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Latvia Country Risk Report Q2 2015

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, %

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.


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