Latvia

Politics:

• Analysis

  Latvia politics: Quick View - Security forces seek to ban pro-Russian party

  Event

  Local media reported on October 30th that security officials had approached the chief state notary, Ringolds Balodis, to request the annulment of the registration of the pro-Russian January 13 Movement.

  Analysis

  Security officials demanded the annulment on the grounds that the founding convention of January 13 Movement, which was registered in 2009, violates Latvian law. In order for a new party to be registered, it must hold a founding convention with at least 200 members. The January 13 Movement claims that it had 213 members present, whereas security officials have questioned this, citing evidence that little more than 100 people were present. Mr Balodis rejected the demands of the security officials, declaring that he could not make such a ruling on his own, directing them instead to the prosecutor's office.

  The January 13 Movement was renamed "For the Mother Tongue!" in 2012; it is a controversial presence in Latvia. In February 2012 it stirred up tensions when, along with other pro-Russian politicians, it initiated a nationwide referendum on making Russian an official language in Latvia. Although the referendum was defeated, one of the party's founders, Vladimir Linderman, declared it a success, as it consolidated the Russian-speaking minority. Mr Linderman is also a controversial figure: he is a member of the unregistered and outlawed National Bolshevik party, which was suspected of being behind a conspiracy to assassinate the Latvian president in 2002.

  State relations with the national minority are problematic in Latvia. Russia regularly criticises Latvia's treatment of the Russian-speaking minority. The most recent focus of discord has been Latvia's move to grant automatic Latvian citizenship to all local non-citizens, who are predominantly Russian-speakers. The issue dates back to 1991: in the aftermath of Latvia's secession from the Soviet Union, those born in Latvia during Soviet rule, but without any direct relatives living in Latvia before 1940, were stripped of their citizenship. (Around 320,000 people were affected, or 16% of the population.)

  Any serious erosion of Russian-speaking rights or political representation could hamper prospects for future co-operation between Harmony Centre (the single largest party in parliament, which draws the majority of its support from Russian-speakers) and the ruling Unity.

  November 01, 2012

• Background

  Latvia: Key figures

  Andris Berzins

  Mr Berzins took office as president in July 2011, having been controversially elected by parliament in preference to the popular Valdis Zatlers, who was seeking a second term. He will have to work hard to change the public's perception of him as a stooge of Latvian "oligarchs". He surprised many observers by selecting Janis Maizitis, a popular corruption-fighting former prosecutor-general, as his national security adviser. Mr Berzins has few firm policy positions or priorities. He has spoken of the need for good relations with Russia and reforms to secondary education, but his real interest, as an ex-banker and a former head of the Latvian Chamber of Commerce, is likely to lie in the economic sphere.

  Valdis Dombrovskis

  After the resignation of the government of Ivars Godmanis in February 2009, the then president, Mr Zatlers, nominated Mr Dombrovskis, at the time a member of the European Parliament, to form a new government. He presided over a four-party coalition that included his own New Era party, which subsequently entered the Unity alliance. Mr Dombrovskis has generally shown himself to be a capable prime minister in highly challenging circumstances. Unity's election victory in October 2010, which came despite the government having presided over tough austerity measures, owed much to his personal popularity as a competent technocrat, and he continued in office at the head of a two-party coalition. He remained prime minister after the 2011 election, leading a three-party coalition. He has a strong background in economics, having held various posts, including that of chief economist at the Bank of Latvia (the central bank), before serving as finance minister in 2002-04.

  Valdis Zatlers

  Mr Zatlers took office as president in July 2007, following his election by the Saeima (parliament), where he was the candidate of the governing coalition, which then included a number of parties with close ties to vested interests that were seen as preferring a weak president. The surprise choice of Mr Zatlers, a former orthopaedic surgeon with no political affiliation, proved unpopular. Nevertheless, he gradually became more assertive in his role, culminating in his decision in May 2011 to take the unprecedented step in Latvia's post-communist history of exercising his constitutional prerogative to call a referendum on dissolving parliament after members had blocked an anti-corruption investigation. He subsequently lost the presidential election in June as parties with ties to vested interests voted for Mr Berzins. Mr Zatlers then founded his own political party, the Zatlers' Reform Party (ZRP), to champion political transparency. The ZRP came second in the September 2011 election, winning 22 seats in parliament, and entered government as part of the three-party coalition that subsequently emerged.

