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

While efforts to slash spending, raise taxes and keep the currency pegged to the euro helped Latvia recover from a “brutal recession,” additional cuts may be needed this year to curb inflation, Timothy Ash, head of emerging-market research at RBS in London, said today in an e-mailed note.

Official projections appear optimistic against this backdrop: the weakening of global/European growth and also little evidence of an upturn in domestic credit growth. “The weaker growth/recovery outlook could also strain budget targets, albeit admittedly the Latvian authorities have shown a strong ability to rein in the expenditure side," said Ash.

Ash pointed out that "most foreign commentators, including himself, argued at the time, that given the shear extent of external imbalances, the only option for the Latvian authorities was to abandon the fixed exchange rate regime, devalue, and go for growth. The shear extent of the fiscal adjustment undertaken was nothing if not remarkable.", reports LETA, referring to Bloomberg.

It is “difficult to imagine a West European economy forcing through such a brutal fiscal adjustment in defense of a rigid exchange rate regime. Perhaps Greece is currently showing just how difficult it is to live up to the Latvian experience," added Ash.