Even compared with the global pity party that has followed the financial crisis and subsequent economic slowdown, Latvia has not been having a good time. The government expects that the economy will contract 18% in 2009, followed by a 4% drop in 2010. “We expect to return to a positive growth during the fourth quarter of 2010. There will be a recession, but afterwards there will be growth during the last quarter,” Latvia’s prime minister, Valdis Dombrovskis, tells fDi Magazine.

The FDI picture is hardly any prettier. “We certainly saw over the past years, and especially during 2008, that FDI was falling. For example, in 2008, we received 44% less FDI than in 2007. Certainly, it is the worst decrease. We also expect an FDI decrease this year, although there are a few positive trends in manufacturing, for example, and the logistics and transport sector is doing relatively fine,” says Mr Dombrovskis, who has been in office since March.

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Tough times

The press for Latvia in the past year has not been positive, and those on the ground in the country are among the first to admit that not all of the negative attention is undeserved.

“Regarding our economic strategies, there are some problems. There is a negative image of Latvia and of our financial markets. On the other side, our negotiations with international loans providers are leading to an augmentation of taxes. We are about to introduce a capital gains tax and a dividend tax. This is the negative point,” he says.

“But there is also a positive aspect. Asset prices and labour prices are falling. Consequently, for those companies that want to look at the long-term perspective, it is probably the best moment to do so, even if there are still difficulties in front of us, because prices are significantly lower. For example, the real estate sector has lost 50% of its value, if we compare with a couple of years ago.”

Latvia still has some of the lowest taxes in the EU – providing cost advantages, especially when combined with the reduced asset and labour prices. “We are looking forward to finding investors for our largest and independent commercial bank,” says Mr Dombrovskis, by way of example of a bargain-basement deal that investors might wish to snap up.

Basic survival

The new mayor of Riga, Nils Usakovs – the city’s first native Russian-speaking leader – clearly sees no point in understating the severity of the immediate scenario. “Our main objective is to get through the winter, because unemployment is growing. We do really hope that this winter will not be too cold because it will affect us, obviously. So the main thing will be to protect our system from collapse,” he says.

“Salaries have decreased by 60%. We have to protect our school system, our healthcare system: we have two hospitals. Also, we’ve got serious problems with public transport. We would like to support young children [from the first to the third grade] to travel for free. Consequently, going through all these social problems, it looks like an extremely difficult winter.”

While he is upfront about the stark challenges facing the city and the country, the mayor is concerned that a grim face not be presented to the world. Riga is, after all, a city whose fortunes, depleted as they are, depend greatly upon tourism and one whose appeal to holiday-makers and weekend visitors is its reputation for showing visitors a good time. “It has to look like a city that is not in crisis. And, if we don’t take the opportunity to attract tourists, our chances to face the crisis will be lower,” he says. “Despite the crisis, tourists can spend money.”

Resilient Riga

The city is working on a plan to develop the entertainment industry, to cater to a potential market of an estimated 200 million tourists. “I was in Estonia a couple of weeks ago and I was really upset with the fact that in Riga we don’t have the possibility to run big events. The reason is that in Estonia, they can attract 70,000 to 80,000 people. In Riga, we can only attract up to 40,000 people. So the entertainment industry could help us on a short-term basis,” says the mayor.

Down the line

“On a long-term basis, of course, we have to talk about the development of industries such as research and development, and the improvement of education. But we are far behind Germans and Scandinavians because they put much more effort than us in this domain,” says Mr Usakovs.

He says he is not sure to what precise extent tourism figures have dropped in 2009, but suggests that the large discounts being offered in restaurants around the city tell the story. Just as plummeting asset and labour prices could tempt investors looking for a bargain back to Latvia, on a more micro level, cheaper food and drink combined with new entertainment attractions might fill up flights into the capital city again. Indeed, a fine time can still be had in Riga, even in the dark winter months – but locals and their elected leaders will likely be holding their breath for a spring thaw.

COUNTRY PROFILE

Latvia

Population: 2.2 millionPop. growth rate: -0.614%Area: 62,249 sq kmReal GDP growth: -4.6%GDP per capita: $17,300Current account: -$4.354bnLargest sector (% of GDP): Services 61.8%Labour force: 1.19 millionUnemployment rate: 5.3%

Source: CIA World Factbook, 2009