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Friday 23.08.2019 | Name days: Valgudis, Ralfs, Vitālijs

Expert: if lat was devalued, IMF asked no more cuts

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BNN news from Latvia, Baltics, Primekss Board Chairman and economy expert Janis Oslejs

Primekss Board Chairman and economy expert Janis Oslejs

If we devalued the lat, the International Monetary Fund (IMF) neither asked for more cuts, nor consolidation, Primekss Board Chairman and economy expert Janis Oslejs (Ošlejs) told in an interview to the business news portal BNN.

Similarly, he believes the government should concentrate all its political courage and initiate negotiations with the IMF and commercial banks on devaluation compensation mechanisms etc. Oslejs indicates Dombrovskis coalition is hiding in trenches, convinced that nothing should be changed with regard to the currency rate. He calls this short-sighted.

Is this the right moment to start up a business to be real masters when the good times come?

Microenterpirses is a way to escape payroll taxes, not a reasonable invention. I would rather say that this is a good time for businessmen to toughen themselves. However, many business people are losing their capital, which means they will have no resources to grow. If a businessman manages to capture the right moment, he is a real winner. But I would still not recommend to take up a business, except one linked to exports to Scandinavia, where the states devalued their currencies successfully in 2008 and 2009, and to Germany that is currently flourishing economically.

What do you propose to promote the Latvian economy?

Out first task in reviving the economy is to find people capable of continuing economic activities making sufficient profit. The second task is to revive banks, so that they have free resources for lending. The problem of Latvia is that about 35 000 mortgage takers are in material difficulties and banks are about to take everything away from them. Similarly, many businessmen, unable to meet their liabilities, go bankrupt. What Iceland just recently and Sweden in 1992 did was they turned loans in foreign currencies into ones in local currencies, reducing the value of their currency against a foreign one afterwards. It would be enough for Latvia to reduce the lat by 30%, as it would allow writing off 30% loans worth billions. Many businessmen are in a grace period with no principal repayment, consequently such a support would do them good. As long as people are left with some money, they can start operating with it. Commercial banks have about 30% non-payers, but real estate is not money, it is non liquid assets. This is how we round up with zombie banks, as in early 1990 in Japan. If a bank owns a real estate, it is there as a “dead cargo”. And then we are stuck. A practical solution for banks would be that the government partly compensated for their losses due to the devaluation with its bonds that can actually be turned into money. This would start the engine of the national economy. We should create a slight inflation, so that companies profit and banks have where to invest. From the money obtained from the devaluation, the state should establish both venture capital funds and the Development Bank to finance growth of industry.

Would the IMF approve of such a move?

The IMF is a very intelligent organization with good economists. I should remind that the IMF asked the government of Godmanis to devalue the lat, because they knew the consequences of the crisis. Unfortunately, the government and the Central Bank were strict and did not agree to that. It means the IMF would agree with my plan, because it is exactly how they themselves work. The organization is interested is states being capable of settling payments with their own currencies. If we stick to this currency rate, we will not be able to pay for the consumed import goods. This is what they told us – if you do not change the lats exchange rate, you must reduce the domestic consumption considerably, namely, cutting public sector jobs and reducing a number of benefits. If we devalued the lat, the IMF neither asked for more cuts, nor consolidation, because we would make use of import less. The IMF representatives would be happy to see the initiative I have just described. The government should concentrate all its political courage and initiate negotiations with the IMF and commercial banks on devaluation compensation mechanisms etc. So far Dombrovskis coalition has been hiding in trenches, convinced that nothing should be changed with regard to the currency rate, which is short-sighted.

It means it is no shame to go bankrupt or write off debts in capitalism?

Exactly. We could rather call it a slight wound in the face, moreover, it is often that Latvian businessmen cannot go bankrupt, because they have guaranteed personally, thus undertaking additional liabilities. They cannot shut down the company, because the outstanding loan and obligatory payments will be there any way. Neither is it possible to keep operating, it is only existing as a zombie – neither dead, nor alive. In this case we do not mean possible bankrupt of the state, but a reasonable monetary policy. It is a standard practice helping Iceland and Sweden to flourish considerably.

