“Rus.nra.lv” got acquainted with this report and explains what worries its authors and how it will affect consumers and households.
Good news
The world economy is slowly but surely recovering from the shock caused by the pandemic and the Russian invasion of Ukraine. Unemployment is low, jobs are plentiful, and wages continue to rise. However, a faster recovery is not possible due to high inflation. In 2022, high inflation was fueled by rising food and energy prices, and quarantines imposed in China also played a role. Although now the pandemic has been overcome and the energy market prices have returned to pre-war levels, experts are very cautious in predicting economic growth and thus also simplifying the living standards of the population.
According to the assessment of the International Monetary Fund, which the Bank of Latvia refers to in its report, the growth of world GDP in 2022 is estimated at 3.4%, but in 2023 it could reach 2.8%. In developed countries, especially in the Eurozone, forecasts are even more restrained. Economists in Germany and some countries of the Nordic and Baltic region (Sweden, Estonia, Lithuania) predict a slight drop in GDP.
The Bank of Latvia is most concerned about measures to limit inflation, especially the increase in interest rates in the second half of the year, which will continue in 2023 as well. This has made borrowers in the European Union and Eurozone countries, including Latvia, more vulnerable.
The vulnerability of neighboring countries increases risks in Latvia
When it comes to the stability of Latvia’s financial sector, the experts of the Bank of Latvia look with concern not only at world markets, but also at the situation in the Nordic countries. Latvia’s largest commercial banks, like “Swedbank” and SEB, either operate as Baltic branches of Scandinavian companies of the same name, or their shareholders are from Scandinavian countries, as, for example, in “Luminor” bank. These banks in Latvia are called systemically important, which means that the financial sector of our country depends on developments in the parent companies of these banks.
During the pandemic, the presence of stable foreign investors was a great asset. But now the vulnerability of the Nordic financial system has come to the fore again. Experts of the Bank of Latvia cite unbalanced development of the housing market in the countries of the region, high household debt, as well as the dependence of leading banks on market financing and large investments in commercial properties as “weak stages”.
Fluctuations in energy prices are an additional concern. “Taking into account the geopolitical context, the risk of cyber-attacks and other large-scale unexpected disruptions to the financial infrastructure of the Nordic countries remains high,” says the Bank of Latvia’s 2022 financial stability report. If the situation in Northern Europe worsens, the parent banks in Scandinavia will first of all solve the problems of local depositors, not Latvian depositors, as evidenced by the experience of the 2008 crisis.
The bridge is destroyed – let’s go around the roads?
Literally nothing is wrong on the eastern border. In the tense geopolitical situation, instead of implementing the slogan “Latvia is a bridge between the West and the East”, the “bridge” had to be closed in a hurry. Passenger air traffic was closed, and a sharp drop in cargo transportation through Latvian ports was expected, where Russian cargo accounted for approximately 80-90% of the turnover.
However, in 2022, the expected breaking of economic ties did not happen. On the contrary, in the first half of 2022, Russian cargo literally flooded Latvian ports. Not all of them managed to be taken away, as an example we can cite more than 100 thousand tons of “Uralkalij” mineral fertilizers, which got stuck in Latvia for almost a year. However, some cargoes managed to be classified by their owners as “strategically important” for the European Union, and their transportation continued even after the start of the war: for example, the European Union completely refused to buy Russian coal until August 2022. Imports of natural gas continued, and imports of liquefied gas – a mixture of propane and butane – even increased. Its volume cannot be considered as fully consumed in Latvia, because gas filled in cylinders was often taken to Ukraine by Polish or Ukrainian gas carriers. All this certainly increased the total volume of imports. As a result, according to the data of the Central Statistics Office of Latvia, in 2021 Latvia exported goods to Russia for 1.197 billion euros, while in 2022 this indicator was 1.194 billion euros, so with a minimal reduction. On the other hand, the volume of Latvian imports from Russia in 2022 has even increased in monetary terms: in 2021, goods were imported for 1.772 billion euros, and in 2022 – already for 1.831 billion euros.
