COMMENT: Latvia says yes to austerity, no to populism

By bne IntelliNews October 4, 2010

Lars Christensen of Danske Bank -

The weekend's parliamentary elections gave surprisingly strong backing to the incumbent prime minister, Valdis Dombrovskis. His Unity Alliance party is now able to form a coalition government.

-- We see the outcome as a clear mandate for Dombrovskis continuing his efforts to consolidate the public finances and reform the Latvian economy. The result is strongly positive from a market perspective and should significantly reduce the political risk in Latvia and secure the continuation of the IMF/EU-sponsored reform programme.

--The election results are clearly positive for the Latvian economy and markets, in our view.

Hard-working Dombrovskis pulls off a miracle

A year ago, the outcome of the weekend's parliamentary elections in Latvia would have been unimaginable, but the numbers do not lie - the hard-working reformist incumbent Prime Minister Valdis Dombrovskis secured his coalition 59% of the vote and effectively won for his government the much-needed public mandate to move on with reforms and fiscal consolidation. It is now clear that the Unity Alliance government will continue after the elections. The Unity Alliance now controls 63 of 100 seats in the Latvian parliament versus 45 prior to the elections.

The elections were somewhat of a disappointment for the Pro-Russian populist and anti-IMF Harmony Centre Party. The party won only 26% of the vote - significantly less than the 30-35% suggested by the opinion polls.

Overall, it is hard to see the result of the election as anything other than the Latvian people's rejection of the "easy way out" economic policy and a resounding yes for the reform efforts of the incumbent government. There is no doubt that policy makers in both Washington and Brussels will be relieved by the outcome of the elections, and so will investors.

Furthermore, if the government puts forward yet another austerity budget for 2011, then we would not rule out positive ratings action from one or more of the credit rating agencies. In addition, the pro-reform outcome of the elections is likely to be received positively by investors and should be quite supportive for the Latvian markets.

The Latvian economy is still in very bad shape and the recovery is very weak and fragile, but the weekend's election results will surely increase investor confidence and should provide a positive boost. We are still in for a sustained period of low growth, but thanks to the Latvian electorate, we could now be heading for brighter times for the Latvian economy.

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