Latvia’s internal adjustment and lessons for Europe Ilmārs Rimšēvičs Governor of the Bank of Latvia May 24, 2012
Presentation outline Setting the scene: some
developments before the crisis How Latvia came through the
recent crisis? What are the lessons learned and
implications for Europe?
Latvia’s economy was on a fast track during 2004-2007
However, if driving fast, one has to make sure that the pace is sustainable
Latvia has lived through a boom-bust cycle: severe recession followed years of unsustainable double digit growth Real GDP growth (%) 15,0
10,0
7,2
7,6
8,9
10,1
11,2 9,6 5,5
5,0
0,0
-0,3 -3,3
-5,0
-10,0
-15,0
2011
2010
2008
2007
2006
2005
2004
2003
2002
F – forecast
2009
-17,7
-20,0
Over the past boom Latvia was running enormous underlying fiscal gap General Government budget balance (ESA’95), % of GDP 0 -2
-0,4
-4
-0,5
-0,4
-4,2
-9,8
-8,2
-3,3
-6
-5,5
-6,4
-8 -10
-8,5
-3,5
-1,9 -0,8
-2,2
-2,7
-5,6
-7,5
-12 -14
-14,1
-16 -18 -20
2005
2006
2007
Consolidation effort Fiscal gap Source: Eurostat, F - BoL staff estimation
2008
-18,6 2009
2010
2011
2012F
Actual (targeted) balance Structural budget balance
To be or not to be, was the question in 2008
Many suggested devaluation as a way out of the crisis. Why devaluation was not an appropriate solution?
Latvia lost market access already at the outset of the recent crisis and the fiscal gap had to be closed quickly by massive consolidation Breakdown of budget consolidation measures, % of GDP
Source: Ministry of Finance; Bank of Latvia staff calculations
How Latvia managed to accomplish what initially was claimed being impossible?
Speed
A speedy consolidation can be compared to a timely pruning an apple-tree – you earlier and richer harvest
How Latvia managed to accomplish what initially was claimed being impossible?
Ownership
How Latvia managed to accomplish what initially was claimed being impossible?
Commitment
How Latvia managed to accomplish what initially was claimed being impossible?
Solidarity
Latvia has regained its competitiveness: wage-productivity gap has been closed Real hourly wage and labour productivity per hour (seasonally adjusted), 2005 Q1 = 100 150 140 130
120 110 100 90
Labour productivity Source: CSB; Bank of Latvia staff calculations
Real wage
Q3
2011 Q1
Q3
2010 Q1
Q3
2009 Q1
Q3
2008 Q1
Q3
2007 Q1
Q3
2006 Q1
Q3
2005 Q1
Q3
2004 Q1
80
Despite loud ex-ante warnings of protracted recession risks under internal adjustment scenario, a strong “V” shaped recovery followed Real GDP growth, % 15
10
5,5
5 0 -5 -10 -15 -20
2006 Source: CSB; F – Bank of Latvia forecast
2007
2008
2009
2010
2011
Source: Eurostat
Estonia Lithuania Latvia Poland Sweden Slovakia Austria Germany Finland Romania Malta Belgium Bulgaria Czech Republic France Hungary Netherlands Luxembourg Denmark United Kingdom Ireland Spain Cyprus Italy Slovenia Portugal Greece
Indeed, Latvia and other Baltic countries have clearly benefited from getting through the internal adjustment at an early stage GDP growth in 2011, % y-o-y
8,0
6,0
4,0
2,0
0,0
-2,0
-4,0
-6,0
-8,0
Despite problems in many European countries, GDP growth even accelerated in Latvia (the fastest growing economy in Europe at the beginning of 2012) GDP growth in Latvia, % y-o-y 8,0
+6.8%
7,0 6,0 5,0 4,0
3,0 2,0 1,0 0,0
2011 I Source: CSB;
II
III
IV
2012 I
Exports already well above the pre-crisis peak level; Latvia ranges among the export leaders in Europe Merchandise export revenue growth (2011 over 2009, %) 90 80
85 72 71 71
70 60
55 53
50
44 44 43 43 42
40 30
38 35 34 34 33 33 32 31 30 29 29
26 23 21
20
10
10
2
Estonia Bulgaria Latvia Lithuania Romania Greece Czech Republic Malta Sweden Cyprus Slovakia Poland Hungary United Kingdom Portugal Slovenia Netherlands Germany Spain Austria Belgium Italy Finland France Denmark Ireland Luxembourg
0
Source: Eurostat
Latvia has managed to stabilize debt at moderate level and to avoid initially expected debt explosion General government gross debt, % of GDP 50
44,7
45 40
42,6
43,4
2011
2012F
36,7
35 30 25 20
19,8
15 10 5 0
2008 Source: Eurostat, F -Bank of Latvia forecast
2009
2010
Lessons
What are the lessons learned?
