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Latvia Country Risk Report Q4 2016

  • August 2016
  • -
  • Business Monitor International
  • -
  • 41 pages

Core Views


From a cyclical perspective, the rise in economic confidence andindustrial production point to a growth pick up in H216, supported byrecovering exports. Medium term, the solid business environmentshould ensure economic growth outperformance in a Europeancontext, in spite of the ongoing demographic decline.Latvia’s Short-Term Political Risk score of 72.1 out of 100 is likelyto remain above the eurozone average of 69.8, supported by strongpolicy continuity and social stability. The potential for Russian aggressionremains the main political risk, as highlighted by the poorshowing in the ‘security/external threats’ subcategory.



Major Forecast Changes

Real GDP growth came in at 2.1% y-o-y in Q116, with private consumptionthe main contributor to the headline figure. On a q-o-qannualised basis the figure came in at 1.6%, recovering from a mildcontraction in Q415. Despite this rebound and our expectations for acontinued recovery in H216, we have downwardly revised our 2016growth forecast to 2.3%, from 3.0% previously.

Table Of Contents

Latvia Country Risk Report Q4 2016
Executive Summary.. 5
Core Views...5
Major Forecast Changes.5
Key Risks.5
Chapter 1: Economic Outlook.. 7
SWOT Analysis... 7
BMI Economic Risk Index.. 7
Economic Growth Outlook 8
Growth To Accelerate In H216...8
From a cyclical perspective, the recent rise in economic confidence and industrial production point to a growth pick-up in H216,
supported by recovering exports. Medium term, the solid business environment should ensure economic growth outperformance in a
European context, in spite of the ongoing demographic decline.
GDP By Expenditure Outlook 9
Gradual Investment Recovery Ahead9
Weak demographics and low fixed capital formation growth pose significant threats to Latvia's medium-term growth outlook.
TABLE: GDP GROWTH FORECASTS..9
TABLE: PRIVATE CONSUMPTION FORECASTS9
TABLE: GOVERNMENT CONSUMPTION FORECASTS.9
TABLE: FIXED INVESTMENT FORECASTS.. 10
TABLE: NET EXPORTS FORECASTS 10
Structural Fiscal Position 10
Fiscal Accounts To Remain In Solid Shape10
Latvia will continue to run only minimal fiscal deficits, leading to a sustained reduction in government debt ratios over the coming years.
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES. 11
TABLE: FISCAL AND PUBLIC DEBT FORECASTS... 11
External Trade And Investment Outlook 12
Large External Liabilities Pose Only Minor Threat12
Latvia's external indebtedness is significantly larger than most eurozone peers, although the country now runs only a small current
account deficit and external debt had been declining since 2010. Despite high external indebtedness, Latvia's structural external position
will continue to improve over the coming years.
TABLE: CURRENT ACCOUNT BALANCE FORECASTS... 12
TABLE: CAPITAL and FINANCIAL ACCOUNT BALANCE. 13
TABLE: EXPORTS... 13
TABLE: IMPORTS 13
Monetary Policy Framework 14
TABLE: MONETARY POLICY FORECASTS.. 15
Chapter 2: 10-Year Forecast.. 17
The Latvian Economy To 2025 17
Looking For A 'New Normal'.17
After years of growth outperformance following one of the worst recessions in Europe, we believe 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. 17
Chapter 3: Political Outlook... 19
SWOT Analysis. 19
BMI Political Risk Index... 19
Domestic Politics. 20
Solid Political Risk Score Intact...20
Latvia's Short-Term Political Risk score of 72.1 out of 100 is likely to remain above the eurozone average of 69.8, supported by strong
policy continuity and social stability. The potential for Russian aggression remains the main political risk, as highlighted by the poor
showing in the 'security/external threats' subcategory.
TABLE: POLITICAL OVERVIEW. 20
Long-Term Political Outlook... 21
Slower Growth And Ethnic Tensions Key Themes To 2025..21
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 actually 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.. 25
SWOT Analysis. 25
Operational Risk Index 25
Operational Risk... 26
TABLE: DEVELOPED STATES - LABOUR MARKET RISK... 26
TABLE: DEVELOPED STATES - LOGISTICS RISK.. 30
TABLE: DEVELOPED STATES - CRIME AND SECURITY RISK.. 33
TABLE: DEVELOPED STATES - TRADE AND INVESTMENT RISK. 35
Chapter 5: BMI Global Macro Outlook... 37
Global Macro Outlook.. 37
Brexit To Hit Global Growth.37
TABLE: GLOBAL ASSUMPTIONS.. 37
TABLE: DEVELOPED STATES, REAL GDP GROWTH, % 38
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %... 39
TABLE: MACROECONOMIC DATA and FORECASTS.. 41

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