Q What’s your forecast for 2009 and when do you foresee a recovery?
A Latvia has had very rapid growth over the past four to five years. But there is no free lunch and Latvia’s economy has overheated. The government now has to think about how to revive the economy and I believe the right steps are finally being taken. The government is currently working on reducing the size of the budget deficit and most probably will come back to the balanced budget at the beginning of next year.
Wages in the public sector are frozen and there is also the establishment of an export credit guarantee agency which will facilitate the work and activities of our entrepreneurs throughout the world.
I believe 2009 will be a challenging year and the economy will still continue to adjust. But we believe the end of 2009 and beginning of 2010 will be when we start to see the first signs of recovery.
Q What measures are you taking to avoid boom and bust cycles?
A Under the fixed exchange rate regime there is very little that the central bank can do except with the monetary reserve. So it is very important that the government has a tight fiscal policy in boom times to create a fiscal surplus which allows it to stabilise the situation when there is an economic slowdown by then having the extra resources to stimulate the economy if necessary.
Q Your banking sector is led by foreign-owned banks – are you in negotiations with some of the foreign banks such as Swedbank to ensure continued lending?
A Lending activity today is still at very high levels though we are coming down from 60% in 2007, to about 15% in 2008. Of course, a lot of things depend on how lending will proceed but at the moment there are no signs that banks are going to close the lending socket completely. So, we are quite confident that Latvian financial markets are liquid and the mother institutions will continue to provide necessary resources for development of the economy.
Q And what of financial aid from the IMF?
A Since last December, Latvia has had access to international support – credit lines of about €7.5bn from the EC, IMF, World Bank, EBRD [European Bank for Reconstruction and Development] and regional lenders in Nordic countries including Poland, the Czech Republic and the Baltics, based on public sector structural reforms including reducing the salary growth of recent years, which had overtaken productivity. Unchanged currency peg and fast euro adoption in 2012 should also be seen as cornerstones of the stabilisation programme: pain from any devaluation would be broader and deeper than any gains for exporters, whereas the current downturn and the international support will encourage much-needed reforms of the Latvian economy.
Q Do you think the currency exchange rate is at the right level?
A Yes – there is extensive research on the pros and cons of changing the exchange rate and there are no pros or pluses in taking this action so Latvia could only lose if it were done.
Q How will the downturn affect the corporate sector?
A It will make people do business in a more efficient and productive way. Latvia has been relying on a cheap labour force so far, even though they are skilled and educated, which is not making people look for higher productivity or to invest in machinery and equipment. One of the most important things for the Latvian government is to stimulate real production and increase productivity.
Q If the country’s growth has been based on the availability of credit and a strong banking sector, what will be the source of economic growth going forward?
A I think that it would be to their absolute detriment if [banking systems which operate in Latvia] did not continue to lend to Latvia because so much investment has already been made in this country that it would worsen their previous investments. And of course, EU structural funds will continue to flow in and there will still be money coming in from abroad in repatriation of capital from people working abroad.