Q: How meaningful is for Latvia to join the OECD?
A: It’s an impressive achievement for a country that 26 years ago, when it signed its independence declaration, was a small, underdeveloped post-Soviet country. Today we are a fully-fledged member of the EU and the eurozone, as well as of Nato, and we have now been invited to join the OECD. From a practical perspective, the country had to comply with the standards set by 21 different committees in fields such as governance of state-owned enterprises [SOEs] and oversight and transparency of the banking sector. With regard to the former, SOEs make up 18% of GDP and the OECD accession roadmap triggered big changes in the way these companies are operated. We reintroduced supervisory boards, but most importantly we changed the overall attitude towards these companies to make them really business-oriented. Now all these SOEs have a general business strategy, and we aim for them to achieve an average return on investment of 5% from almost zero in two years.
Q: On the other hand, the rate of non-resident deposits, which have often exposed the transparency weaknesses of the Latvian banking system, remains very high at more than half of total deposits. How are you trying to improve regulation there without risking a capital flight?
A: In 2015, the banking system reported a total turnover of €380bn – one third attributable to domestic capital, two thirds tracing back to non-resident transactions. Most of this capital comes from CIS countries which brought along transactions connected to money-laundering and political corruption we wouldn’t like to see in Latvia. It’s not a matter of legislation in place, as noted by the OECD committee, but of its enforcement and overall oversight by our Financial and Capital Market Commission (FKTK). We took two steps there: we changed the FKTK’s management and introduced new auditing procedures and amendments to the existing regulations to significantly increase sanctions for banks breaching the rules. On top of that, right now we are drafting a specific banking strategy and debating whether or not those deposits are toxic, and whether we will able to service them according to international rules and make them good for the national economy.
Q: The new government that was sworn in earlier this year put the development of its foreign investment promotions strategy higher up the agenda. What are the pillars of your FDI strategy?
A: Latvia finds itself in a classic middle-income trap and it’s key to develop some of the factors that will make the country more attractive to foreign investors. The availability of cheap labour is not a factor any more as wages are growing faster than the overall economy. Today, the first factor is to invest in the education system to make quality labour available. Second, we have to improve the business environment, for example by tackling the shadow economy, which makes up around 21% of GDP. Overall, we plan to reach to the 20th position in the World Bank’s Ease of Doing Business report by 2018, from our current 22nd position [out of 189 countries].
Q: Is there any prioritised sector when it comes to attracting foreign investment?
A: The first priority is the logistics sector, where we expect a lot of development with the Rail Baltica project, a railway corridor between Tallinn (Estonia) and Warsaw (Poland) through Riga (Latvia) and Kaunas (Lithuania). Then the liberalisation of the gas market will wrap up by April 2017, which entails the break-up of the state-owned gas company into two companies dealing with retail operations and storage and transmission operation, with Latvija Gaze obliged to sell there.
Q: Are you planning further privatisations of SOEs in the near future?
A: We have no plans for it at the moment, but we expect to revise the state portfolio and look deeper into what to do with those companies that are not necessarily attributable to state functions. Flagship air carrier airBaltic is actually being sold, while the state retains significant shares in the telecommunications operators Lattelecom and LMT. At the moment the situation there is on hold, but it’s in the government’s plans to create a strategy to get out of those participations.
Q: How are Russian sanctions affecting Latvian exporters and the economic cycle as a whole?
A: It’s not the first time such a situation with Russia has arisen. During the 1998 crisis exports dropped by 60%. That was a dramatic situation for Latvian exporters as Russia was the country’s main exports market. But today we have a quite diversified exports matrix. Before the sanctions the Russian market accounted for 15% of total exports. Now it has dropped to 8%, and the only sectors that were really hurt by sanctions were agriculture and the milk industry. Russian sanctions are not a worry any more. Should they be lifted I doubt there will be export opportunities left for Latvian exporters given the depreciation of the rouble. On a broader level, we are looking at moderate growth and planning to raise annual GDP growth to 2.9% this year, and 3.5% in both 2017 and 2018.