Core Views Latvia's economic recovery will continue into 2014 and beyond, although we emphasise that strong headline real GDP growth is largely a result of statistical base effects. We see growing scope for the government to ease up on its long-held policy of fiscal austerity going forward. We anticipate the moderation in consumer prices in Latvia to pick up slightly in 2014. We forecast inflation to average 0.8% in 2014 and 2.5% in 2015.
Major Forecast Changes We have downgraded our forecast for Latvia's real GDP growth to 1.9% from 3.8% previously, as the escalating trade war between the EU and Russia is adversely affecting Latvia's goods and services export prospects. We now forecast Latvia to grow by just 1.9% in 2014 and 3.4% in 2015, from a previous forecast of 3.8% for both years previously. As the 2014 budget has been predicated on real GDP growth of 4.0% in 2014 and 2015, we see considerable risks that government revenues will arrive below projections due to weaker VAT and corporate tax receipts.
Table Of Contents
Latvia Business Forecast Report Q4 2014 Executive Summary 5 Core Views...5 Major Forecast Changes.5 Key Risks To Outlook5 Chapter 1: Political Outlook.. 7 SWOT Analysis 7 BMI Political Risk Ratings.. 7 Foreign Policy . 8 Government Intervening To Counter Impact Of Russian Embargo..8 Rising tensions between Latvia and Russia support our expectations for higher defence spending over the coming years. Domestically, the government will step up attempts to support enterprises affected by Russia's embargo on EU imports. TABLE: Political Overview8 Long-Term Political Outlook... 9 Slower Growth And Ethnic Tensions Key Themes To 2023....9 The coming decade for Latvia will be marked by the scars of the global financial crisis of 2008/09. The country's governments will struggle to return the economy to pre-crisis growth and will pay the political and social price for this inability to promote growth and ease ethnic tensions. Chapter 2: Economic Outlook.. 13 SWOT Analysis... 13 BMI Economic Risk Ratings.. 13 Economic Activity .. 14 Caught In The Crossfire14 We have downgraded our forecast for Latvia's real GDP growth to 1.9% from 3.8% previously as the escalating trade war between the EU and Russia is adversely affecting Latvia's goods and services export prospects. TABLE: Economic Activity14 Balance Of Payments... 16 Current Account Deficit To Widen On Russian Embargo16 The growing trade war between Russia and the EU will cause Latvia's current account deficit to widen in 2014, and we have revised our current account deficit forecasts accordingly. TABLE: Current Account.16 Fiscal Policy... 18 Fiscal Slippage Expected Due To Growth Downgrades...18 On the back of our growth forecast downgrades due to the escalating trade war between Russia and the EU, we now expect a widening of the fiscal deficit in 2014 and 2015. This deficit widening will be driven by lower than expected government receipts. TABLE: Fiscal Policy18 Chapter 3: 10-Year Forecast 21 The Latvian Economy To 2023... 21 Looking For A 'New Normal'...21 After three years of growth outperformance following one of the worst recessions in Europe, we think growth is set to shift down a gear over the next 10 years, despite the country's accession to the eurozone, as it struggles with competitiveness and demographic challenges. TABLE: Long-Term Macroeconomic Forecasts...21 LATVIA Q4 2014 Chapter 4: Business Environment 23 SWOT Analysis... 23 BMI Business Environment Risk Ratings 23 Business Environment Outlook. 24 Institutions 24 TABLE: BMI BUSINESS and OPERATION RISK RATINGS....24 TABLE: BMI LEGAL FRAMEWORK RATING....25 Infrastructure. 26 TABLE: LABOUR FORCE QUALITY..26 TABLE: EMERGING EUROPE - ANNUAL FDI INFLOWS....27 Market Outlook... 28 TABLE: TRADE and INVESTMENT RATINGS28 Operational Risk. 29 Chapter 5: Key Sectors... 31 Pharmaceuticals and Healthcare... 31 TABLE: Pharmaceutical Sales, Historical Data And Forecasts32 TABLE: Healthcare Expenditure Trends, Historical Data And Forecasts 33 TABLE: Government Healthcare Expenditure Trends, Historical Data And Forecasts... 33 TABLE: Private Healthcare Expenditure Trends, Historical Data And Forecasts... 33 Other Key Sectors... 35 table: Telecoms Sector Key Indicators35 table: Autos Sector Key Indicators.35 table: Infrastructure Sector Key Indicators.35 table: Food and Drink Sector Key Indicators....36 table: Freight Key Indicators36 Chapter 6: BMI Global Assumptions. 37 Global Outlook.... 37 US Revision Drags Down Forecast.37 Table: Global Assumptions37 Table: Developed States, Real GDP GrowtH, %..38 Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %.. 38 Table: Emerging Markets, Real GDP Growth, %.39