So why was the slogan “We are paying for the war!” popular all last year, meaning that the sanctions are worsening the standard of living of the people of Latvia, but we are ready to tolerate it until Ukraine wins? First, until the middle of last year, there was a cosmic increase in energy and food prices. Secondly, Latvia refused to buy fertilizers from Russia, and our farmers were forced to look for new suppliers on the eve of the new harvest, whose prices were two or three times higher than in 2021. At the same time, the increase in fertilizer prices was also caused by the general increase in energy prices. The restrictions also affected buyers of fodder, which was mostly imported from Russian regions. In some regions of Russia in 2021, Latvia was one of the main buyers not only of grain, but also of fodder and other agricultural by-products, which were used as feed for Latvian cows and chickens. The list of such invisible things, which made the life of Latvian entrepreneurs and residents more comfortable and cheaper, could be continued for a long time – steel, nails, metal doors, wood and shavings. The war in Ukraine made it impossible to buy such products from neighboring countries, where bombs were aimed both at steel factories and at developed agro-industrial companies and their workers who ensured production. It was bad for everyone.
At the same time, the volume of Latvian trade with the CIS countries has increased. “Attention should be paid to the dynamics, especially in those groups of goods whose exports to Russia and Belarus are subject to sanctions,” warn experts of the Bank of Latvia. For example, in the 2nd half of 2022, compared to the 2nd half of 2021, the export of these goods to the CIS countries close to Russia increased by 29.8 million. euro or 264%. The export of goods to Armenia, the import of which is prohibited to Russia, increased by 1303%, to Kazakhstan – by 996%, and to Kyrgyzstan – by 685%. Here the question arises, how the EU sanctions policy is followed by the companies that export these products.
“Rus.nra.lv” already wrote about official and unofficial reasons why Latvia’s trade with Central Asian countries has increased.
A blow to borrowers and investment
Before the war in Ukraine, business in Latvia was allowed after the restrictions of covid. As a result, economic activity and private consumption increased – people began to enjoy shopping, entertainment, restaurant visits and vacations. Inflation in Latvia gradually decreased along with the drop in global energy and food prices.
However, the high level of inflation remained for a long time, putting considerable pressure on the activities of non-financial sector companies. This had a negative impact on the solvency of Latvian residents and reduced the availability of new housing. The situation with borrowers will worsen, warns the Bank of Latvia. Not only households that have taken out a mortgage loan for the purchase of a home or purchased household appliances on lease will suffer.
The experts of the Bank of Latvia also mention the insufficient investments in the economy and the weak development of lending as significant structural deficiencies that slow down the development and competitiveness of Latvian companies. In addition, investment activity will decrease due to high uncertainty due to high costs – including the maintenance of civil servants – as well as rising interest rates. The negative impact is also caused by generally stricter financing conditions and the slow absorption of EU funds.
Five forecasts of the Bank of Latvia
Inflation in Latvia will gradually decrease in 2023 and could be around 3% at the end of the year. The average increase in consumer prices in 2023 and 2024 will be 8.5% and 2.4%, respectively. The low unemployment rate, which was 6.4% in the 1st quarter of 2023, will contribute to wage growth. It is expected that Latvia’s GDP will increase slightly (1.2%) in 2023. But already in 2024, the growth of the national economy could reach 3.1%. Prerequisites for this could be the restructuring of energy resources and material supplies, the acceleration of the disbursement of EU funds and the normalization of the level of public expenditure. At the end of 2023, the state budget deficit will decrease and revenues will increase. Although Latvia’s public debt is not excessive (40.8% of GDP in 2022), the cost of servicing it is growing too fast, and the budget deficit in 2022 reached 1.7 billion euros. This reinforces the need to improve the competitiveness of companies and eliminate structural deficiencies in EU financing.
2023-07-08 02:15:13
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