Analytics, Economics, EU – Baltic States, Financial Services, Latvia

The Commission expects a budget deficit for Latvia of around 8.6% this year, rising to around 9.9% next year, in contrast with the previously predicted figures of 12.3% and 12% respectively.

Signs of stabilization can be seen in the Latvian economy, which is having a positive effect on all three Baltic States economies, indicates the Commission.

Meanwhile, 0.9% growth is predicted for Estonia in 2010, rising to 3.8% in 2011.

The Commission's report indicates that economy activity in Latvia is gradually improving, with the liquidity situation in the interbank market back at pre-crisis levels by the beginning of 2010, and CDS (credit default swap) spreads falling rapidly, indicating improved market confidence towards Latvia.

However, these positive changes have still not led to an increase in lending to the private sector, and lending margins remain well above pre-crisis levels, which is slowing the restructuring of the economy, says the report.

According to the Commission's estimations, Latvia's financial sector is well capitalized after an increase in the levels of banking capital; however, the banks are expecting a further worsening of their credit portfolios, and are therefore very cautious about taking on any additional risks.

Retail sales grew slowly at the beginning of 2010, which was connected with significantly reduced prices during the sales period; however, growth in local demand is being affected by the weakness of the employment market, high levels of private debt, and further expected cuts in budget spending.

Meanwhile, there has been a healthy growth in Latvia's export volumes, with a significant recovery of the Latvian export market and an improvement in national competitiveness, and renewed investment is also being noted in the real estate market, according to the Commission's forecast.

However, the recovery of private investment is being delayed by a lack of clarity over public finances, especially in terms of tax policy, as well as the forthcoming parliamentary elections in October.