Latvia could go bankrupt in two years
26.01.2009, 13:39 Latvia could go bankrupt within two years,
said the Centre for Strategic Research, Russian business portal rus.db.lv
writes.
Baltic States will be the first victims of the financial crisis among the
countries with transitional economies. Even if the International Monetary Fund
will be able to save the region, avoiding prolonged stagnation is still not
possible.
Center for Strategic Research has prepared a review of «The impact of the
crisis on developing countries and countries with transitional economies”,
writes Infox.ru.
It includes Baltic countries among the states with negative payment balance
and heavily dependent on foreign capital flows. The economy in the region grew
at the expense of low level of debt accumulation by population. The authors of
the report argue that the states have tied themselves to the U.S. economic
cycle, allowing the rapid increase in private sector borrowing in foreign
currency.
Distinct signs overheating economies of the Baltic republics emerged a year
ago, according to the survey. Rating agency Fitch analyst Ed Parker explained
that the agency has lowered ratings of Latvia three times, Lithuanian twice and
Estonian once since August 2007.
«The outlooks for all three countries are negative», - he added.
«The negative outlook means the chance of reducing the rating over the next
three to six months», - reminded the representative of the agency.
The entry to the European Union in 2004 led to a sharp increase in borrowing
and as a result the companies have started to actively develop the mortgage,
construction and retail spheres.
According to the survey, the loans of Latvian private sector make up 125 pct
of GDP and loans of government 9 pct of GDP, amounting to USD 40 bln. The
experts are waiting Latvian households to bankrupt massively in next two years.
70 pct of deposits and 90 pct loans in Latvia are issued in euros, but Latvia
won’t join euro at least until 2010. The exchange rate is fixed, but the effect
of devaluation on small economies after 13-15 years of fixed exchange rate could
be very destructive (as in Russia in 1998), explained the survey.
The volume of foreign debt in the Baltic countries is growing rapidly, as
well as the size of related payments to the international reserves.
In 2008 the number of bankruptcies of commercial firms increased nearly
twice, and the number of finished industrial products for the year fell by 12.7
pct, returning to the level of 2004. Woodworking companies, furniture factories,
plants construction and development companies were particularly affected.
“Production has gradually moved from the Baltic states to the countries which
are less prone to recession - Russia, South-East Asia,” specified the materials
of TSSR.
“I do not envy the Baltic countries. Latvia has the worst position in EU,
Lithuania is slightly better. These are countries with very weak economies,”
said the head of the department of international economic relations at the
Higher School of Economics, Vladimir Pankov.
According to him, they do not have any strong industrial base.
The Center for Strategic Research thinks that the IMF’s aid package to Latvia
is very difficult to implement, especially the fiscal part.
IMF’s program provides, inter alia, reducing the budget deficit in 2009 to 7
pct of GDP. 33 pct of the compensation plans to attract at the expense of
increasing the VAT and excise taxes, 66 pct - by reducing costs and salaries,
including 25 pct in the public sector.
The authors of the review warned that even if the program is implemented
successfully, it’ll likely lead to the suppression of domestic demand and a long
period of stagnation in the Latvian economy.