There is a feeling that Latvia has been in no control over the cash flow and business developments in the national airline airBaltic for years. Most likely, this is linked to the fact that it, like most public companies, has been used to put politically-connected persons in well-paid jobs, Zigurds Vaikulis, head of Citadele Asset Management Portfolio Management Division, indicates in an interview to the news portal BNN.
The economist also talks about how real politicians’ promises are ahead of the parliamentary elections, whether Latvia will manage to join the eurozone in 2011 and why the next year will pose danger not only for Latvia but the world.
Can we trust pre-election statements that less-than-planned could be consolidated? Would that be reasonable?
Currently, the Latvian economy is facing a difficult period which is not related to local events. It is neither tied to airBaltic, nor politicians’ pre-election pledges. It is rather due to global processes. Global economic forecasts are being revised. For already a month and a half they have been downgraded for the key export markets of the US, Europe, Latvia, as well as the Baltic States. If concerns over the Latvian export markets facing stagnation or even recession next year come true, this will hit the Latvian economic and budgetary situation.
Whereas if the current forecasts for the Latvian economic growth hitting 3% next year come true, the required consolidation, including specific factors and even airBaltic, will comprise 100 million lats. Such figures would allow to meet the Maastricht criteria and join the eurozone in 2014. However, if the reality turns out worse and growth is close nothing, the necessary consolidation will grow rapidly to keep the deficit below 3%. Approximately 300 million lats will have to be consolidated at zero growth. But if 2012 falls back in a recession, the consolidation will reach 500 – 700 million lats. It is impossible to predict this.
If Latvia is hit by a second or third wave of crisis, most likely, the plans on joining the eurozone will have to be revised. It is almost impossible to cut additional 500 million lats after the large-scale consolidation carried out in the past three years. If another crisis strikes, it will have to put up with a budget deficit well above 3%. As a result of which accessing the eurozone will be put off automatically.
Will Latvia manage to join the eurozone in 2014?
It depends on global economic developments next year. There is little hope that the worst scenarios will not come true and neither America, nor Europe will face double dip. In this case, the possibility to join remains fairly high. If in early 2011 inflation undermined the accession, now it is risks behind the budget.
In my view, the probability of joining the eurozone is now lower than it was in late June or July. Chances will keep dropping, since risks of not meeting the budget criteria are growing rapidly.
We cannot do practically anything to tackle them. We cannot change neither the Maastricht criteria, nor global economic trends. The government can only draft an aggressive plan for ensuring compliance with the Maastricht criteria in the event of possible crisis.
There are talks on the necessity to defer repayment term of the loan granted to Latvia.
Such talks have a very negative impact on Latvia’s credibility and opportunities to borrow or refinance the debt at all. The reason why the confidence in Latvia has renewed, enabling to sell bonds in international markets and get increased ratings, is the expectations that Latvia will meet all its commitments. If politicians who have great odds of getting in the Saeima and dictating the political rules start discussing loan repayment delay, lenders and investors will lose this confidence. This will result in unpredictable negative consequences. Sooner or later, Latvia will have to return this money.
Would such action lead to credit rating downgrade?
Definitely. If the economic situation starts deteriorating sharply, Latvia will be likely to renew its economic aid package or ask for another one.
Should Latvia involve in airBaltic rescue?
The national airline airBaltic’s contribution to the Latvian economy should not be underestimated. Not only is this a chance to local residents to travel, it also serves as a cross-border travellers transit hub. It is export of services. There are also more indirect benefits – the impact on the local tourism industry, Latvia’s accessibility due to which many foreign companies have opened representations exactly in Riga, rather than in Tallinn or Vilnius. The advantages are jobs at the company, airport and tourism industry – revenues and taxes that stay in Latvia. The country needs a strong airline; the question is whether it has to be in airBaltic‘s current form.
It is clear that the state as majority shareholder in the company has failed to do its homework. At present, there is a feeling that Latvia does not know what percentage it owns in the company and that for years it had no control over cash flows, business trends and developments. This is most likely due to the fact that form the state’s side this company, like most public companies, was used for employing politically-connected people at well-paid posts, for instance at the council. For some reasons, negligence or other motives, not to say more, the state has neither managed the company, nor sufficiently inquired about the ongoing events there. Hopefully, the brought-in consultants will understand what the problem is and take appropriate action, because now the situation resembles searching for a black cat in a dark room. The state has insufficiently monitored this company or very lightly treated the ongoing events in recent years, which is very surprising.
Politicians also promise pension increase – after five years the average pension will comprise 250–300 lats. Can Latvia afford to do this now?
Currently, the average pension is 180 lats, so 250 lats does not seem so unattainable, if you look at how pensions have changed in times when the Latvian economy was growing relatively fast. However, in terms of near future, I think it is unfair to the others to promise substantial benefits, pension raise or indexation next year. The current budget does not allow it. Pensions are small, below the subsistence level, which is awful. Yet it is now far more important to think about how to promote growth in the part that is earning the money for pension payments. If there is no development in the labour market, it will become increasingly difficult to pay pensions even at the current levels.
