2013-03-13 17:32:26 - Fast Market Research recommends "Latvia Business Forecast Report Q2 2013" from Business Monitor International, now available
Despite frequent changes to governing coalitions and the fractious nature of domestic politics, there has been broad consensus in favour of further EU integration, including membership of the eurozone.
Although now lower than before the recent elections, the risk of government instability is comparatively high and the average life span of coalitions since independence has been around 15 months.
The administrative and technical capability to formulate and implement policies is weak in places, and corruption remains an obstacle to the proper workings of the state.
The authorities have made good progress in recent years towards strengthening the judicial system, improving the capacity of the public administration and
combating corruption. Further progress can be expected in the coming years as the EU clamps down the bloc's worst offenders.
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Given the fragmented nature of Latvian politics, policymaking will remain encumbered by the potential for disagreement between members of the coalition.
Business interests wield significant influence over the main political parties. However, outside the area of public procurement this does not have a major impact on foreign investors
BMI Political Risk Ratings
While the election of a centre-right coalition government bodes well for policy continuity, political stability will nonetheless remain under scrutiny over the medium term. The coalition government must negotiate difficult budgets, entailing ongoing cuts to public expenditure to meet the Maastricht budget deficit criteria, which could put increased pressure on the cohesion of the coalition.
Partial Table of Contents:
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
BMI Political Risk Ratings
Improving Political Risk Outlook
- We expect to see a modest improvement in Latvia's political risk ratings as a result of stable inflation, declining unemployment alongside robust economic growth and a sound fiscal outlook. However, we caution that if the rapid pace of fiscal consolidation continues, there is an increasingly salient risk of declining social stability, which could ultimately result a downgrade of our ratings for Latvia.
Long-Term Political Outlook
Stagnant Growth And Ethnic Tensions Key Themes To 2022
- 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 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.
TABLE: POLITICAL OVERVIEW
Chapter 2: Economic Outlook
BMI Economic Risk Ratings
Balance of Payments
External Accounts Characterised By Stability
- We expect Latvia's current account to remain in deficit, forecasting a shortfall equivalent to 2.2% of GDP in 2013 and 2014, with the positive effects from Latvia's internal devaluation broadly offset by households driving up consumer imports. While financial account inflows are liable to remain weak, Latvia's international reserves are sufficiently high to act as a buffer against shortfalls.
TABLE: GDP BY EXPENDITURE
Rapid Fiscal Consolidation Could Turn Problematic
- We have revised up our estimates for Latvia's 2012 fiscal deficit, which we now expect to have made up 1.5% of GDP, from a previous forecast of 2.4%. In addition, we have altered our forecasts for 2013 and 2014, expecting the fiscal deficit to improve to 1.0% of GDP in 2013 and 0.6% in 2014. However, unless the pace of fiscal consolidation slows, Latvia risks damaging long-run economic potential through excessive cut-backs to public spending.
TABLE: FISCAL POLICY
Growth Upgrades On Stronger Exports
- We have upgraded our end-2012 estimate for Latvia's real GDP growth to 5.2%, from a previous forecast for 4.2%, on the back of a stronger than expected recovery exports. We expect that growth in 2013 will continue at a similarly robust pace of 4.3%. We reiterate that while this represents the fastest headline real GDP growth forecast in the EU, output is still well below pre-crisis levels in real US$ terms, and the pace of recovery is largely a result of statistical base effects. We expect that a return to pre-crisis levels of economic output will not arrive until 2016, at the earliest.
Rates To Remain On Hold Despite Low Inflation
- Despite posting a surprisingly low inflation reading of 0.6% y-o-y in January 2013, we maintain our expectation for rates to remain on hold in Latvia over 2013, as the central bank will be wary of stoking inflation and potentially derailing Latvia's long-held eurozone accession ambitions.
TABLE: MONETARY POLICY
Still At Risk Of Deposit Flight
- We maintain our expectations for Latvia's domestic banking sector to underperform by regional standards. Despite strong headline real GDP growth, the banking sector remains mired by continued private sector deleveraging, and we forecast aggregate loan books to continue contracting in 2013. A systemic lack of public confidence in banks and an increasingly liquid deposit term structure places the sector at risk of deposit flight.
Chapter 3: 10-Year Forecast
The Latvian Economy To 2022
L-Shaped Recovery To Usher In Era Of Below-Trend Growth
- Following the three-year depression, we believe that economic growth will be more subdued over the long term. What is more, with domestic demand set to remain under pressure as the private sector accounts for its excessive foreign borrowing in previous years, the export sector will become an increasingly important driver of economic growth over the long term.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Business Environment
Full Table of Contents is available at:
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