This crisis has shown that
MORE is LESS and LESS is MORE
"One doesn't die from debt, one dies from not being able to borrow" General government gross debt, % of GDP 200
2005 150
Rogoff & Reinhart debt thresholds for advanced and emerging economies
100
50
Greece* Ireland Italy Portugal US Belgium France UK EU27 Germany Spain Hungary Austria Malta Cyprus Netherlands Poland Slovenia Finland Slovakia Latvia Denmark Czech Rep. Lithuania Romania Sweden Luxembourg Bulgaria Estonia
0
Source: AMECO
"One doesn't die from debt, one dies from not being able to borrow" General government gross debt, % of GDP 200
2010 150
Rogoff & Reinhart debt thresholds for advanced and emerging economies
100
50
Greece* Ireland Italy Portugal US Belgium France UK EU27 Germany Spain Hungary Austria Malta Cyprus Netherlands Poland Slovenia Finland Slovakia Latvia Denmark Czech Rep. Lithuania Romania Sweden Luxembourg Bulgaria Estonia
0
Source: AMECO
"One doesn't die from debt, one dies from not being able to borrow" General government gross debt, % of GDP 200
2013 150
Rogoff & Reinhart debt thresholds for advanced and emerging economies
100
50
Greece* Ireland Italy Portugal US Belgium France UK EU27 Germany Spain Hungary Austria Malta Cyprus Netherlands Poland Slovenia Finland Slovakia Latvia Denmark Czech Rep. Lithuania Romania Sweden Luxembourg Bulgaria Estonia
0
Source: AMECO
Most Euro area countries suffering from high debt are still running large budget deficits Euro area fiscal indicators, % of GDP General government gross debt Greece* Ireland Italy Portugal Belgium France EU27 Germany Spain Austria Malta Cyprus Netherlands Slovenia Finland Slovakia Luxembourg Estonia Source: AMECO
2000 104.4 37.5 108.5 48.5 107.8 57.4 61.9 60.2 59.3 66.2 55.0 59.6 53.8 26.3 43.8 50.3 6.2 5.1
2005 101.2 27.2 105.4 62.8 92.0 66.7 62.9 68.6 43.0 64.2 69.7 69.4 51.8 26.7 41.7 34.2 6.1 4.6
2010 144.9 94.9 118.4 93.3 96.2 82.3 80.3 83.2 61.0 71.8 69.0 61.5 62.9 38.8 48.3 41.0 19.1 6.7
2013 198.5 121.1 118.7 112.1 100.3 91.7 84.9 79.9 78.0 73.7 71.5 70.9 66.0 54.6 53.5 51.1 20.3 6.1
General government budget deficit 2000 -3.8 4.7 -0.9 -2.9 -0.1 -1.5 0.5 1.1 -1.0 -1.8 -5.8 -2.3 2.0 -3.7 6.8 -12.3 6.0 -0.2
2005 -5.6 1.7 -4.5 -5.9 -2.8 -3.0 -2.5 -3.3 1.3 -1.8 -2.9 -2.4 -0.3 -1.5 2.5 -2.8 0.0 1.6
2010 -10.8 -31.3 -4.5 -9.8 -4.2 -7.1 -6.6 -4.3 -9.3 -4.4 -3.6 -5.3 -5.0 -5.8 -2.8 -7.7 -1.1 0.3
2013 -6.8 -7.8 -1.1 -3.2 -4.6 -5.1 -3.2 -0.7 -5.3 -2.9 -3.6 -4.7 -2.7 -5.7 -0.8 -5.2 -0.9 -0.8
Latvia’s example shows that Speed, Ownership,
Commitment and Solidarity works Real GDP growth, % y-o-y 10
Talks about consolidation and inability to deliver
5
2012 I
IV
III
II
2011 I
IV
III
II
2010 I
IV
III
II
2009 I
IV
III
II
2008 I
0
-5
-10
-15
-20 Source: CSB
First large consolidation implemented by Dombrovskis government