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Latvia Country Risk Report Q3 2016

  • May 2016
  • -
  • Business Monitor International
  • -
  • 45 pages

Core Views Latvia's economic recovery will remain broadly on track in 2016 and 2017, as improving labour market conditions feed through into steady private consumption growth. We forecast real GDP growth to expand by 2.9% in both years, but caution that the economic outlook will sour over the next decade due to the country's dire demographic profile. Policy continuity and strengthening economic growth will ensure a narrowing of Latvia's fiscal deficit and see a reduction in the general government debt as a share of GDP, despite rising defence spending over the coming years. Although Latvia's current account deficit will widen, it will remain much smaller than its pre-crisis levels and will pose less of a threat to financial stability in the country. Inflationary pressures will accelerate with rising global oil prices from Q416, but are unlikely to pose any threats to the country's economic growth outlook. Major Forecast Changes We have modestly revised down our real GDP forecasts to 2.9% in both 2016 and 2017, from 3.0% and 3.3% previously. This reflects even weaker economic growth outlooks in key trading partner Russia and the two other Baltic nations.

Table Of Contents

Latvia Country Risk Report Q3 2016
Executive Summary 5
Core Views5
Major Forecast Changes5
Key Risks5
Chapter 1: Economic Outlook 7
SWOT Analysis 7
BMI Economic Risk Index 7
Economic Growth Outlook 8
Severe Demographic Challenges Ahead8
Latvia faces a challenging long-term economic growth outlook A rapidly declining working-age population will be only partially offset by
productivity gains, implying lower trend growth lies ahead for the small Baltic nation
GDP By Expenditure Outlook 10
TABLE: GDP GROWTH FORECASTS10
TABLE: PRIVATE CONSUMPTION FORECASTS10
TABLE: GOVERNMENT CONSUMPTION FORECASTS10
TABLE: FIXED INVESTMENT FORECASTS11
TABLE: NET EXPORTS FORECASTS11
External Trade And Investment Outlook 12
Widening Current Account Deficit No Cause For Alarm12
Latvia's current account deficit will expand over the next few years, due to ongoing weakness in the country's main trading partners and
strengthening domestic demand Deficits will still remain relatively small by historical standards, meaning external imbalances will pose
a much smaller threat to financial stability than in years gone by
Outlook On External Position 13
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE14
TABLE: EXPORTS14
TABLE: IMPORTS14
Fiscal Policy And Public Debt Outlook 15
Policy Continuity And Strong Growth Favour Fiscal Outlook15
Policy continuity and strengthening economic growth will ensure a narrowing of Latvia's fiscal deficit and see a reduction in the general
government debt as a share of GDP, despite rising defence spending over the coming years Nevertheless, a declining working-age
population poses a long-term risk to maintaining a low budget deficit
Structural Fiscal Position 17
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES17
Monetary Policy 18
Inflation To Accelerate From Q41618
Inflation will accelerate markedly from Q416 onwards as solid demand-side price pressures are accompanied by a sudden uptick in
annualised oil prices Inflation will reach the eurozone's 20% target at some stage in 2017
Monetary Policy Framework 19
Chapter 2: 10-Year Forecast 21
The Latvian Economy To 2025 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 ten years, despite the country's accession to the eurozone, as it struggles with competitiveness and demographic
challenges
TABLE: LONG-TERM MACROECONOMIC FORECASTS 21
Chapter 3: Political Outlook 23
SWOT Analysis 23
BMI Political Risk Index 23
Domestic Politics 24
Short-Term Stability Cannot Mask Demographic Decline24
Over the coming years, a deteriorating demographic picture will place increased strain on the Latvian political system A declining
working-age population matched with extreme opposition to inward migration from the Middle East and North Africa is likely to see
social tensions increase in the long term, given the exodus of young, educated workers from Latvia experienced over the past 15
years
TABLE: POLITICAL OVERVIEW 24
Long-Term Political Outlook 25
Slower Growth And Ethnic Tensions Key Themes To 202525
The coming decade for Latvia will be marked by the scars of the global financial crisis of 2008-2009 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 4: Operational Risk 29
SWOT Analysis 29
Operational Risk Index 29
Operational Risk 30
TABLE: DEVELOPED STATES - LABOUR MARKET RISK30
TABLE: DEVELOPED STATES - LOGISTICS RISK34
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK37
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK 39
Chapter 5: BMI Global Macro Outlook 41
Global Macro Outlook 41
Tentative Stability, But New Risks Emerging41
TABLE: GLOBAL ASSUMPTIONS41
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 42
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %43
TABLE: MACROECONOMIC DATA and FORECASTS 45

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