Dombrovskis Says Latvia's Austerity Program May Ease as Economy Recovers
Valdis Dombrovskis, Latvia's newly elected prime minister, speaks during an interview in Berlin on April 29, 2009. Photographer: Michele Tantussi/Bloomberg
Latvia’s economic recovery may mean less austerity in next year’s budget, Prime Minister Valdis Dombrovskis said.
“We are quite clearly on track as regards the state budget,” Dombrovskis said yesterday during an interview with Bloomberg Television in Riga, Latvia’s capital. “The bulk of the fiscal consolidation is already over.”
Latvia’s economy is rebounding from last year’s 18 percent slump as manufacturing and exports advance. Dombrovskis, who turns 39 tomorrow, said growth probably accelerated in the second quarter after economic production expanded 0.3 percent from the previous period in the first three months of the year.
The Baltic country turned to a group led by the European Commission and International Monetary Fund for a 7.5 billion- euro ($9.9 billion) loan in 2008 after its second-biggest bank collapsed. Dombrovskis’ government approved spending cuts and revenue increases equal to 10 percent of gross domestic product to meet terms of the loan and avoid devaluing its currency.
Those measures helped keep the budget deficit to 9 percent of GDP last year, less than the 10 percent limit set by the lenders. The European Union limit is 3 percent.
Dombrovskis, whose minority coalition faces parliamentary elections in October, said the recovery program will go ahead even if his government loses.
“Of course we are looking to win the election but, in any case, any new government will be confronted with the same issues. They will have a substantial budget deficit,” he said.
Trailing in Polls
Dombrovskis’ Unity party was in second place in June with 12.3 percent support, behind opposition party Harmony Center at 18.8 percent, according to a survey of 1,022 people by pollster SKDS. More than 43.4 percent of those who took part in the survey, which had a margin of error of 3 percentage points, said they were undecided or didn’t plan to vote.
Latvia opted to cut state wages, reduce expenditures and raise taxes to restore competitiveness rather than devalue the currency because of the high level of foreign currency borrowing. With the lats pegged to Europe’s single currency, about 85 percent of all loans are denominated in euros.
Society has shown a “degree of appreciation” that the austerity measures were necessary and Latvia is on the path to recovery, Dombrovskis said.
“We do not intend to go for any massive additional wage reduction in the public sector,” he said. “In the first quarter of this year our wages in the public sector are down by some 25 percent. That’s quite a substantial decrease and we do not intend to go for an additional substantial decrease.”
Additional Austerity
Latvia has agreed to keep its budget deficit to 8.5 percent of GDP this year and cut it to 6 percent next year by making an additional 400 million lati ($747 million) of spending cuts and revenue increases in the 2011 budget.
“Depending on the economic forecast this figure may change, and currently it seems it may change to the lower side,” Dombrovskis said.
The IMF and the EU now expect the economy to shrink 3.5 percent this year, compared with an earlier forecast for a 4 percent contraction. The Latvian central bank and Swedbank AB estimate the contraction may be about 2.5 percent.
Consumer prices, which rose almost 18 percent in the year through May 2008, have been falling since October. Exports grew an annual 34.6 percent from a year earlier in May, and industrial production expanded 13.3 percent in June. The unemployment rate has increased to 20.4 percent in the first quarter, according to a labor force survey by the central statistics office.
‘Bumpy’ Recovery
Latvia’s recovery may be “bumpy” if the global economy slows, said Aidan Manktelow, an analyst at the Economist Intelligence Unit in London.
“Latvia’s made remarkable progress on austerity and rebalancing the economy,” Manktelow said. “But it seems likely that the rebound in external demand will falter later this year and in 2011, and that could highlight residual problems with competitiveness in Latvia and a need for further progress on internal devaluation,” he said.
Citadele Bank, the retail lender created out of Parex Banka AS, which was taken over by the state in 2008 after a run on its deposits, may be sold after parliament approves the 2011 budget following the elections, Dombrovskis said.
The government will “take into account market concerns,” which may rise ahead of the elections and the budget debate, he said. After the budget may be “an appropriate time to go for the first attempt to sell the bank,” he said.
Latvia, which has two Eurobonds together totaling 800 million euros, may return to the market in 2012.
“I wouldn’t expect to go for any major issue in 2011,” Dombrovskis said. “Moreover, right now we’re negotiating with the IMF and Commission to slow down the absorption of the loan.”
To contact the reporters on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net David Tweed in Riga at dtweed@bloomberg.net;
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