming into Latvia from across the globe," says Dakters.
Latvia has access to a consumer market of over 660 million, and its abundance of sea and road transport links provides easy accessibility to surrounding countries - hence, the importance of the government's manufacturing development programme. "The government is now showing their intention to be an investment-friendly country. Not just saying it, but actually doing it," says Dakters. 
Through LIDA, the government has proved its commitment to foreign investors, offering not only start-up help, but also support after the investment's implementation. Foreign representatives of LIDA situated in France, Germany, Russia, Kazakhstan, the Netherlands, U.K. and Sweden - with offices in Norway and Denmark - testify to Latvia's intention of attracting foreign manufacturers.
Investors also have the opportunity to enter the state support programme, which offers grants for entrepreneurship, participation in international exhibitions, modernization, the development of new products, and for increasing the qualifications of employees. 
LIDA is currently accepting applications for EU grants. "The grants which are being offered at the moment are an additional incentive for foreign investors," Dakters says. "Many grants are geared specifically for manufacturing companies. We definitely hope to attract more manufacturers from abroad."

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CREDIT RATINGS

Fitch affirms Latvia's rating

Fitch Ratings recently affirmed Latvia's ratings at Long-term foreign currency A- (A minus) with Positive Outlook and Long-term local currency A with Stable Outlook, New Europe reported. 
The Short-term foreign currency rating is affirmed at F2 and the Country Ceiling at A+, the rating agency said in a press release. Latvia's sovereign ratings continued to be supported by strong economic growth and an established history of structural reforms and policy discipline.
Public finances are a considerable support to the ratings and, despite frequent changes of government, are backed by a broadly-based consensus that has successfully ensured fiscal restraint. The general government deficit has been below 3.0% of GDP since the beginning of the decade. Its gross general government debt-to-GDP is among the lowest of any sovereign rated by Fitch and the public sector is a net external creditor. On the other hand, Fitch cautions that the rapid pace of credit growth and strong demand growth in Latvia could give rise to inflationary pressures. "Latvia was upgraded in July 2004 following the publication of its Convergence Programme for full EMU participation, and our central scenario is for the country to adopt the Euro in 2007-2008," said David Heslam, Associate Director in Fitch's Sovereign Department.
As Euro membership approaches and becomes more certain it will increasingly be factored into Latvia's foreign currency ratings. Sovereign creditworthiness will be increasingly dependent on the strength of public finances - a factor in Latvia's favour, while large current account deficits and external debt will become less of a credit constraint, other things being equal.
However, Fitch noted that Latvia's large current account deficits and the continued rise in the external debt stock (on both a net and gross basis) remain concerns. The recent pace of credit growth is also a source of concern, which is partly sustaining the current account deficit, and has the potential to fuel inflationary pressures, the main risk to Latvia's timetable to adopting the Euro. Such current account deficits have been sustained for some time and may be consistent with Latvia's stage of development - reflecting strong inflows of investment-related goods and a catch-up process in the expansion of the domestic financial sector and consumption. Nevertheless, prolonged current account imbalances raise a question over debt sustainability, particularly as the financing mix has deteriorated since the sharp widening of the deficit in 1998. Net equity FDI inflows covered less than a fifth of the current account deficit in 2003, increasing Latvia's reliance on foreign borrowing to bridge the savings-investment gap. Despite their stability through past crises, dependence on non-resident bank deposits to fill the gap is also a potential weakness, as is growing foreign currency borrowing by households, which may lack the natural currency hedge of companies involved in trade. A prolonged continuation of these trends is unsustainable from a macroeconomic balance viewpoint, as increasing liabilities leave the economy open to sudden slowdowns in growth and exchange and interest rate shocks; a rise in debt servicing could itself dampen future economic expansion.

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TRANSPORT

Baltics prioritise road, rail links

A trilateral agreement by Lithuania, Latvia and Estonia placed at the top of the agenda the improvement of road and rail infrastructure connecting the Baltic states and western Europe, Deutsche Presse-Agentur (dpa) reported.
"The improvement of the infrastructure is a precondition of our full integration in Europe," Lithuanian Prime Minister, Algirdas Brazauskas, said in Riga after a meeting with his counterparts, Indulis Emsis (Latvia) and Juhan Parts (Estonia). While parts of the western network between Berlin and Helsinki are reachable "via the Baltic" other sections are in need of renewal, he said. "In the medium-term we are aiming for a 'modern motorway,'" Brazauksas said. The route is an important trade route between western and eastern Europe and Finland. The prime ministers' discussion also focused on continuing the "Rail Baltic" project. So far, different track widths are slowing down railway traffic but the support of the European Union will be required to improve such a scheme, they said.

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