Latvia Country Risk Report Q2 2015
Core Views
Latvia's economic recovery will continue into 2015 and beyond,although we emphasise that strong headline real GDP growth islargely a result of statistical base effects. We see growing scope forthe government to ease up on its long-held policy of fiscal austeritygoing forward.
The Russian embargo on EU agricultural goods has weakened thegrowth outlook and Latvia will be among the worst EU states affected.
Growth will remain subdued due to the need for further deleveraging.
Major Forecast Changes
We have downgraded our forecast for Latvia's real GDP growth asthe escalating trade war between the EU and Russia is adverselyaffecting Latvia's goods and services export prospects. We nowforecast Latvia to grow by just 2.0% in 2015 from 2.2% previouslydue to the impact of the Russian embargo on trade.
We have downgraded our inflation forecasts due to the collapse inoil prices.
- Executive Summary
- Core Views
- Major Forecast Changes
- Key Risks To Outlook
- Chapter 1: Political Outlook
- SWOT Analysis
- BMI Political Risk Index
- Domestic politics
- Foreign Policy Issues To Dominate Agenda
- With the incumbent coalition set to serve out another term, we expect foreign policy issues will dominate the agenda, with the Russia-
- Ukraine crisis showing few signs of abating in 2015.
- Table: Political Overview
- Long-Term Political Outlook
- Slower Growth And Ethnic Tensions Key Themes To 2024
- 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.
- Chapter 2: Economic Outlook
- SWOT Analysis
- BMI Economic Risk Index
- Economic Activity
- Growth Outlook Sinking With Russia-Ukraine Crisis
- Russia's deteriorating economic situation is having knock-on effects on Latvia. While the economic impact has been relatively limited in
- terms of trade volumes, it is severely dampening business confidence, which in turn is crimping investment. We have downgraded our
- real GDP growth forecast to 2.0% in 2015, from a previous forecast of 2.2%.
- Table: GDP By Expenditure
- Balance Of Payments
- Weaker Regional Outlook Dampening Exports
- We forecast a slight widening of Latvia's current account as the rapidly deteriorating Russian economy leads weakens Latvian exports.
- Table: Current Account
- Fiscal Policy
- Public Finances Among The Strongest In CEE
- The outlook for Latvia's public finances remains one of the strongest in Emerging Europe. While growing disinflationary trends and the
- possibility of a growth shock from the Russia-Ukraine crisis remain downside risks, the solid sovereign debt profile is well placed to
- absorb any unexpected shortfalls.
- Table: Fiscal Policy
- Monetary Policy
- Deflation In 2015
- We forecast Latvian consumer prices to drop into deflation in 2015, driven primarily by low oil and food prices. This should prove
- supportive to household consumption.
- Table: Monetary Policy
- Exchange Rate Forecast
- EUR: Parity Is In Sight
- Although it has fallen significantly already, we remain fundamentally bearish the euro versus the US dollar due to lower real yields,
- slower real GDP growth, and much greater economic and political tail risks. We envisage USD/EUR hitting parity at some point in 2015
- and 2016, but the euro should slowly appreciate over a multi-year period thereafter.
- Table: Eurozone Currency Forecasts
- Chapter 3: 10-Year Forecast
- The Latvian Economy To 2024
- Looking For A 'New Normal'
- After three years of growth outperformance following one of the worst recessions in Europe, we think growth is set to shift down a
- gear over the next 10 years, despite the country's accession to the eurozone, as it struggles with competitiveness and demographic
- challenges.
- Table: Long-Term Macroeconomic Forecasts
- Chapter 4: Operational Risk
- SWOT Analysis
- Operational Risk Index
- Operational Risk
- tABLE: Developed States - Labour Market Risk
- Table: Developed States - Logistics Risk
- Table: Developed States - Crime & Security Risk
- table: Developed States - Trade & Investment Risk
- Chapter 5: Key Sectors
- Food & Drink
- Table: Food Consumption Indicators - Historical Data & Forecasts
- Table: Hot Drink Value/Volume Sales, Production & Trade - Historical Data & Forecasts
- Table: Food Consumption Indicators - Historical Data & Forecasts
- Other Key Sectors
- table: Pharma Sector Key Indicators
- Table: Telecoms Sector Key Indicators
- Table: Infrastructure Sector Key Indicators
- Table: Autos Sector Key Indicators
- table: Freight Key Indicators
- Chapter 6: BMI Global Assumptions
- Global Outlook
- Weaker EMs To Weigh On Growth
- Table: Global Assumptions
- Table: Developed States, Real GDP GrowtH, %
- Table: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
- Table: Emerging Markets, Real GDP Growth, %
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