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Bank of Latvia: are we back on our feet or still missing out on something?

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUAt first glance, it seems that after overheating and accelerating, Latvia faced a deep dip, then accurately diagnosed its weaknesses and is now successfully reviving its economy. This is not just about disproportionate budget spending and debt burden reduction, indicates Agnese Bichevska, economist at the Bank of Latvia.

“The illusion about eternal economic growth at the cost of borrowing also included a focus on industries related to real estate, investments with short-term yields and the domestic market. Now, export and production have come to the forefront. Long-term development of Latvia is not possible without them. The question is – are we really back on our feet by laying a stable foundation or are we still missing out on something?” the economist asks rhetorically.

Since Latvia’s foreign debt levels are quite high, the option to boost growth at the expense of accumulating larger debt is rather exhausted. In order to reduce future debt, positive changes are needed in the external trade balance, namely, a trade surplus, Bichevska informs.

During the crisis, the domestic demand shrunk rapidly along with dropping disposable income, spending and lending activities. However, with competitiveness improving, Latvia’s actual export of goods and services resumed growth again, becoming the key economic driver. With exporters’ market shares increasing, Latvia’s business capacity started to renew and new jobs emerged gradually. This gave a stimulus to the domestic demand  – now with a more sustainable basis compared with the GDP growth based on borrowing.

Along with export growth, demand for commodities also increased imports. Only starting from the second half of 2010, more rapid import surge was additionally propelled by the growing domestic demand and, especially, the demand for capital goods: production equipment and vehicles. Considering that demand for capital goods could be boosting imports for several years, the aim, however, is that exports exceed imports.

A similar picture is also seen on the production side of GDP – breaking down by sectors. In the pre-crisis period, domestic demand oriented sectors grew the fastest: trade, construction and real estate transactions. While industrial performance was insufficient. Industrial producers suffered from labour shortages, as workers sought higher salaries in faster-growing sectors. There was huge pressure on the wage increase, so production costs rose, while productivity stagnated. Therefore, industrial producers lost their competitiveness in foreign markets, indicates the Bank of Latvia economist.

However, there is a positive trend observed in investment structure. It has been changing gradually in favour of productive investments with higher and longer yield, which is the basis for sustainable economic growth.

We can conclude that the situation is far from ideal, but it is getting better. Compared to the «fat years», the GDP structure has improved, strengthening the national economy. Apparently, foreign investors also appreciate this – foreign direct investments played a notable role in the first half-year’s investment growth. However, also a number of significant local investors’ projects or their rounds have been implemented in the second quarter of 2011, with plans to keep placing investments in the coming quarters as well. This gives hope that sustainability will not stop, Bichevska says.

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  1. Lore says:

    I feel saitfsied after reading that one.

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