Comments on: How Latvia Came Through the Financial Crisis Mark Griffiths (mgriffiths@imf.org) European Department International Monetary Fund
Outline 1. Economic performance under the program Program succeeded but at great economic cost 2. Was the fixed exchange rate key? Authors passionate but unlikely to convince the sceptics 3. What s missing from the Book and what s next for Latvia? 2
Since mid-2009, CDS speads have fallen 1300 1200 5-year CDS Spreads of Baltics (basis points) 1100 Latvia 1000 900 800 700 600 500 400 300 200 100 0 3
Overnight interest rates too 35 Overnight Rigibor (Percent) 30 25 20 15 10 5 0 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Nov-08 Dec-08 Jan-09 Feb-09 Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 4
Current account shifted from unsustainable deficit to surplus Latvia: Current Account Balance (percent of GDP) 10 10 5 5 0 0-5 -5-10 -10-15 -15-20 -20-25 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Haver Analytics -25 5
Non-resident deposits returned (capital inflows) Latvia. Resident and Non-Resident Deposits 6,800 6,400 6,000 Resident Deposits Non-Resident Deposits 5,600 5,200 4,800 4,400 4,000 3,600 3,200 2,800 2007:1 2008:1 2009:1 2010:1 2011:1 6
Resident depositors regained confidence in the Lats Latvia. Share of Lats Deposits in Total Household Deposits 60 60 55 55 50 50 45 45 40 40 35 35 30 2007:1 2008:1 2009:1 2010:1 2011:1 Source: Haver Analytics 30 7
International reserves increased (until recently) 6.5 6.0 (includes international i support package disbursements) Gross International Reserves (Billions of euros) 5.5 5.0 4.5 40 4.0 3.5 3.0 2.5 2.0 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 8
But GDP fell 25 percent Baltics: Real GDP Developments, 2007q4=100 110 110 100 Latvia Estonia Lithuania 100 90 90 80 80 70 70 60 60 50 2002:1 2004:1 2006:1 2008:1 2010:1 Source: Haver Analytics 50 9
Unemployment increased to 20 percent Latvia: Harmonized Unemployment trate SA, % 24 24 20 20 16 16 12 12 8 8 4 00 01 02 03 04 05 06 07 Source: Central Statistical Bureau of Latvia/Haver Analytics 08 09 10 4 10
Unemployment has fallen 60,000 from its peak Latvia: Total lharmonized Unemployment SA, Thous.Persons 240 240 200 200 160 160 120 120 80 80 40 00 01 02 03 04 05 06 07 Source: Central Statistical Bureau of Latvia/Haver Analytics 08 09 10 40 11
But employment is 200,000 down 16 percent decline Latvia: Employment: Average Number of Employed Persons SA, Thous 1160 1160 1120 1120 1080 1080 1040 1040 1000 1000 960 960 920 00 01 02 03 04 05 06 07 Source: Central Statistical Bureau of Latvia/Haver Analytics 08 09 10 920 12
Outline Economic performance under the program Program succeeded but at great economic cost Was the fixed exchange rate key? Authors are passionate but unlikely to convince the sceptics What s missing from the Book and what s next? 13
Latvia has the most unequal income distribution in the EU 40 GINI Coefficient for EU 27 Countries, 2007 35 0 = max equality 100 = max inequality 30 25 20 15 10 5 0 Slovenia Hungary Slovak Rep. Sweden Czech Rep. Austria Finland Belgium Denmark Netherlands Malta Cyprus Ireland Germany Luxembourg France Estonia Poland Italy Spain UK Greece Bulgaria Romania Portugal Lithuania Latvia 14
What s missing i from the book? Financial sector stabilization and reform Improving the quality of fiscal adjustment Role of IMF and EU How did PSI contribute? 15
What s next for Latvia? From stabilization to growth? Can Latvia join the euro in 2014? 16
Rebound slower than other Baltics Baltics: Recovery since 2010: Real GDP Growth (q/q seas adj) 36 3.6 36 3.6 3.2 2.8 Latvia Estonia Lithuania 3.2 2.8 2.4 2.0 16 1.6 1.2 0.8 0.4 0.0 2010:1 2010:2 2010:3 2010:4 2011:1 2011:2 Source: Haver Analytics 2.4 2.0 16 1.6 1.2 0.8 0.4 0.0 17
Exports are growing rapidly, like other Baltics Baltics: Export Performance of Goods and Service (euros), 2007q4=100 120 120 100 Latvia Estonia Lithuania 100 80 80 60 60 40 40 20 20 2002:1 2004:1 2006:1 2008:1 2010:1 Source: Haver Analytics 18
But export share remains low Baltics: Exports as share of GDP 100 Latvia 100 Estonia Lithuania 80 80 60 60 40 40 20 20 0 0 2001 2005 2010 Source: Haver Analytics 19
Product mix is not very high tech 20
Scope for improving educational quality and growth 600 PISA Ranking of 15 Year Old Students (Math, Reading, Science), 2009 550 500 ** 450 400 350 Romania Bulgaria Croatia Greece Lithuania LATVIA Spain Italy Portugal Ireland Luxembourg Hungary UK Czech Rep. Sweden Poland Austria OECD Slovak Rep. France Norway Slovenia Denmark Estonia Germany Belgium Netherlands Switzerland Finland 21
Inflation has jumped to 4.8 percent y/y (but supply shocks) - risk of missing Maastricht Latvia: Harmonized CPI: Y/Y%Ch %Change NSA, % 20 20 15 15 10 10 5 5 0 0-5 00 01 02 03 04 05 06 07 08 09 Source: Statistical Office of the European Communities /Haver Analytics 10-5 22
Latvia has more to do, but let s let s put in perspective: 5-year CDS Spreads of Balkans (Basis points) 450 Latvia Bulgaria Croatia Romania 400 350 300 250 200 150 Jul 10 Jul-10 23 Jan 11 Jan-11 Jul 11 Jul-11
CDS lower than Southern Europe: 600 5-year CDS Spreads of Southern Europe (Basis points) 500 Latvia Spain Cyprus Italy 400 300 200 100 0 Jan-10 Jul-10 Jan-11 Jul-11 24
And well below Euro Area program countries: 3000 5-year CDS Spreads of Euro Area Program Countries (Basis points) 2500 Latvia 2000 Greece Portugal Ireland 1500 1000 500 0 Jan-10 Jul-10 Jan-11 Jul-11 25