Out with the new, in with the old in Latvia

By bne IntelliNews January 17, 2014

Mike Collier in Riga -

"Lose weight, exercise more," will have been the New Year's resolution of more than one person for 2014. But in the case of Latvia's government it is more likely to read: "Stay fat, avoid doing too much."

After two months of increasingly absurd negotiations on the formation of a new government following Valdis Dombrovskis' surprise resignation in November last year in the wake of the Zolitude supermarket disaster that killed 54 people, Latvia is finally ready to have someone in charge again.

The good news is the country will take an important step forward by having its first ever female prime minister in former agriculture minister Laimdota Straujuma. The bad news is the government itself appears to have taken two steps back by bringing in the oligarch-controlled Union of Greens and Farmer (ZZS) into the new coalition, which will now consist of four actual parties and six "independent" MPs of dubious provenance.

Talk of Straujuma as "Latvia's Angela Merkel" sadly extends no further than a passing physical resemblance to the German chancellor. Both women are products of a communist bloc upbringing, rather short and stout, and with an endearingly scatter-brained edge to them. But Straujuma will also need her lookalike's ability to make violently opposed parties work together if she is to be anything more than a stopgap.

In one of the last acts of his premiership, Dombrovskis did manage to achieve his ambition to see Latvia into the Eurozone. bne was there outside the HQ of Citadele bank (still for sale after being rebranded from the notorious nationalised Parex) as he withdrew a €10 note from an ATM and held it up to polite applause. Yet even in that act Dombrovskis was trumped by his Estonian counterpart Andrus Ansip, his guest for the evening, who elicited cheers when he revealed a hitherto unknown ability to speak at length in faultless Latvian.

On January 10, a trio of EU heavyweights - or rather two heavyweights and a makeweight, in the forms of Jose Manuel Barroso, Olli Rehn and Herman van Whasisname - arrived in Riga to offer their own congratulations, having given themselves a week to make sure the currency switch wasn't a disaster. In fact, euro adoption took place with commendable smoothness and despite a lack of widespread public enthusiasm for the move, the Latvian public has taken to using euros with unfussy stoicism. "Latvia's membership shows that the euro remains attractive and open to those that meet the required conditions. We are already working with another Baltic country, Lithuania, so I think not very far from now we will have all the three Baltic states members of the euro," European Commission President Barroso said during a "press conference" that involved all of one question before cracking open the champagne at a celebratory reception.

With just eight months until the next scheduled elections in October, the "new" old-style government is unlikely to press ahead with any major reforms and will be characterised by jostling for position ahead of the vote, particularly when the dead-man-walking Reform Party is absorbed into Dombrovskis' Unity party, as now seems a certainty.

So the big question is whether an ineffective administration can screw up the country's current rosy economic outlook and if so, how fast.

Economic prowess

Latvia is expected to top the EU's growth chart for a third year in a row when 2013 data is released on February 10, with GDP expected to have risen by more than 4%. Inflation data is already in, showing average annual inflation of zero for last year, and joblessness has dipped below 10% of the workforce for the first time in four years.

Further upgrades to Latvia's credit rating are probable and on January 15 the country successfully sold €1bn of seven-year Eurobonds that yield 2.815%. Demand exceeded supply by a factor of four - suggesting that maybe the price was too low - and a further foray into the markets is likely later in the year. "Economic growth, accession to the Eurozone and improvements in Latvia's credit ratings obtained up to now have allowed Latvia to borrow in international markets on favourable terms," Finance Minister Andris Vilks said following the issue. "The successful sale of bonds clearly continues to testify to foreign investors' high evaluation of the work accomplished in Latvia's economy as well as the credibility of the state in general."

Nordea Bank's chief economist Andris Strazds agrees the current macroeconomic picture is optimistic. "The most important question now is what will happen in October 2014. If more populist forces or vested interests come to power, reforms could stop and growth could falter in 2015," he tells bne. "Prices for most services continue to slowly rise, indicating that domestic demand is still relatively strong. In combination with a revival of demand, growth in the main export markets should mean that 2014 will be a relatively fat year for Latvia."

But even such optimism comes with a worrying undertone. The last person to talk about "fat years" was the suitably rotund prime minister Aigars Kalvitis, the self-styled "guarantor of stability" who blithely piloted the country from 2004 to 2007 through its period of massive fiscal imbalances and oligarch-dominated politics that led directly to one of the deepest economic recessions in history.

Kalvitis' coalition was not a million miles away from the one that has just taken charge. And come October the resemblance could become even stronger, turning the recent years of genuine reform into a temporary feel-good interlude rather than an ongoing long-term improvement. Such is the fate of most New Year resolutions.

Out with the new, in with the old in Latvia

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