  September 20, 2012

• Structure

  Latvia: Political structure

  Official name

  Republic of Latvia

  Form of state

  Parliamentary republic

  Legal system

  On August 21st 1991, after the failed coup in Moscow, the Latvian government declared that the transition period leading up to the restoration of independence had ended and, in effect, established legal continuity between the 1918-40 republic and the current state

  National legislature

  The 100-seat Saeima (parliament) is identical to the legislature that was in place before the second world war; only Latvian citizens and those resident in Latvia before June 27th 1940 are eligible to vote; legislators sit for four-year terms

  Electoral system

  Proportional representation, with a 5% threshold for parties to enter the Saeima

  National elections

  Next presidential election due in June 2015; next legislative election due in October 2015

  Head of state

  President, elected by the Saeima; currently Andris Berzins

  National government

  The government, headed by Valdis Dombrovskis, took office in October 2011. It comprises the centre-right Unity coalition, Zatlers's Reform Party and the conservative-nationalist National Alliance

  Main political parties

  The Unity coalition, which comprises New Era, the Civic Union and the Society for a Different Politics (SCP); Zatlers's Reform Party (ZRP); the Union of Greens and Farmers (ZZS); the National Alliance, which comprises For Fatherland and Freedom-Latvian National Independence Movement (TB-LNNK) and All for Latvia; Harmony Centre

  Council of Ministers

  Prime minister: Valdis Dombrovskis (Unity)

  Key ministers

  Agriculture: Laimdota Straujuma (Unity)

  Culture: Zaneta Jaunzeme-Grende (National Alliance)

  Defence: Artis Pabriks (Unity)

  Economy: Daniels Pavluts (ZRP)

  Education & science: Roberts Kilis (ZRP)

  Environment & regional development: Edmunds Sprudzs (ZRP)

  Finance: Andris Vilks (Unity)

  Foreign affairs: Edgars Rinkevics (ZRP)

  Health: Ingrida Circene (Unity)

  Interior: Rihards Kozlovskis (ZRP)

  Justice: Gaidis Berzins (National Alliance)

  Transport: Aivis Ronis (independent)

  Welfare: Ilze Vinkele (Unity)

  Central bank governor

  Ilmars Rimsevics

  November 12, 2012

• Outlook

  Latvia: Key developments

  Outlook for 2013-17

  • The ruling coalition lacks a formal majority, and is unlikely to last in its current form for a full term, although there are a limited number of alternative coalition partners in the current parliament.
  • The euro zone crisis poses risks. If market access is compromised by rising risk aversion globally, the government could have to turn back to the IMF and the EU for support.
  • The budget deficit is expected to narrow in 2012, before growing by 0.1 percentage points, to 2.7% of GDP, in 2013. It is unlikely to be below 2% of GDP until 2017 as the coalition's commitment to fiscal consolidation falters.
  • Despite a recession in the euro zone, real GDP is expected to grow by 4.5% in 2012. Annual GDP growth is expected to average 3.5% in 2013-17.
  • Consumer price growth is expected to ease in 2012 owing to cuts in tax rates and interest rate rises, before averaging 2.5% in 2013-17. After cutting the main interest rate to 2.5% in September, further cuts are possible.
  • A partial break-up of the euro zone would be unlikely to threaten the lat's peg to the euro, but a complete break-up would be extremely destabilising.
  • The current account, which ran large deficits before the economic crisis, has rebalanced. Deficits will grow again amid resilient domestic demand.

  Review

  • Security officials have sought to ban the pro-Russian January 13 Movement on the basis that its founding congress, held in 2009, was not attended by at least 200 members, a minimum requirement according to Latvian law.
  • The authorities have banned a referendum on automatic citizenship for the country's 300,000 non-citizens for international law and security reasons.
  • On October 23rd the financial regulator announced that Norvik Banka, the eighth largest bank in Latvia, had received a capital injection of more than EUR5m (US$6.4m) from Sandor Demjans, a Hungarian businessman.
  • In September Latvia's inflation rate fell to 2.9%, as measured on the EU's harmonised index of consumer prices (HICP); which is consistent with euro zone membership criteria for the first time.
  • Industrial production in September was 3.1% higher than in September 2011 and 2.8% lower than in August 2012 (both figures are seasonally and working-day-adjusted).
  • According to provisional data, in August exports increased by 14.9% year on year, amounting to LVL621m (US$1.1bn) at current prices. This is the highest monthly export amount ever recorded.

