Latvia’s Adjustment Under a
Fixed Exchange Rate Regime
Mark Weisbrot
Co-Director,
Center for Economic and Policy Research
GDP Losses in Recessions
Percent Decline in Real GDP
Years Duration of Downturn
-0.2
Japan, 1992
-0.6
Norway, 1987
-2.6
Philippines, 1997
Sweden, 1991
-6.0
Hong Kong, 1997
-6.2
Colombia, 1998
-6.9
Korea, 1997
-7.7
Malaysia, 1997
-9.3
-10.1
-11.1
2.1
Average (without Latvia)
2.1
Average (with Latvia)
Finland, 1991
-12.4
Thailand, 1997
-13.5
Indonesia, 1997
-14.7
Argentina, 2001
-21.9
2.0
-24.1
Latvia, 2007
United States, 1929
-28.9
-30
-25
-20
-15
Percent
Source: IMF World Economic Outlook and Reviews.
-10
-5
0
Years
5
Projected GDP
10
IMF Projection, Apr. 2008
9
GDP Lost Due to the Crisis
(Total: $47 billion lats by 2039)
8.5
8
Billions of Real (2000) Lats
Actual GDP
8.5
IMF Projection, Feb. 2012
7
6
5
4
3
2
• Real GDP is not projected to meet its pre-crisis level until 2016.
1
• Extending IMF projections further, real GDP will catch up to its 2008-projected trend in 2039.
0
2006
2007
2008
2009
Source: IMF World Economic Outlook and Reviews.
2010
2011
2012
2013
2014
2015
2016
Argentina: GDP
500
20-Year-Trend
465
Actual
450
389
Billions of Real (1993) Pesos
400
377
350
300
293
276
274
272
250
246
234
200
150
Devaluation
100
50
0
1998
1999
2000
2001
Source: IMF International Financial Statistics.
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Recent Devaluations and GDP Loss
Date
Months
until
Trough
Devaluation
National Currency
per US Dollar
Before
Trough
GDP Decline
Size of
Devaluation
Quarters
until
Trough
Loss in
GDP
Change in GDP
3 Years after
Devaluation
Argentina
Jan-01
5
1.0
3.6
-72.2%
2
-4.9%
17.2%
Finland
Sep-92
11
4.4
5.8
-23.9%
4
-2.4%
6.8%
Georgia
Dec-98
2
1.5
2.3
-36.8%
1
-1.6%
6.5%
Iceland
Oct-08
1
91.2
135.3
-32.6%
6
-10.4%
-6.3%
Indonesia
Jul-97
12
2,446.6
13,962.5
-82.5%
5
-13.4%
-7.9%
Iran
Mar-93
2
67.3
1,635.7
-95.9%
4
-1.6%
10.6%
Italy
Aug-92
12
1,102.6
1,605.1
-31.3%
2
-1.7%
6.0%
Malaysia
Sep-97
4
2.7
4.4
-37.8%
5
-8.5%
6.7%
Mexico
Dec-94
3
3.4
6.7
-48.6%
4
-8.0%
5.9%
South Korea
Dec-97
1
1,025.6
1,701.5
-39.7%
2
-9.1%
14.0%
Sweden
Nov-92
9
6.2
8.1
-22.8%
2
-0.4%
8.9%
Thailand
Jul-97
6
25.8
53.8
-52.1%
5
-14.2%
-4.7%
Aug-92
12
0.5
0.7
-23.1%
0
0.0%
9.7%
2007Q4
24
0.49
0.48
2.1%
8
-24.1%
-21.3%
United Kingdom
Latvia
Source: IMF International Financial Statistics.
Latvia: Unemployment
35%
Unemployed, Involuntarily Part-Time, and Discouraged Workers
Unemployed
30.1%
30%
25%
21.6%
20.5%
20%
Percent
20.5%
15%
14.3%
10%
12.9%
7.5%
5%
5.3%
0%
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Note: Unemployment is measured as a percent of the active labor force. Unemployed, involuntarily part-time, and discouraged workers are
measured as a percent of the active labor force plus discouraged workers.
Source: Latvijas Statistika.
Latvia: Employment
1,250
1,148.8
Employment (Age 15-74)
1,000
986.6
Thousands of People
916.1
750
500
250
0
2002
2003
Source: Latvijas Statistika.
