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Latvia Business Forecast Report Q2 2014

  • February 2014
  • -
  • Business Monitor International
  • -
  • 49 pages

Core Views

Latvia's economic recovery will continue into 2014 and beyond, although we emphasize 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 0.1% in 2013 and 1.1% in 2014.

Major Forecast Changes

We have revised up our expectations for the current account deficit, which we now expect to arrive at 1.2% in 2014, from a previous forecast of 2.2%

Key Risks To Outlook

The prevailing risk to our forecasts for Latvia remains the persistent eurozone sovereign debt crisis. A further deepening of the crisis would pose downside risks to most of our forecasts.

Table Of Contents

Latvia Business Forecast Report Q2 2014
Executive Summary 5
Core Views 5
Major Forecast Changes 5
Key Risks To Outlook 5
Chapter 1: Political Outlook 7
SWOT Analysis 7
BMI Political Risk Ratings 7
Domestic Politics 8
New Government: Business As Usual 8
Unity party member Laimdota Straujuma has been appointed the next prime minister of Latvia. The new government is expected
to retain a broadly similar composition to the previous coalition, and we do not expect to see any major shifts in policy ahead of the
parliamentary election in October 2014.
TABLE: Political Overview 8
Long-Term Political Outlook 9
Slower Growth And Ethnic Tensions Key Themes To 2024 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 Outlook 14
Russia Weighs On Growth Outlook 14
De spite an improving outlook for regional economic activity, real GDP growth is showing signs of deceleration in Latvia. We believe this
is partially due to exogenous factors, such as Russia's decision to route less cargo through Riga's port, and also due to weaker trade
links with the eurozone.
Fiscal Policy 16
Minimal Risks To Fiscal Stability 16
Despite the potential for a slight easing of fiscal austerity this year, Latvia's sovereign credit profile is one of the strongest in Emerging
Europe, and the introduction of the Fiscal Discipline Law in 2013 combined with strong growth and a conservative fiscal stance should
ensure Latvia retains its creditworthiness over the coming years.
TABLE: Solid Credit Rating 17
Balance of payments 18
Sustainable External Account Deficits Ahead 18
Latvia's external accounts are still deleveraging from the 2005 to 2007 period of rapid financial inflows when hot money inflows pushed
the current account deficit to unsustainable levels. With the deleveraging process still some way off completion, we do not expect to see
a major change in the external accounts over the coming quarters. We expect Latvia to post sustainable current account deficits going
Regional Exchange Rate Policy 21
Euro Strength Unsettling The ECB 21
Passive monetary tightening and improved investor sentiment will compound policy inertia from the ECB has keep the euro strong
heading into 2014. However, weak economic growth, high unemployment, euro strength, deflation risks, a potential LTRO-cliff
and anaemic structural reform are becoming increasingly unpalatable for policymakers. As such, we expect substantial monetary
intervention in 2014. If this comes in the form of an LTRO top-up, then the euro will initially hold firm before sliding by end-year as
growth will remain weak.
Eurozone Currency Forecast 21
Regional Monetary Policy 23
ECB Cut: Pushing On A String 23
A cut in the ECB's refinancing rate will do little to ease monetary policy in the eurozone, given the fractured credit transmission channel
and passive tightening resulting from banks repaying LTRO funds. While there are few easy options to ease policy in the near term, we
warn that if the long running disinflationary trend evolves into full blown deflation, the ECB may have to look at more aggressive forms of
policy stimulus.
Chapter 3: 10-Year Forecast 27
The Latvian Economy to 2023 27
Looking For A 'New Normal' 27
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
ten years, despite the country's accession to the eurozone, as it struggles with competitiveness and demographic challenges.
TABLE: Long-Term Macroeconomic Forecasts 27
Chapter 4: Business Environment 29
SWOT Analysis 29
BMI Business Environment Risk Ratings 29
Business Environment Outlook 30
Institutions 30
Infrastructure 32
Market Outlook 34
Operational Risk 35
Autos 37
Chapter 5: Key Sectors 37
TABLE: Passenger Cars Sales, 2010-2017 37
TABLE: Commercial Vehicle Sales Data And Forecasts 38
TABLE: Passenger Car Sales Data And Forecasts 38
Food and Drink 39
TABLE: Consumption Indicators - Historical Data and Forecasts, 2010-2017 39
TABLE: Alcoholic Drinks Value/Volume Sales - Historical Data and Forecasts, 2010-2017 42
TABLE: Mass Grocery Retail Sales - Historical Data and Forecasts, 2010-2017 43
Other Key Sectors 45
table: Infrastructure Sector Key Indicators 45
table: Pharma Sector Key Indicators 45
table: Freight Key Indicators 45
table: Telecoms Sector Key Indicators 46
Chapter 6: BMI Global Assumptions 47
Global Outlook 47
Fairly Benign Prognosis... With Risks 47
Table: Global Assumptions 47
Table: Developed States, Real GDP GrowtH, % 48
Table: Emerging Markets, Real GDP Growth, % 49

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