  November 12, 2012

Economy:

• Background

  Latvia: Country fact sheet

  Fact sheet

  Annual data	2011a	Historical averages (%)	2007-11
  Population (m)	2.1	Population growth	-2.0
  GDP (US$ m; market exchange rate)	28,480.7	Real GDP growth	-1.8
  GDP (US$ m; purchasing power parity)	35,117b	Real domestic demand growth	-5.1
  GDP per head (US$; market exchange rate)	13,728	Inflation	6.3
  GDP per head (US$; purchasing power parity)	16,927b	Current-account balance (% of GDP)	-5.0
  Exchange rate (av) LVL:US$	0.50	FDI inflows (% of GDP)	3.9
  a Actual. b Economist Intelligence Unit estimates.

  Download the numbers in Excel

  Background: After being annexed by the Soviet Union in 1940, Latvia regained independence in 1991 and moved swiftly to adopt a free-market economy. The political scene has been characterised by a weak left, supported mainly by the large ethnic Russian minority, and a dominant but fragmented right. Governments have tended to be fractious and short-lived but successive administrations have shown a high degree of policy continuity, first in meeting the requirements for EU membership, and now for euro zone entry. A sharp economic downturn after 2008 led to a rise in social discontent, including a riot in the capital, Riga, in January 2009. The centre-right government, led by Ivars Godmanis, collapsed after it struggled to cope with the policy changes necessitated by the recession. Valdis Dombrovskis was appointed prime minister in March 2009, leading two coalition governments. Mr Dombrovskis remains at the head of a three-party coalition government following an early parliamentary election in September 2011.

  Political structure: Latvia is a parliamentary republic. The legislature is the 100-seat, unicameral Saeima, which sits for a four-year term and is elected by proportional representation through party lists. The president is elected by the Saeima for a period of four years and a maximum of two consecutive terms. The president is the head of state and appoints the prime minister, subject to approval by the Saeima, with which most powers rest.

  Policy issues: Privatisation is largely complete. High inflation prevented euro zone entry during the economic boom, and the authorities hope to join the euro zone in 2014, which the Economist Intelligence Unit considers realistic. The main policy goals are to support economic growth, to join the euro zone (maintaining the lat's peg to the euro until then) and to move the public finances back towards balance.

  Taxation: Latvia has a flat system of personal income tax, with a rate of 25%. The corporate profit tax is 15%. Employers also pay social security contributions at 24% of salary (the employee pays a further 11%) and a real-estate tax of 1%. Value-added tax (VAT) is levied at 21% (since July 2012), with a lower rate of 10% for medicines and certain utilities.

  Foreign trade: The current account shifted from a large deficit to a surplus of 8.8% of GDP in 2009 as the economic slump led to a sharp fall in imports and exports and large write-offs in the value of foreign direct investment (FDI). The current-account surplus declined in 2010, and the current account returned to a modest deficit in 2011. Exports, especially to the EU, are dominated by low value-added goods, and Latvian products will need to move up the value chain if the country is to avoid again generating unsustainable external imbalances.

  Major exports 2011	% of total	Major imports 2011	% of total
  Timber products	19.0	Mineral products	15.4
  Metals	13.9	Machinery & equipment	16.4
  Machinery & equipment	13.0	Metals	10.2
  Chemicals	7.5	Chemicals	11.2
  Leading markets 2011	% of total	Leading suppliers 2011	% of total
  UK	3.5	Germany	11.5
  Germany	8.8	Lithuania	10.0
  Lithuania	16.3	Russia	4.9
  Sweden	6.3	Estonia	3.6

  Download the numbers in Excel

  Download text file (csv format)

  November 12, 2012

• Structure

  Latvia: Economic structure

  Data and charts: Annual trends charts

  
  

  