2004
2005
2006
2007
2008
2009
2010
2011
Latvia: General Government Gross Debt and Inflation
150
143.5
2009 Projections-baseline
2009 Projections-10 pp more deflation
133.1
2009 Projections-20 pp more deflation
2011 Projections
125
121.1
2012 Projections
Actual
110.6
107.1
109.9
102.5
97.3
Percent of GDP
100
87.1
87.2
89.2
90.0
88.6
75
74.2
50
43.5
39.9
43.0
43.5
39.1
40.3
2011
2012
46.5
42.3
49.7
45.0
39.4
32.8
25
42.4
35.4
35.5
2015
2016
17.1
9.9
0
2006
7.8
2007
2008
Source: IMF Reviews, 2009 and 2011.
2009
2010
2013
2014
Latvia: Primary General Government Balance
50%
47.8%
45%
42.7%
Expenditure
40%
37.0%
35.0%
35%
35.8%
42.1%
38.5%
36.6%
36.1%
34.0%
38.1%
36.2%
35.6%
39.6%
35.2%
36.8%
35.7%
35.7%
35.1%
34.7%
34.5%
34.1%
34.2%
33.9%
-1.0%
-0.5%
-0.7%
2013
2014
2015
30%
Revenue
Percent of GDP
25%
20%
15%
10%
5%
0.6%
0%
-5%
-10%
-1.1%
-1.2%
-0.5%
-2.3%
-3.3%
-7.0%
Balance
-5.3%
-8.1%
-15%
2004
2005
2006
2007
2008
Source: IMF Fiscal Monitor Database and 2012 Latvia Review.
2009
2010
2011
2012
Latvia Official Interest Rates (Lending)
15%
12.2%
10%
5.5%
5%
0%
7.5%
7.5%
Nominal
5.0%
4.6%
3.9%
2.4%
2.0%
Real
-0.1%
-2.6%
-5%
-10%
Jan-02
Source: Eurostat
-8.8%
Jan-03
Jan-04
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
Jan-11
Jan-12
Trade in Goods and Services
Source: IMF Review
Trade in Goods and Services
80
71.9
Imports
65.8 65.5
67.4
67.8
65.9
65.4
65.0
62.0 61.8
59.2 58.5
60
52.3
46.6 47.2
44.2
40
47.3 46.5
47.6
43.4
40.0
Percent of GDP
Exports
40.6
45.0
42.5
40.7
42.8
41.3
59.1
58.0 57.1
57.9
54.7
43.8
49.6
49.1
59.8 59.1 59.2
51.9
55.9 55.6
57.0
51.4
45.6 45.8
40.3 40.0 40.2
20
1.4
-0.4
0.5
0
-4.2
-20
-18.5 -19.0
Balance
-18.5
-24.0
-25.9
-24.3
-15.7
-13.4 -14.1
-1.0
-0.5
-2.1 -1.5 -2.2 -2.7
-2.1
-6.2
-12.0
-22.8 -22.5
-40
2006
Source: Central Bank.
2007
2008
2009
2010
2011
REER (CPI Method, Against Major Trading Partners)
135
129.6
130
125
122.0
119.7
1/2006=100
120
118.5
118.4
119.3
117.1
115
116.8
110
105
100
95
2006
Source: Central Bank.
2007
2008
2009
2010
2011
Consumer Price Index, Year-over-Year Change
20%
17.9%
Yaer-over-Year Changae
15%
10%
7.5%
5.0%
5%
5.6%
3.6%
0%
-5%
Jan-06
Jul-06
Jan-07
Jul-07
Source: IMF International Financial Statistics.
Jan-08
Jul-08
Jan-09
Jul-09
-4.2%
Jan-10
Jul-10
Jan-11
Jul-11
Jan-12
Capital and Financial Accounts
3
Capital Account
Changes in Reserves
Direct Investment
Portfolio Inv. & Derivatives
2
Other Investment
TOTAL
Billions of USD
1
0
-1
• Direct investment has been positive for 7 quarters.
• So lagging Capital/Financial Accounts is due to
capital flight.
-2
Capital and Financial Account Balance:
-3
0.7
0.9 1.2 1.5 1.6 1.7
2006
2.0 1.4 1.6 1.4 1.3 0.8 -0.1 -1.1 -0.6 -0.7 -0.5 -0.3 -0.1
2007
Source: IMF International Financial Statistics.
2008
2009
2010
0.0 -0.1 0.2
0.5 0.1
2011
Primary Gen. Gov’t. Balance – Other Countries
5
3.9
2.7
3.4
2.5
Germany
1.9
1.0
Percent of GDP
0
0.2
-0.1
-0.2
-0.3
Euro-15
-1.3
-1.5
-2.5
-2.8
-3.1
-3.8
-5
United States
-7.5
-6.7
-6.7
-10
1995
Source: Eurostat.
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
-9.8
2009
2010
2011
2012