Will sticking to the current currency exchange rate head Latvia towards hopeless and slow stagnation?

I see no point in the current policy of the state. How can it be sensible, if there is such huge unemployment that we rank the second right after Spain in the EU? According to the economist Phillips economy rules, unemployment shrinks, if growth rates exceed 3.5% a year and there is also certain inflation. If we grow at the pace forecast by the Prime Minister of Latvia Valdis Dombrovskis – 3.3 up to 3.5% a year, we will need 14 or 15 years to reach the pre-crisis unemployment level. But the jobless will not wait these 15 years. Most of them will simply leave. This in inhumane for a state in the 21th century to make its residents suffer just because it is bad at earning money. If many working age people emigrate, who will pay pensions to the elderly in future?

Do you agree to the conclusion of the government that we are exiting the crisis at a stable pace?

I agree that there is fiscal stability in Latvia. However, I neither see us growing 7% a year, nor any hopes to reach such a growth rate in the following years. If families currently under the burden of mortgage loans are not consumers, neither will we grow as a state. If an economy is falling, it is exceedingly difficult to carry out structural reforms, because the government does not have the funds to build news structures instead of the old ones.

Will we be ready to join the euro zone in 2014?

It is too early, as long as we do not solve private persons and companies debts issue with the help of the devaluation of the lat. At a higher inflation rate than on average in the EU, the majority of Latvian businessmen would make profit. However, this already calls for a longer discussion. After joining the euro zone, the government will no longer have such an option to maneuver. With a fixed currency rate, inflation is also a surge in the price costs of our production, decreasing the external competitiveness of those exporting. Thus this is a kind of deadlock. I do not believe that by late 2013 we will comply with the inflation rates or the requirement that prices have to report long-term stability. Moreover, we have no idea whether the external debt of the state will not exceed 60% of GDP by that time, because we are accumulating debts all the time. In addition, the system of the EU single currency is so up-side-down that it is not even appropriate for weak and poor EU member states. In economy there is Optimal Currency Area Theory that states the euro fits for such central EU states as Germany, France, Belgium and the Netherlands, while it does not fit for Portugal, Italy and Greece at all. The structure of the Latvian economy is not similar to the ones of the most developed EU states. The people are mislead into that if they tighten their belts now, they will see better times in the euro zone. Euro is just an external display, just like a new suit or Mercedes-Benz obtained on leasing. I as an economist propose the following criteria; first of all, the euro should be introduced only when we reach at least 70% of the average GDP in the wealthy states of the EU. Secondly, when our production is at least at as stable level as in Germany. There was a moment it was beneficial for the Baltic states with a similar economic development scenario to introduce a single currency, but it is already too late for that. I believe Estonia made a huge mistake in joining the euro zone too early. Actually, Latvia now has a chance to exceed Estonia in terms of growth, if we review the current policy of the government and devalue the overestimated lat.

Are venture capital funds drivers of crediting?

Not exactly. Commercial banks lend money only to those who already have it. They are not meant to finance risky businesses. We want the banking sector to be stable, it means it should not finance unstable businesses. A venture capital fund is ensuring a company the stability it lacks in order it could attract additional money from a bank. They do not exclude each other. It is not right to cover all the financial needs of a company only with a venture capital. It is important to balance bank and venture fund money. Banks must not lend to companies that do not have a sufficient capital of their own, because the Financial and Capital Market Commission forbids that. Venture capitalists give you the basis, while the bank adds some whipped cream on it.

Don’t you think it is too late to create a Development Bank?

Many companies in Latvia have interesting concepts, but they are currently facing challenges, like LIDO and DK Daugava. During the crisis the state should act as a driver and get the companies out of the ditch. Otherwise, we will lose jobs and tax revenues forever. The Economy Minister Artis Kampars came up with an initiative to create a state investment fund, which is a good idea actually, because there are no other practical options at the moment.

According to your estimates, the state needs 235 companies as Grindekss to recover the lost 200 000 job positions and return the GDP to the level of 2007. Where can we get them?

