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Latvia Country Risk Report Q2 2016

Latvia Country Risk Report Q2 2016

Core Views

Latvia's economic recovery will continue in 2016, although weemphasize that labour market improvements are partly the resultof high levels of emigration.

We see small but growing scope for the government to ease up onits long-held policy of fiscal austerity going 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 medium-term growth outlook, and forecastaverage real GDP growth of just 3.0% between 2016 and 2020, froma previous forecast of 3.4%.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Robust Growth Despite Trade Weakness
Latvian economic activity continues to expand at a respectable pace, although headwinds from the Russian economy are increasing the
drag from net trade on real GDP growth.
TABLE: GDP BY EXPENDITURE
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
External Trade And Investment Outlook
Trade Suffering From Deteriorating Russian Demand
Regional trade dynamics are suffering from the deterioration in Russian economic activity, which is one of Latvia's key trading partners.
However, the current account deficit will remain small, allowing for further improvements in Latvia's large negative net international
investment position.
TABLE: CURRENT ACCOUNT
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: EXPORTS
TABLE: IMPORTS
Monetary Policy
No Inflation Across H116
Falling oil prices will keep CPI growth in Latvia essentially flat for at least the first half of 2016. Nonetheless, we are not concerned that
weak CPI growth is a bellwether for weaker economic activity as underlying services CPI remain robust, and the disinflationary pressure
is largely the result of low energy prices.
TABLE: MONETARY POLICY
Monetary Policy Framework
Fiscal Policy And Public Debt Outlook
Government Collapse Should Not Affect Fiscal Outlook
Despite ongoing uncertainty over the leader of the next government, the outlook of Latvia's public finances remains one of the strongest
in the eurozone, and we forecast only modest fiscal deficits ahead. Robust real GDP growth and low real borrowing costs will help to
drive down the debt/GDP ratio.
TABLE: FISCAL POLICY
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES
Chapter 2: 10-Year Forecast
The Latvian Economy To 2025
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 ten years, despite the country's accession to the eurozone, as it struggles with competitiveness and demographic
challenges.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Straujuma Resignation: Key Implications
The collapse of the Latvian government, although a surprise, will not lead to significant macroeconomic or market developments. There
is a high probability that the new government will be formed from the three parties in the previous coalition, and a significant change of
course in government policy seems unlikely.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Slower Growth And Ethnic Tensions Key Themes To 2025
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 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 AND SECURITY RISK
TABLE: DEVELOPED STATES – TRADE AND INVESTMENT RISK
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Downside Risks Gather Momentum
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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