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Sunday 22.10.2017 | Name days: Irīda, Īrisa
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Economic Diary: the All-Baltic Innovations Fund

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The agreement of Latvia, Lithuania and Estonia regarding the creation of the Baltic Innovations Fund (BIF) with a total volume of 100 million EUR can be called this week’s main event. With the mediation of private venture structures, this fund will invest in companies working in the region.

The All-Baltic Innovations Fund

The European Investment Fund, Latvian Guarantee Agency and its Lithuanian counterparts – Invega and Credex – became the founders of BIF, called to stimulate the growth of competitive economies of Baltic countries. Each republic will invest 20 million EUR in the project. An additional 40 million EUR will be provided by the European Investment Fund. The involved venture foundations will be responsible for the division of funds. These foundations will also invest the same amount, making the total volume of the investment portfolio 200 million EUR.

A single company will be allowed to attract no more than 3-15 million EUR. Up until now, there hasn’t been a single instrument of government aid in the Baltic region, the manager of the fund and risk departments of the Latvian Guarantee agency Krisjanis Zarins. Investments objects will be chosen by the foundations. It is expected that every country will be able to attract the same amount of money it invested in the project.

The duration of the agreement signed in Vilnius is 16 years. The first four years are to be used for the search of private BIF partners. The next five years will be used to manage the investment proves. Another five years – for the exit of foundations from their chosen assets. Nonetheless, these terms are more provisional: if some foundation is chosen next year, it will be able to start selecting companies right away. According to Zarins’ projections, the first Latvian firm will be able to receive money from the BIF in the beginning of 2014.

What we need is more people

Given the rates of economic immigration and low birth rates, Latvia will need innovative industries and service industry pretty soon. These problems were discussed during the meeting of the Demographic Affairs Council under Valdis Dombrovskis. Immigration, made worse by the crisis, is also a more serious threat to economy than the lack of desire of Latvians to reproduce. President of Latvia Andris Berzins started talking about the return of the people who left as the government’s main priority. It is planned to achieve this by improving work productivity, which will make the average wages in Latvia closer to the levels of other EU countries.

The fact that a higher income level is a key factor, which stimulates Latvians to search a better life in other countries, is also confirmed by the latest survey of DNB Latvian barometer. 46% of respondents are confident that the main reason why some of them would consider leaving their homes and work abroad is high income. Reasons like better quality of life (29%) and better social policy (26%) are also popular among respondents.

All that is left is for us to feel happy about the fact that a large proportion of residents cannot be motivated by anything to make them leave our country (31%). Another important factor is keeping in contact with friends and family. This is reason preventing 50% of respondents from going abroad for a long time.

We need to be aware

Two more problems talked about this week – the heavy dependency of Latvia’s economy on export and the relative poverty of households.

Export remains the locomotive of Latvia’s economy. Its proportion in the country’s GDP has grown sufficiently over the years: from 25% in the difficult 2009 to 40-44% in 2012. Nevertheless, the Central Statistical Bureau of Latvia reports that 81% of respondents did not have any savings in the end of 2011. An uneasy prediction can be made from all this: the further growth of economy in the nearby perspective completely depends on the success of exporters, and the notable reduction on important foreign markets (the EU for example, where 70% of Latvian goods are shipped) could result in a new deflation spiral.

Bank analysts say the problem could, theoretically, be expressed in the following way. With a notable decrease of sales on one of the foreign markets, export-companies temporarily freeze or reduce salaries or reduce the number of employees. The negative effect will also be felt by companies of related sectors. The index of consumer attitude, which has been growing confidently in the last months, will go down, dragging retail trade turnover and domestic goods and services producers along with it.

Given this scenario, it is likely the pressure on the state budget will rapidly increase because of the increased number of unemployment benefit receivers, the poor and others. However, economists are certain there will be no repetition of another 2009 scenario. Compared with what the country had three years ago, the country budget is balanced far better. There is even a small reserve; private sector also seems to be more competitive than it was in 2009. Nonetheless – it pays to be vigilant.

A state bond for every Latvian

There is also a possibility that the financial state of Latvia could be improved by the opportunity to purchase state bonds (nominal value 1 LVL). The minimum investment volume for each resident will be 30 LVL, the maximum – 50 thousand LVL per day, the manager of the State Treasury Kaspars Abolins said.

The payment period will be set at six to twelve months. In the future, depending on the level of interest, it is planned to issue five to ten year bonds, Finance Minister Andris Vilks said. This innovation will become an alternative for bank deposits for Latvians. Up until now, individuals have been able to purchase Latvia’s internal loan bonds, but only through a broker or a bank. Mediators collect commissions, and with a small order (for 100 or even 1000 LVL), this is why the purchase of debt papers with respect to a relatively small profitability appears pointless.

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