Latvia's Economy Expands for First Time Since Crisis as Austerity Pays Off

Latvia’s economy expanded on an annual basis for the first time since the Baltic state was engulfed by the global financial crisis more than two years ago as the European Union’s toughest austerity measures pay off.

Gross domestic product grew an annual 2.7 percent last quarter, the central statistics office in Riga reported today, citing preliminary data. That compares with the 0.9 percent median forecast in a Bloomberg survey of eight economists. The economy grew a seasonally-adjusted 0.8 percent from the second quarter, the third consecutive increase.

“The Latvian economy, which was hardest hit by the global credit crisis, has gradually moved upward,” said Violeta Klyviene, a senior analyst at Danske Bank A/S, in a note to clients. “We expect the gradual recovery of the Latvian economy to continue.”

A rebound in Latvia’s industrial production and exports helped end the longest economic decline in the European Union. Budget cuts needed to comply with the country’s $10.4 billion international bailout have improved competitiveness as lower wages help companies sell their goods abroad. The economy is recovering after shrinking about 25 percent through nine quarters of declines, the International Monetary Fund estimates.

‘Draconian’ Cuts

“Mainly on the back of stronger competitive power arising from the draconian wage cuts, Latvian exports are growing at an annual rate of 30 percent,” said Yarkin Cebeci, an economist at JPMorgan Chase, in an e-mailed note. Growth next year may reach 3 percent, he said.

Industrial production expanded 19.4 percent in the third quarter and exports increased to a record 460.7 million lati ($904.6 million) in September. Latvia’s economy will contract about 1 percent this year, central bank Governor Ilmars Rimsevics said on Nov. 4.

“Although the details are yet to be announced, we suspect that continued export strength and some inventory build-up were the main factors behind this growth performance,” Cebeci said. JPMorgan expects Latvia’s economy to contract 0.4 percent on average this year, compared with a previous forecast for a 1.5 percent slump.

The economic contraction this year “may be close to zero,” said Finance Minister Andris Vilks, according to the Baltic News Service. The government is well positioned to improve its credit rating within about six months, Vilks said, according to the Riga-based newswire.

Credit Ratings

Standard & Poor’s and Fitch Ratings, which cut Latvia’s credit rating to junk in 2009, raised their outlooks to stable this year. Moody’s Investors Service, which rates Latvia Baa3, its lowest investment grade, also raised its outlook to stable.

The recovery is boosting tax revenue as Latvia seeks an additional 400 million lati of spending cuts and revenue measures to meet its goal of slashing the budget deficit to 6 percent of GDP next year. Lawmakers already approved austerity measures equal to about 14 percent of economic output since seeking the IMF and European Union loan in late 2008.

Prime Minister Valdis Dombrovskis has said the government will decide on the size of cuts in the 2011 budget after the third quarter figures are released.

The yield on Latvia’s 5.5 percent bond due March 2018 fell 3 basis points today to a record-low 5.12 percent. That compares with a high of 12 percent in March 2009. The cost of insuring against default has eased. Credit default swaps on Latvian five- year debt slipped to 273 basis points yesterday, compared with 328 at the beginning of last month and 1,200 in March 2009.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net

To contact the editor for this story: Willy Morris at wmorris@bloomberg.net

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