  November 12, 2012

• Outlook

  Latvia: Country outlook

  Latvia: Country outlook

  FROM THE ECONOMIST INTELLIGENCE UNIT

  POLITICAL STABILITY: Following the parliamentary election in September 2011, the Saeima (parliament) voted in a new three-party government in October 2011. The coalition comprises the centre-right Unity alliance, the Zatlers's Reform Party (ZRP) and the conservative-nationalist National Alliance. Valdis Dombrovskis remains prime minister, a post that he has held since 2009. The government lacks a formal majority, with the three parties commanding 50 votes in the 100-seat Saeima, but six independent members of parliament (MPs) who defected from the ZRP have pledged their support. The weakness of the government's parliamentary position, the need for ongoing austerity and the traditional instability of Latvian party politics suggest that the coalition is unlikely to survive in its current form for a full four-year term.

  ELECTION WATCH: The next Saeima election is not due until October 2015. Valdis Zatlers's decision (as the then president) to call an early election in 2011 was unprecedented in Latvia's post-Soviet history, and is unlikely to be repeated. Harmony Centre may have reached the limits of its potential; it expanded its support only slightly from the election in 2010 and has had little success in moving beyond its Russian-speaking base. It won the election only because of the fragmenting of the centre-right vote. Centre-right parties seem likely to remain dominant.

  INTERNATIONAL RELATIONS: Latvia will retain a strong transatlantic orientation as the basis of its security. Relations with Russia have shown some signs of improving, and cuts in public spending are forcing Latvia to take a less active role in developing EU and NATO engagement with countries in what Russia views as its "near abroad". Nevertheless, relations are also vulnerable to tensions over the status of the ethnic Russian minority in Latvia, and the post-election treatment of Harmony Centre may have angered the Russian leadership. Any future deterioration in ties between Russia and the West would also increase the risk of Russia disrupting Latvia's foreign trade and energy supplies.

  POLICY TRENDS: The continuing presence of Mr Dombrovskis as prime minister and Andris Vilks as finance minister will ensure considerable policy continuity under the new government. The programme agreed with the IMF and the EU in December 2008 to stabilise the economy expired in December 2011. The government has so far not expressed an interest in a new, precautionary lending agreement. In February 2012 the government successfully placed US$1bn in international bonds, which was intended to cover the country's full financing needs for 2012. The government plans to issue over US$5bn in 2013-14 in order to meet the payment schedule for financial aid provided by the EU and IMF. Although this is ambitious, Latvia should be able to meet its borrowing requirements on international markets. Nevertheless, the euro zone crisis continues to pose risks, and if market access is subsequently compromised by rising global risk aversion, the government could have to turn back to the IMF and the EU.

  ECONOMIC GROWTH: Latvia has made a rapid recovery following a real GDP contraction of nearly 18% in 2009 and 0.9% in 2010, with output growing by 5.5% in 2011. The rebound in economic growth was driven by external demand and investment, alongside improvements in consumer demand as the labour market picked up. In the first quarter of 2012 real GDP growth accelerated to 6.9% year on year--the fastest first-half performance in the EU--followed by 5% in the second quarter. Private consumption, gross capital formation and exports supported growth, with government consumption making the weakest contribution to headline GDP.

  INFLATION: Latvia experienced deflation of 1.1% in 2010 as the recession pulled down prices. Several factors--including higher oil and food prices, a weaker euro, and tax rises--pushed up inflation in 2011 to an average of 4.4%. In order to meet the Maastricht reference rate (calculated using inflation and long-term interest rates among the three best performers in the EU in terms of price stability), Latvia has pursued a number of policies in 2012 to curb price growth: lowering value-added tax (VAT) by 1 percentage point, to 21%, in July; and cutting the interest rate by 50 basis points, to 2.5%, in September.

  EXCHANGE RATES: The Bank of Latvia (BoL, the central bank) aims to keep the lat within a band of ±1% around its central rate of LVL0.703:EUR1. The Economist Intelligence Unit expects the BoL to succeed in keeping the lat broadly within this band. The financial ructions resulting from defaults and even exits from the euro zone of peripheral euro zone sovereigns are unlikely to threaten the lat's peg to the euro, as Latvia has made considerable progress in rebalancing its economy. However, a complete break-up of the euro zone would be extremely destabilising, as Latvia has a large stock of euro-denominated borrowing and the lat would lose its peg.

