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Latvian Economy : development scenarios and challenges

Latvian Economy : development scenarios and challenges. Ilmārs Rimšēvičs Bank of Latvia Governor Riga , November 2011. Latvia successfully recovered from the crisis , we predict this year’s GDP growth at 4.8%. GDP growth , %. * - GDP forecast according to forecast base scenario.

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Latvian Economy : development scenarios and challenges

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  1. LatvianEconomy: developmentscenariosandchallenges Ilmārs Rimšēvičs Bank of LatviaGovernor Riga, November 2011

  2. Latviasuccessfullyrecoveredfromthecrisis, wepredictthisyear’s GDP growthat 4.8% GDP growth, % * - GDP forecastaccording to forecastbasescenario

  3. Inthethirdquarter, GDP growthremainedhigh GDP growth(%)

  4. Latvia has already implemented sizable fiscal consolidation Breakdown of budget consolidation measures, % of GDP

  5. Latvia has quickly regained its cost competitiveness: wage-productivity gap has narrowed considerably Real hourly wage and labour productivity per hour (2005 Q1 = 100, seasonally adjusted)

  6. Competitivenessandexportgrowthfosteredrecovery; countrieswithfixedexchangerateareEuropeanleadersin terms of exportgrowth Goodsexportsin2010, % y/y

  7. Witheconomicrecovery, unemploymenthasdropped. Employmentgrowinginalmostallbranches Registeredunemployment, %

  8. Globaleconomicprospectsareunfortunatelybeginning to deteriorate; growthpredictionsforLatvia’smaintradingpartnersarebeingreducedsubstantially GDP forecastforeuroareain 2012, % (JP Morgan, timeaxis-moment of makingforecast)

  9. The EuropeanCommissionhasadmitted: recession – a dropinproductionandservicesvolumespossible. • On10 November, CommissionerOli Rehnwarned of possible“repeatedrecession" inEurope, whenannouncingthe EC forecastsfor EU countries, whichpoint to anexpecteddropingrowth. • “The future outlook is unfortunately gloomy. This forecast is the last wake-up call. The recovery in the EU has come to a standstill and there is a risk of a new recessionunlessdecisivemeasuresaretaken.”

  10. TheresolutionoftheEuropeandebtcrisiswillnotbefast, speculationsandfluctuationsinthefinancialmarketswillcontinue *highlighted=non-compliance with Maastricht criteria; data source: European Commission (forecasts accordingly unchanged as per political scenario)

  11. Recentexperienceshows: thosecountriesthatmanage to straightentheirfinancesaremoresuccessfulinstayingabovethewater • GDP annualgrowthrate; 2nd quarter, %

  12. Stillmuch to do to straightenoutstatefinances: budgetdeficitimplieshigherinterestpaymentsandincreaseddebt GeneralGovernmentdebtandinterestpayments (EKS’95 methodology) * Bank of Latviaforecast, ** alongwith FISIM

  13. In a shorttime, Latviahasbecome a countrywith a debtburden Totaldebt of stateandlocalgovernments (% of GDP, ESA’95 methodology)

  14. Totalexpenditure of stateconsolidatedgeneralbudgetishigherthanin 2007 p - predicted

  15. Latvia’screditratingsarelow! Thatmeans: fewerjobs, higherinterestpayments Standard&Poor’sratingagency’slong-termcurrencyliabilityrating A+ A+ A– BBB+ BBB+ BBB– BB+ BB+ BB–

  16. Whatdolowcreditratingsmeanforthepublicsector? Schedule of centralgovernmentdebtrepaymentbynominal, mil.lats

  17. Ifeuroisnotintroducedandcreditratingsarenotimproved, it maycostthebudgetanadditionalbillion lats ininterestpaymentsinthenext 10 years Additionalannualinterestpaymentsifeuronotintroducedandborrowingandrefinancingthedebtinthefinancialmarket, mil. lats In 10 years, wewilloverpaybyalmost 1 billion LVL

  18. Whatdolowcreditratingsmeanfortheprivatesector?Furtherdropinlendingandlimitedopportunities to financenewinvestments Loans to domesticbusinessesandhouseholds, annualgrowthrate(%)

  19. Statebudgetwillbethedecisivefactorthatwilldeterminefuturedevelopment of theeconomy • Determiningclear steps towardsthebalancedbudget • AdoptingtheFiscalResponsibilityLaw

  20. In 2012, budgetdeficitmustbeunder 2.5% andcontinue to shrinkinsubsequentyears Maximumpermittedbudgetdeficit (accg to ESA’95) levels, to stop theexcessivedeficitprocedureinstigatedagainstLatvia (willsubstantiallyimproveconfidenceinstatefinances; a preconditionformeetingtheMaastrichtcriterion): • in 2012 – 2.5% of GDP • in 2013 – 1% of GDP • in 2014 – balancedbudget

  21. Budgetmustbeconsolidatedindependently of eurointroductionplans. Yeteurochangeoverwouldbeanadditionaladvantage EURO Budgetstrategy Measure Budgetbalance (% of GDP)

  22. Wearepredictingthatinflationin 2013 willapproachtheMaastrichtcriterion. Yetifnegative risks materialize, inflationmayexceedthecriteria Forecast of inflationandMaastrichtcriterion, % Countrieswiththelowestinflationin EU * EC autumnforecastBoLcalculations

  23. It mustbenotedthat “thewindow of opportunity” foreurointroductionmayverypossiblybeshutafter 2014 InflationandMaastrichtinflationcriterion, %

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