The problem of Latvia is essential. States developing at a pace 7-8% a year invest in their economies 25-30% of GDP. In case of Latvia we should invest around 3.5 or 4 billion lats for some 20 years. Then we could catch up with the average Western Europe living standard yet in the time of our generation. Nobel Price winners have studied 13 states growing 7% a year during 20 years. They found out this connection. Why can’t we make use of the successful experience of Singapore and Hong Kong? Where could we get the money? Even if Russian businessmen hid their capitals here and laundered a billion, it still would not be enough. We cannot turn Latvia similar to Liechtenstein, if, within the framework of the EU, there is active combat of money laundering. Germany is currently asking Liechtenstein to present its actual depositors. We cannot rely on investors coming into the production sector with 3 billion lats a year and bring Latvians welfare for today and the next 20 years.

Maybe we need our own Marshall Plan as in the post-war Germany?

We could use that. Unfortunately, the EU is currently cutting its budget, which means it is unlikely it will be a source of such huge investments. We would have to organize it ourselves. We would have to invest at least 7% of GDP or 800 million up to a billion lats in infrastructure development as it was done by Theodore Roosevelt in the USA or Karlis Ulmanis before the war in Latvia. If the national currency was devalued, we would be allowed to restart heating the economy with the help of public ordering.

Would potential investors be interested, if payroll taxes were abandoned for 300-350 lats salaries?

Yes, they would. Russian citizens purchasing real estate to get a residence permit in the Schengen Area should be taxed more. I barely see any point in the schema with the residence permits. If we want investors to place their money in production, the work force should be as cheap as possible. We do not want speculative investors in Latvia, boosting property prices and turning production into a completely unprofitable activity. In that case people were left with less money for purchasing goods. We want both salaries for the work force and as low costs as possible – high salaries and low production prime costs. We aim at an average salary of 2000 lats if we want to double the welfare for the following 20 years.

Why are you offended as being too left in your beliefs?

How can I be left, if I am a capitalist? Capitalistic growth depends on people having capital directly. The system currently in Latvia is not real capitalism, because people and businessmen barely have any money. It resembles more some kind of a «post-Soviet feudalism». Capitalism is a system propelling you only ahead. I believe the government should balance the income of the society, so that as many people as possible benefit. This would create capitalists.

You founded Primekss in 1977. What have you accomplished during these 13 years?

We have accomplished a lot of things. We have come up with the best method of how to build safe and flat floors in factories. We were awarded by the Latvian Investment and Development Agency for The Most Innovative Product 2009. Such floors boost efficiency of industrial sites. Moreover, the technology of how we produce them reduces CO2 emissions by 50%. Our clients Skanska, Norvegian Post and others are using this PrimeComposite technology. This helped us to strengthen our positions in the entire Scandinavian region. We have many orders for 2011, because businessmen appreciate the quality of Primekss. However, we do not have orders in Estonia and minimal ones in Lithuania. We have just recently build factories in Jelgava and Talsi, Latvia.

Why did HC Betons and Ramirent ask for your insolvency in 2009?

It was not because they envied us, it was because Primekss was in serious financial difficulties. Because when the crisis stroke many clients went bankrupt without settling with us, which hit our finances considerably. We were not able to pay further, thus our creditors HC Betons and Ramirent got angry. In 2009 and early 2010 we were unable to settle our payments. At the moment we make profit, because we have an excellent product.

Did you attract resources from venture capital fund to overcome the financial difficulties?

Yes, we did. This covered the gaps in our balance and gave us a chance to expand. We had a task to ensure business risks with our own capital to head towards rapid growth. The leading venture capital fund in the Baltics BaltCap invested 1.4 million euro in Primekss in October 2010, thus acquiring a considerably minority share of the company. This is the first investment of BaltCap Latvia Venture Capital Fund established within the framework of JEREMIE Holding Fund initiative.

How often do you try to carry out too much but with too little resources, risking to become greedy?

If Primekss had not invested 250 000 euro co-financing from the EU in research during several years, allowing to develop a unique and patented technology PrimeComposite for the production of thinner and durable seamless concrete flooring, we might have not faced financial challenges in 2009. But we aimed at creating the best system, so we did not put aside enough funds for the safety cushion, which took revenge upon us during the crisis. However, venture capitalists were interested in helping us.


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