IMF gives Latvia an upgrade and a nudge

By bne IntelliNews May 17, 2012

Mike Collier in Riga -

Following an upgrade to investment status by Standard & Poor's earlier in May, the International Monetary Fund (IMF) gave Latvia an "upgrade" of its own on May 16 when it more than doubled its GDP forecast for the Baltic state this year from 1.5% to 3.5%.

Speaking in Riga alongside Finance Minister Andris Vilks, the IMF's Mark Griffiths - head honcho for the country ever since Latvia took a €7.5bn bailout in 2008 - said the figure could end up being even more substantial. "Short-term indicators suggest 2012 growth might end up slightly higher, provided the external environment does not deteriorate. Underlying inflation remains low and headline inflation should fall to around 2.6%," Griffiths said.

The move sets the scene nicely for a planned June 5 IMF conference in Riga, at which Christine Lagarde will be centre stage to plug the message that austerity can indeed get results provided it is properly applied.

Having seen its economy shrink by 18% in 2008 and a cumulative 25% during the crisis as a whole, Latvia posted strong growth of 5.5% last year and reported first-quarter growth of 6.8% on year on May 10.

The official growth forecast remains just 2%, but Latvian Prime Minister Valdis Dombrovskis has said openly in recent weeks that he expects it to be revised to "between 3% and 4%" in coming weeks.

Away from the macro music, the IMF also whistled a couple of tunes likely to be of interest to investors as they flagged up what could be big moves from the state to private sectors.

Going, going, gone

First on the block was Latvijas Hipoteku un Zemes Bank (Latvian Mortgage and Land Bank, MLB), a loss-making state-owned entity in an already overcrowded banking sector. Plans to sell off the bank's commercial assets have been doing the rounds for a while despite a certain notable reluctance to sell from the bank's often well-connected clients.

The European Commission has been trying to force the pace and the IMF has now given the government a prod in the ribs too, saying "the authorities should sell all commercial assets unless there is clear evidence that the bids are well below market value."

The non-commercial rump of MLB should then be merged with other institutions to form a single development bank, the IMF said.

Also up for grabs should be national flag-carrier airBaltic, the sale of which would rid the state of a constant source of negative headlines as well as a drain on its resources, which last year totalled LVL58m - equivalent to 0.4% of GDP. "The government should closely monitor implementation of the new business plan to return the airline to profitability quickly and should sell the airline to a strong strategic investor to avoid further taxpayer losses," Griffiths said.

Speaking of the airBaltic business plan, coincidentally also on Wednesday the airline announced the recruitment of a new chief operations officer, Martin Sedlacky, who even more coincidentally penned that very same business plan while working for Boston Consulting.

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