Tuesday, July 17, 2007

Ilmars Rimsevics on the Latvian Economy

Associated Press today:

Latvian Bank Chief Confident on Economy

RIGA, Latvia -

Despite high inflation, excessive wage growth and massive consumption, Latvia's economy - the fastest growing in the European Union - will stabilize and survive the storm unscathed, Latvia's central bank chief said Friday.

"I believe the government's anti-inflation plan is starting to work," Ilmars Rimsevics, governor of the Bank of Latvia, told The Associated Press in an interview.

"We have all chances in the world to have a soft-landing," he said, referring to a slowdown in annual growth of GDP to a sustainable 5 - 7 percent.

After GDP catapulted 11.9 percent in 2006, Latvia boasted the most robust economy in the EU - thanks largely to a binge in consumer consumption. Banks have been offering cheap loans and Latvians have eagerly borrowed to buy trips to London, new Toyota cars and real estate.

The volume of loans grew 58 percent in 2006, with mortgages skyrocketing 89 percent. The absence of a capital-gains tax on real estate sales meant that many Latvians jumped in the market by snapping up two or more properties at once.

In one infamous case in 2003, former Prime Minister Einars Repse borrowed over half a million euros and purchased seven properties while serving as Latvia's prime minister.

While the good times have been a blessing for the country of 2.3 million, that split from the Soviet Union in 1991, they have come at a cost.

Annual inflation in June reached 8.9 percent, the highest in the 27-member EU, and the current account deficit in 2006 was 21.3 percent - also the highest in the union.

The first alarm bell sounded in February, when Standard & Poor's, a rating agency, gave the Latvian economy a negative outlook.

The government moved quickly to curtail spending and in March passed a series of anti-inflation measures, one of which now forces banks to verify sources of income.

"This shopping spree can't continue forever, so I think more and more people are reconsidering the decision to go out and spend and are saving instead," Rimsevics said.

Still, other warnings signs abound. Last year wages rose 30 percent, putting pressure on the competitiveness of domestically made goods and triggering rumors of a possible devaluation of the lat - Latvia's currency - which in turn would undermine confidence in East European economies.

This kind of talk aggravates Rimsevics, who is up for re-election in December.

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