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Tuesday 24.10.2017 | Name days: Renāte, Modrīte, Mudrīte
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Economic Diary of Latvia. Potholes on a flat road

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RUThe year of the Fire Monkey promises many surprises for Latvia’s economy. There may even be a couple of shocks in store for the country. In any case, this is one of the possible conclusions one can come to from predictions made by well-known investors, economists and international organizations.

George Soros, American financial guru, made quite a shocking prediction on the first week of January. During his speech at an economic forum in Sri-Lanka, he compared the current situation on global financial markets to that of 2008, when the last global financial crisis began. According to Soros, the global economy is currently heavily affected by China’s attempts to find a new growth model. The billionaire believes China has serious problems with its reformation strategy. In addition, yuan exchange rate continues to decline, which in turn affects global financial markets. Return to positive interest rates has also become a problem for developing countries, said Soros.

Senior researcher at the Cato Institute, Richard W. Rahn, believes the world will face a new financial crisis this year. According to him, growth of the global economy will be lower than what was stated in the latest IMF report because the ratio of public debt to GDP in the world is currently at a record level, which means slower economic development rates.

In USA, this ratio is equal to 98% of GDP, in Eurozone it is 104% and in Japan – 220%. Any serious destabilization of the world economy can easily throw the world back into recession, said the expert.

Latvia: nice spot we have here

Looking at the possibility of a new financial crisis from the perspective of state debt, Latvia has a chance of avoiding any major shocks. According to information from the State Treasury published this week, Latvia’s debt pales in comparison with that of other countries. Latvia’s debt was equal to 34% of GDP (EUR 8.4 billion) at the end of 2015. By the end of 2016, it will have reached 40% of GDP (EUR 10.1 billion). As explained by the State Treasury, the increase of the state debt is tied to the need to reduce obligations issued in the form of bonds in US dollars: February 2017 marks the deadline for paying back USD 1 billion. Money will be required to cover loans and budget deficit.

Nevertheless, Latvia’s debt remains rather modest. Thanks to low budget deficit indexes, Fitch retains Latvia’s index at ‘A-‘. The agency also highly praised the rate of economic development in Latvia, which, according to predictions, will likely stay at 3% in the next couple of years.

Eurozone: just a little bit more

According to the outlook of the World Bank published this week, Eurozone’s economy will likely grow from 1.5% to 1.7% in 2016. Even though it seems modest, it will be the highest growth rate since 2010. Measures that have been holding back the region’s recovery for the past several years (like strict austerity) are slowly weakening. Available loans are stimulated by expenditure, fiscal consolidation is practically complete and the monetary policy is as friendly as it can be.

At the same time, low prices on raw materials increase overall purchasing power, which contributes to the increase of consumption by households. To help the recovery process gain momentum, enterprises should do the same, because investment expenditure currently stays 15% below the pre-crisis level. Trust in economic development will grow in the corporate sector. More accessible loans mean investment growth rates will exceed GDP growth in the coming years.

Russia: recession continues

As for the Russian Federation, low oil prices and international sanctions, according to experts of the World Bank, will not allow this country to hope for positive developments and growing investments. Experts of the bank predict a decline of 0.7% for Russia’s economy in 2016. Recession in this country could be replaced with growth no sooner than 2017 or 2018. Russia’s GDP is expected to grow by 1.3% in 2017, according to experts. With that, recovery of economic growth rates in Russia will continue in 2018.

Nevertheless, the World Bank is not very optimistic about perspectives in global economy as well. Specialists of the bank have corrected global GDP outlook to a negative one, reducing it to 0.4%. With that, global GDP should grow by 2.9% in 2016. Global economy and especially developing economies may run over a very big pothole, believes the bank’s chief economist Kaushik Basu.

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