This week’s developments in the Latvian economy can be divided into good and bad ones. Let’s start with the latter.

Approaching Storm

If the eurozone collapses, Latvia will suffer the most of all Central and Eastern European countries, according to auditing company PricewaterhouseCoopers (PwC).

“Most likely, 2013 will see a recession in Western Europe, accompanied with global financial crisis yet of an unknown scale,” PwC says in its latest study Approaching Storm. Report on Transformation.

According to analysts, post-socialist countries are vulnerable to two factors. First, they can easily become victims of a potential global financial panic. Second, they can be closed off from economic ties with Western European countries.

Having conducted an in-depth analysis, the company has come to a conclusion that Latvia is the most endangered country, followed by Slovenia, Hungary and Belarus. Bulgaria, Serbia and Ukraine could also face serious problems. PwC also raises concern over Lithuania, Croatia, Romania, Estonia, Poland and the Czech Republic. Meanwhile, the Russian economy appears to be more stable.

PwC also draws attention to the severe indebtedness – 145.18% of GDP (public and private sectors taken together). For Lithuania, the figure totals 78.5%, while for Estonia – 103.9%. The situation is even more complicated by the fact that Latvia’s loans (53.6% of GDP) are short-term. If markets start panicking, interest rates can go up. The large debt burden and the lack of economic activity may put the national currency – the lat – under huge pressure (just like in 2009).

Dead Debts

Tax debts reach record high – LVL 1.052 billion. The tax debt first hit a ten-digit number back in May 2012. As of September 1, natural and legal entities owned the Treasury LVL 1.052 billion, which is 0.7% more than in July. The amount includes debts to the state basic budget – LVL 709.496 million, the municipal budgets – LVL 208,353 million and the social budget – LVL 133.916 million.

According to the State Revenue Service, debts still applied penalties account for 53.23% or LVL 559.841 million of the total amount. But it is also added that LVL 374.309 million are actually the so-called dead debts. It means that debtors have no money and no assets against which to bring a claim.

Tax debts are no longer growing as fast as a couple of years ago. In future tax debts will not grow more than a percent per month. Some three to four thousand new debtors “join the club” every month, says Santa Garanca, head of the national body for tax debt recovery.

Currently, the total tax debt has a tendency to increase.

The Parliamentary Finance Committee has approved (in the first reading) a bill that establishes a publicly available database of taxpayers whose debt exceeds LVL 100. It is expected to launch the database by January 2013, so that businesses can have a peek in their partners’ ability to pay.

Almighty Latvians

In terms of EU funds acquisition, the Baltic States have advanced to the leader positions among Central and Eastern European countries. Latvia ranks the second in the TOP 10, making use of 87% of the available money.

Meanwhile, Estonia tops the list, according to the audit firm KPMG. The results reject various speculations that Latvia is acquiring the funds too slowly and can miss out on some part of them.

The study shows that Latvians are pretty almighty – they have managed both to catch up with leaders and even outrun them. Back in 2008, when the funding programme kicked off, Latvia had acquired almost nothing. Already 45% of the funds were used a year later, 67% in 2010 and 87% in 2011.

“The low activity of 2008 can be explained with the fact funding was easily available from other sources (including banks) – it is a characteristic of the pre-crisis period,” says KPMG manager Edgars Voļskis.

Despite all the challenges brought along by late 2008 and 2009, Latvia kept acquiring more and more of the EU funds.

“Money was also channeled into infrastructure development, with the transport sector acquiring EUR 1.34 billion, the health sector – EUR 804 million and environment-related programs – EUR 618.33 million. The sectors were followed by human resource development and innovations.

Wage Hikes

Growth in Latvian labour costs still outpaces inflation. In Q2, the annual rise reached 5%. During the period from April to June, compared with a year earlier, labour costs (per hour) were up LVL 0.13 or 3.3%. However, seasonally adjusted figures show an increase of 4.1%, but the Central Statistical Bureau reports a rise of 4.7%.

The biggest leap (+9.4%) was recorded in the sector of transport and warehousing. Labour costs in public administration, defense sector, the compulsory social insurance (+6.7%), hospitality (+6.1%) and other services (+5%) are also well above the average.

“Nominal pay has already been growing for some years. At the moment, the picture has a bit changed – wages are climbing faster than consumer prices. This is a result of improvements in the labour market. The unemployment is dropping and competition for skilled professionals is growing fiercer,” says DNB Bank economist Peteris Strautins.

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