  EXTERNAL SECTOR: The deep recession in 2009 led to a dramatic shift in the current-account balance, which in the years immediately before the crisis was running large deficits. The current account posted a surplus of 3% of GDP in 2010, but returned to a small deficit in 2011, of US$363m, equivalent to around 1.3% of GDP. Goods export volumes have rebounded strongly, in line with the rapid recovery in external demand, but domestic demand has started to grow again, pulling in imports. The income account shifted into surplus in 2009-10, largely because of losses made by foreign-owned firms, but it ran a deficit again in 2011 as corporate finances improved. Although export growth will be weakened by a slowdown in external demand in the early part of the forecast period, strong domestic demand will lead to a widening of the current-account deficit, to 4.6% of GDP, in 2017. The services and current transfers balances will record steady surpluses, owing in part to Latvia's increasing efficiency in absorbing EU funds.

  November 02, 2012

• Forecast

  Latvia: Country forecast summary

  Country forecast overview: Highlights

  • A three-party, centre-right government headed by Valdis Dombrovskis was appointed in October 2011. The government lacks a formal majority in parliament but is supported by six independent members of parliament (MPs).
  • The weakness of its position and the traditional instability of Latvian party politics mean that the coalition is unlikely to last a full term in its current form. There is a broad consensus favouring an open economy and a pro-Western foreign policy.
  • Relations with Russia have improved, but remain subject to tensions over sensitive historical questions and the status of the large ethnic Russian minority in Latvia. However, EU and NATO membership largely shields Latvia from excessive Russian pressure. Latvia will continue to pursue an Atlanticist foreign policy as the basis of its security.
  • Despite a recession in the euro zone, real GDP is estimated to grow by 4.5% in 2012. Annual real GDP growth will slow to 2.9% in 2013 amid a sluggish recovery. Annual real GDP will average 3.7% in 2014-17 as external conditions improve and domestic consumption strengthens.
  • The 2008-10 recession led to a sharp fall in government revenue, and despite stringent spending cuts, the government will continue to post budget deficits throughout the forecast period. The budget will move towards balance as economic growth strengthens, narrowing to a deficit of 1.8% of GDP by 2017.
  • In spite of global oil and food price rises, inflation is estimated to slow to an average of 2.4% in 2012, allowing Latvia to meet the euro zone entry criteria. Inflation will remain subdued in 2013-17, reflecting the economy's spare capacity.
  • Latvia has intensified efforts to meet the euro zone entry criteria, making membership in 2014 likely. Euro zone membership could be delayed if fiscal consolidation is slower than we currently expect. A partial break-up of the euro zone would be unlikely to threaten the lat's peg to the euro, but a complete break-up would be destabilising.
  • Strong domestic demand amid a difficult external environment is expected to lead to a widening of the current-account deficit to 2.1% of GDP in 2012. The deficit is forecast to gradually widen as a percentage of GDP throughout the forecast period, but will remain restrained by historical standards.
  • The demographic outlook is poor, with population numbers set to continue declining. The population is ageing and is being depleted by the migration of young Latvians, many of whom will become permanent emigrants.

  

  November 12, 2012

View detailed map

Country Briefing

Land area

64,589 sq km

Population

2.26m (2009)

Main towns

Population in '000 (2008)

Riga (capital): 717

Daugavpils: 106

Liepaja: 85

Jelgava: 66

Jurmala: 56

Climate

Temperate, with more extreme fluctuations inland; average temperatures, 20°C in summer, -5°C in winter

Languages

Latvian, also known as Lettish (a member of the Indo-European language family), is the state language and the first language of about 62% of the population. For about 36% of the population Russian is the main language of communication

Weights and measures

Metric system

Currency

Lat (LVL) = 100 santims, replaced the Latvian rouble in 1993

Time

Two hours ahead of GMT (three hours ahead of GMT during the summer)

Fiscal year

Calendar year

Public holidays

April 6th (Good Friday), April 9th (Easter Monday), April 30th (Bridge Holiday), May 1st (Labour Day), May 4th(Declaration of Independence Day), November 19th (Proclamation of the Republic), December 25th-26th (Christmas), December 31st (New Year's Eve)

March 12, 2012