Latvia’s economy may grow more than predicted next year as consumption in the Baltic nation helps make up for slower exports to the debt-ridden euro area, according to the International Monetary Fund.
Gross domestic product may advance 3.7 percent, compared with a previous forecast of 3.5 percent growth, Shekhar Aiyar, the lender’s mission chief to Latvia said yesterday in an interview. That pace “is pretty healthy” and should accelerate to 4 percent to 4.5 percent after 2013, he said.
“The recovery is now quite broad based, so it’s not just an external demand story,” he said in a phone interview from Washington. “Domestic demand is returning.”
Latvia is paying off ahead of time the IMF’s contribution to a 7.5 billion-euro ($9.8 billion) bailout taken in 2008 after its second-biggest bank needed a rescue, a real estate bubble burst and global credit markets froze. The economy grew 5.2 percent from a year earlier in the third quarter, the ninth consecutive period of expansion, after slumping more than a fifth in 2008 and 2009.
The yield on Latvia’s dollar bond due 2020 was little changed at 2.94 percent.
After borrowing costs plunged, the Baltic country is using the proceeds of a $1.25 billion bond sale to repay its bailout in full almost three years ahead of schedule.
In the wake of Lehman Brothers Holding Inc.’s 2008 demise, the government passed spending cuts and tax increases equal to more than 16 percent of economic output to stabilize public finances. After enduring devaluation pressure, the country’s exchange-rate peg to the euro is now broadly in balance, Aiyar said.
“It is a very laudable achievement, and it’s been a very difficult adjustment and full credit to the authorities and also to the people of Latvian for being able to do it,” he said.
The IMF supports Latvia’s goal of adopting the euro in 2014 because it would eliminate exchange-rate risk and may strengthen the banking system, Aiyar said.