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Economist: Latvia’s future depends on people’s patience; politicians mostly focus on near future

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Baltic news, News from Latvia, BNN.LV, BNN-NEWS.COM, BNN-NEWS.RU«People in Latvia currently live better than they ever have. Still, income level in Western Europe and elsewhere in the world will remain higher for some time.» Which predictions about banking sector’s operations have come true, and what is going on with ‘pained child’ – Latvia’s judicial system? Luminor Bank’s economist Pēteris Strautiņš explains in an interview to BNN.

«Latvia’s economy grows more rapidly than the economy in Western Europe. Income levels are also higher there. It is important to understand the difference: if this is about income level or the rate at which changes are realized. This means Latvia’s future depends on the patience of its residents. And patriotism. Undoubtedly,» adds Strautiņš.

«Many people have already decided to leave, because they want better quality of life now, not after some time.»

Answering the question as to the way it is possible to motivate people to stay in Latvia, Strautiņš mentioned that the majority of residents in Latvia will have a higher status in society. «People’s welfare perception is determined less by the absolute income level and more by the relative income level – a person’s income level when compared to other people. There is also a high probability of residents losing some of their acquaintances if they leave Latvia.»

«It is easy to ruin something. Building something with political decision, however, takes time»

Strautiņš says that «it is clear that wealthy countries are rich because businesses there have a legal framework». «Those countries allow investments in infrastructure and education».

«Achieving something with a political decision to raise Latvia’s welfare level – something like this is unlikely. Political decisions are unlikely to have an immediate effect in most cases,» explains the economist.

Strautiņš notes that voters and politicians often think only about the near future. He says that long-term thinking for political matters would benefit voters, because «they already form demand for the political elite». He adds: «Political elite should also try forming long-term thinking».

Labour market is experiencing interesting times

«This year’s wage rise is expected to be larger than last year’s. We can expect some 6-7% growth. This will not apply to everyone, of course. Wages never grow equally for everyone,» says Strautiņš. He explains: «It is something dictated by the labour market. The economy is starting to bounce from the resource accessibility border. Companies compete with one another for employees and tempt people with bigger wages. Some of the unemployed people who have given up hope of finding work or who do not find wages attractive will be pulled into the labour market. And what do we see? The employment level does grow – Latvia has reached the average level in the European Union. Its resource [labour force] has yet to be exhausted. If Latvia reaches Sweden’s level, where, I believe, employment is the highest in the EU, we can expect some 70,000 to 80,000 more workers.»

Strautiņš says that wage rise is the main factor that can change migration balance. «People leave, people return. There are no miracles here. It is as simple as making Latvia’s labour market attractive. Only then will people decide to stay.»

The economist predicts that if Latvian residents do not have enough patience, their future will likely end up in some other country. «If we look at the world in general, people in other countries have no environment as the one found in Latvia, with the kind of infrastructure and living space with sufficiently powerful production traditions.»

«Just read on Twitter – a person noticed the first taxi driver from Nigeria in Riga,» adds the economist.

«Latvian companies will have an opportunity to raise wages more rapidly than in Ireland and Germany»

«Ireland and several other countries in the same region have already reached the border of world technological capabilities. Respectively, those are the best technologies that exist in the world are more or less used there. Latvia still lacks them. Because of that, it is possible to raise income level by adopting technologies, which is easier to do than create new technologies,» says Strautiņš.

He continues: «With that, it is possible for businesses in Latvia to increase wages more rapidly than Ireland or Germany».

As for 2018, the economist believes things are not looking bad. «If we look at production and retail trade increase in the first two months, we will see that GDP growth rate is above 5%. With that, even if we slow down in the second half of the year, 4% is still realistic.»

«GDP growth in expressed in monetary form is two billion euros a year. GDP may become two or a couple of bullion euros larger than a year before.»

When asked what contributes to Latvia’s growth, Strautiņš says: «If we look at powers pushing welfare growth in the near future, we will see that they are found in industries that have reached a sufficiently high development level and whose part in the economy is large. Those are industries that are able to produce enough money. Programming industry, mechanical engineering, classical woodworking – these industries provide several dozen millions in the form of export goods. Under favourable conditions we can expect a hundred million euros. On top. Because the rate at which changes are added in economy is rapid.»

When asked about the future situation with exports if the transit business is bogged down, Strautiņš says: «Transit [railway and port services] last year was equal to 4.5% of the total volume of exports of goods and services. Something goes up, something goes down – it keeps going.»

It should be mentioned that Inga Antāne, president of Baltic Association – Transport and Logistics, mentioned at the beginning of April that the volume of freight carried by rail in Latvia has declined 23% in the past four years. Turnover in Latvia’s ports has declined 16% in the same amount of time. The association’s president says that estimates show that Latvia’s national economy has lost at least EUR 132 million since 2014. These losses, according to her, keep increasing every day.

Antāne comments on this the following way: «This has a definite effect on Latvia’s economic situation, because transport and logistics is the country’s second largest sector of the national economy. It brings the budget more than one billion euros and provides jobs to 70,000 or 80,000 people. Latvia is located on Europe’s external border with Russia and is subjected to high political, social and economic threats if the national economy is weakened. If the country’s second largest national economic sector suffers, so do other industries. Paid taxes reduce and unemployment increases. More people are subjected to the poverty risk.»

«Both banking sectors parts have completely different fates!»

«Of course, what happened with the non-resident banking sector will have a negative and immediate effect on economic increase,» comments Strautiņš.

«Latvia’s banking sector has two parts. Both are separated, and both these parts have completely different fates. If we look at the banking sector that services Latvian resident and businesses – everything is calm there. As savings of Latvian residents and companies increase, so does the volume of deposits. Because the economy keeps growing, banks have more work and more sources of revenue,» the economist explains.

«Banks that work primarily for foreign clients and banks that export services, on the other hand, are currently experiencing volume declines that appear in deposit statistics. We all know about ABLV Bank – it has been liquidated.»

The economist predicts that «it is clear operational volumes for non-residents will reduce». «It is possible that some of the banks will voluntarily decide to narrow their operations and focus on specific niches. I would not use the world ‘collapse’. Changes are planned for this banking sector, but I hope those banks will be able to pass the processes gradually.»

The interview with Luminor economist took place a week ago. Predictions mentioned then have come true. For example, Danske Bank has decided to cease servicing private persons in Baltic States. The economist also mentioned this bank will likely focus on subsidiaries of Nordic companies. Danske Bank also promised this process will be a gradual one.

«Non-resident banks have had it good for some time. We, on the other hand, did not earn as much. We missed the chance to earn some money. Now this missed opportunity has turned around in a sense that it is now necessary to prevent reputation risks and market structure change risks,» says Strautiņš.

«One field in which we look poorly when compared to other European countries is deposit research and development.»

When asked what the 13th Saeima should do, Strautiņš once again said: «One thing that comes to mind is funding of science. The field in which our positions are looking very bad when compared to noughbouring countries and the rest of Europe is deposit research and development.»

«It seems the court justice system, which has been a pained child so far, is progressing somewhere good»

Generally Strautiņš is positive and hopeful when it comes to the future: «It can be said that education is not perfect. The general education system is undergoing changes in its school network – rationalization. It even seems like the court justice system, which has been a pained child so far, is progressing somewhere. Waiting time are becoming shorter and some processes are being sped up.»


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