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Key Economic Data 
 
  2003 2002 2001 Ranking(2003)
GDP
Millions of US $ 9,671 8,406 7,500 94
         
GNI per capita
 US $ 4,070 3,480 3,230 79
Ranking is given out of 208 nations - (data from the World Bank)

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Update No: 321 - (28/09/07)

The Hong Kong of the North
There is no doubt that Latvia is benefiting greatly from the falling out between Estonia and Russia. This concerns events in April when the Estonian Government agreed to the removal of a Soviet war memorial from central Tallinn to the outskirts. 

Local Russians of whom there are many 'stranded' originally, by the sudden collapse of the USSR; and Russians in Russia, were outraged on the slur on the victory in the Great Patriotic War. But of course it was a great patriotic defeat for the Baltic States, every one of them. The Russians do not want to know about that. They 'liberated' them from the Nazis and now face base ingratitude for merely occupying them and giving them the benefits of soviet life, complete with coddling by the KGB for the following forty-six years. 

Putin was obviously simmering with rage at the Estonian impudence. He ordered economic retaliation forthwith. Much of the transit trade that went via Estonia is now going via Latvia, which already had the lion's share of transit trade from Russia via the Baltic States anyway. 

Geography markedly favours the Latvians here. Ventspils is an excellent ice-free natural harbour, indeed so is the whole of the Gulf of Riga, and takes the bulk of Russia's exports of oil across and away from the Baltic Sea. Other goods and commodities are being shipped there, in the aftermath of the rift. 

Latvia is a lacustrian and riverine bounty, with over 1,000 lakes in the Latgale Upland alone, in the east of the country, and 12,000 rivers. It is a network of natural waterways to the wider world, one that will now benefit from global warming.

The Latvians have sensibly dropped anti-Russian rhetoric, unlike Tallinn. They can look forward to the reward of becoming the 'Hong Kong of the North'.

But this is only for the long term. In the short run there are a host of problems to tackle, stemming from massive economic over-heating. One can have too much of a good thing. The long boom, with GDP expanding at nearly double digit rates each year has left behind a train of deficits and financial disarray. 

Economy minister resigns
The man in charge of running the economy is clearly a key figure. Latvian Economy Minister Juris Strods said on September 16th that he was resigning for family reasons. Strods, a member of the nationalist 'For Fatherland and Freedom' party, said he would leave his post after his party names a replacement.

"My family needs me more than ever before," Strods told reporters, but declined to give details. Local media have reported that his grandson is gravely ill.

Strods, 45, took office in October 2006 as a member of the four-party coalition government that was formed after parliamentary elections.

Rumours had been circulating for months that Strods' departure was imminent, but the minister denied any intention to leave his post, which plays a key role in distributing hundreds of millions of euros in EU development funds to Latvians.

The macro-economy in deficit and turmoil 
Strods is the second minister to leave the 19-member cabinet.
His successor will have a hard job on his hands. Latvia's economic record since independence has been impressive, but the country's massive imbalances now risk jeopardising these results. 

September brought a fresh set of shocking macroeconomic data for Latvia. Particularly notable was the rise in the current account to around 30% of GDP and a rise in inflation to 10.1% year/year, - both in August.

Just to recall a few more terrifying macroeconomic data:

Wage growth: 34.5% y/y 
Producer prices: 18% y/y 
Credit growth to private sector: 47% y/y.

Some local observers and policy-makers in Latvia claim that Latvia is a special economy and therefore normal economic rules do not apply. Latvia sure is special -- no country in the world has larger imbalances, but unfortunately gravity also works in Latvia and the kinds of imbalances being seen there are surely not sustainable. The risk of a hard landing in the economy and financial distress is very significant and no investor should ignore these risks.
Until now the Latvian government has failed to take the risks seriously enough or to implement real measures to curb the massive imbalances in the economy. The Latvian government in March put forward a "plan to combat inflation". At that time inflation was around 7% y/y and the current account deficit was around 20% of GDP. -The new numbers, six months on, show that the plan has failed to reduce inflation and the current account deficit.
Urgent policy action to reduce the imbalances in the economy, therefore, is needed.

Latvia and Bulgaria on the brink
The following is no surprise, therefore. After the US financial crisis the markets of Bulgaria and Latvia are faced with the highest risk rate of all Eastern European countries, a Standard and Poor's report says. 
Among reasons for that are their strong dependence on foreign investments, the changed crediting criteria and their low productivity. According to analysts, investors are getting more cautious and direct investments will thin out. Next come Turkey and Romania. 
Russia, Ukraine and the Czech Republic have the lowest risk ratings. 15 countries with so-called developing markets have been analysed. Of them 11 are in Eastern Europe.

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