On the other hand – the socio-anthropologist Roberts Kilis believes there will be no pensions at all. They will be replaced by poverty benefits.
It is possible to say as well that this poverty benefit is received exactly by the employed that have to sustain their children – the amount does not differ significantly if looking at the revenue per head.
However, these statements caused a great uproar in the society, urging people to build their own savings, rather than relying on the state.
In fact, the situation is not that bad, because until 2008 – 2009 the Latvian pension system was considered as one of the most progressive in the world. We are one of the few in Europe, as even the neighbouring countries started later than Latvia, with a three-Tier pension system, where the money is being actually accumulated in the 2nd Tier rather than on the promise, while the third Tier is people’s own savings. The taken direction was very good, so there was nothing to pick at until 2008. Now, when the country is running out of money, the situation has taken different direction. However, if it renews, we will be able to say that reforms have taken the right shape.
How do you assess the government’s implemented economic policy in general?
There were no huge mistakes made over the past three years, as these were actions taken in crisis circumstances. It is always possible to argue the merits of raising taxes, rather than looking for consolidation on the expenditure side. But if you look at how this is done in other countries where consolidation has already started or will begin – throughout the entire eurozone and also in the large countries, such as America and Japan, where budgets are in even more terrible state, Latvia can serve as a positive example for the world, or rather a testing ground.
The government has not taken aggressive or bold steps to break the Latvian economy structure or its flow. We have not rearranged ourselves in the crisis or become much more efficient. Instead, natural processes have taken place, similarly as in all countries during crises. There is a slight increase in the manufacturing’s share in the economy; however, this is more due to a technical step, rather than a deliberate one. It is impossible to say that the government boosted the economic growth or shifted the economy to production. The Latvian export structure has neither changed significantly, nor there is new value added. The fact that the share of production has increased in the economy is tied to external processes, where politicians have absolutely no say. There were no huge mistakes made, but there was also no great added value contributed by the government, in order to jump-start the economy.
What is happening to the real estates taken over by banks? When will they be offered on the market?
Major banks have funds for resolving the issues of the taken-over properties. Judging by what fund managers say, there is no essential property hold-back at all. If the property has been brought to the stage where the bank is eligible to place it on the market, it will do so. Maybe something is being held back, but if there is an opportunity, banks are already getting rid of these properties.
Large proportion of banks have already put up with the fact that something will be lost and it will be impossible to recover everything. However, these losses have been already accounted for in 2009 and 2010. The money earned by banks in the previous decade was lost over the past two years. Banks are gaining even by selling property for half the price than the loan given in 2007, as the number of such properties is declining.
Has competition resumed between banks?
Competition geared towards conquering market share, as it was in 2004 – 2007 when the interest rates for loans were highly abnormal, was more like a dumping, considering that the Latvian borrower was able to get a loan for the same interest as in Sweden. It was aiming higher than one could afford. Currently, there are no grounds for talking about this.
Banks are rather fighting for good borrowers, which are few in number, and for producing enterprises operating with European Union’s financial aid. Competition gets also harsh in servicing the public or private companies’ cash flows, such as card issuance. But it has always been like this.
What are your forecasts for the world food and other commodity price developments over the next year?
Prices of food and other commodities as well as petrol have not grown for several months. One of the reasons is the global economic outlook deterioration, growing more pessimistic with every day. Energy and food prices will retain a moderate downward trend, given that the current global economic climate is not favourable for price climb.
You said previously that concerns over re-recession are now real and the likelihood of new recession has risen from 30% to 50%. What is it like now?
This probability keeps growing. Financial markets continue to signal about the increasing risks for example, related to the eurozone’s problematic countries. More than a year has passed, but none of these countries are near to fulfilling the plans on the budget adjustment. This does not improve the overall sentiment – on the contrary, there are now talks about Greece’s default likelihood hitting 100%. Processes are constantly moving in the worst direction.
The recession is unlikely to occur in the third or fourth quarter, but in 2012. Next year will be a dangerous year. In 2011, Latvia’s main export markets, as well as Germany and America will post fairly good performance, but the recession risks are growing very fast for the next year.
However, the relapsing into recession will not be as tragic as already experienced, and the crisis numbers will not be as bad as in 2008 year, when Latvia was pulled underwater by construction industry, real estate market, and real estate transactions. The worst scenario for Latvia would be the GDP indicators returning to late 2009 – early 2010 levels. Also, the unemployment rate will not be higher than in 2010.
When Latvia is likely to reach the pre-crisis level?
That is a question that is difficult to answer, but I would like to think that it will happen in the nearest five, seven or ten years. It is necessary to look at how the situation will evolve in the world as a whole, although Latvia has all the potential to grow faster than the old European countries.