Abstract
This Selected Issues paper and Statistical Appendix highlights that the strong economic expansion in Latvia that began in 1996 and accelerated in the following year reversed sharply in mid-1998 as a result of both external and domestic shocks. The initial expansion was fueled by accelerating domestic private and public demand, as well as growing demand for Latvia’s output in both new, mostly European Union, and the traditional Commonwealth of Independent States markets. Domestic consumer and investment demand were supported by growing real incomes and tax revenues and pent-up demand carried over from previous years.
II. Effects of the 1998 Russian Crisis on the Latvian Economy
A. Background
9. This chapter traces the effects of the Russian economic and financial crisis on different sectors of the Latvian economy. The effective devaluation of the ruble on August 17, 1998 and the subsequent government-imposed debt repayment moratorium considerably set back the Russian economy and thus destabilized the region as a whole. The Russian crisis has impacted the Latvian economy through both direct and indirect channels, and as a result annual GDP growth slowed considerably to 3.6 percent in 1998 from 8.6 percent one year earlier. Latvian growth projections for 1999 and 2000 have been revised downwards, as economic activity is only expected to pick up slowly from its current contraction. The effect of the Russian crisis on the Baltic region as a whole has been larger than most would have originally anticipated, in particular as these economies have been fairly successful in diversifying their trade since the dissolution of the Soviet Union. In the wake of the crisis, it has become evident that Latvia’s ties to Russia extend beyond traditional trade channels, and that these have transmitted the slowdown in Russia to most sectors of the Latvian economy.
B. Links Between the Latvian and Russian Economies
10. Foreign trade. Exports of goods and services accounted for roughly 52 percent of Latvia’s GDP in 1997. Since the dissolution of the Soviet Union, Latvia has significantly increased the share of its exports going to the EU (see Table 1), However, the countries of the BRO have remained important trade partners, and in 1997 still accounted for 41 percent of Latvia’s exports and 32 percent of Latvia’s imports (Table 2). In other words, Latvian exports to the BRO accounted for roughly 21 percent of GDP in 1997. To the extent that there are linkages from export industries to other sectors of the economy, the contraction in exports to the BRO that resulted from the economic and financial crisis in Russia has spread throughout the economy.
Latvia: Distribution of Exports by Destination
(In percent of total exports)
Latvia: Distribution of Exports by Destination
(In percent of total exports)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | ||
|---|---|---|---|---|---|---|---|
| EU | 32.1 | 39.3 | 44.2 | 44.1 | 48.9 | 56.6 | |
| BRO | 51.8 | 50.8 | 46.8 | 47.5 | 41.1 | 28.9 | |
| Russia | 28.6 | 28.1 | 24.9 | 23.2 | 20.9 | 12.1 | |
| Estonia and Lithuania | 6.0 | 8.2 | 8.8 | 11.2 | 11.7 | 12.0 | |
| Other BRO countries | 17.3 | 14.5 | 13.1 | 13.1 | 8.5 | 4.9 | |
| Rest of the world | 16.1 | 9.9 | 9.0 | 8.4 | 10.0 | 14.5 | |
Latvia: Distribution of Exports by Destination
(In percent of total exports)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | ||
|---|---|---|---|---|---|---|---|
| EU | 32.1 | 39.3 | 44.2 | 44.1 | 48.9 | 56.6 | |
| BRO | 51.8 | 50.8 | 46.8 | 47.5 | 41.1 | 28.9 | |
| Russia | 28.6 | 28.1 | 24.9 | 23.2 | 20.9 | 12.1 | |
| Estonia and Lithuania | 6.0 | 8.2 | 8.8 | 11.2 | 11.7 | 12.0 | |
| Other BRO countries | 17.3 | 14.5 | 13.1 | 13.1 | 8.5 | 4.9 | |
| Rest of the world | 16.1 | 9.9 | 9.0 | 8.4 | 10.0 | 14.5 | |
Latvia: Distribution of Imports by Origin
(In percent of total imports)
Latvia: Distribution of Imports by Origin
(In percent of total imports)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | ||
|---|---|---|---|---|---|---|---|
| EU | 27.0 | 40.7 | 49.9 | 49.1 | 53.2 | 55.3 | |
| BRO | 50.8 | 39.9 | 38.7 | 37.6 | 32.1 | 27.2 | |
| Russia | 28.1 | 23.5 | 21.6 | 20.3 | 15.6 | 11.8 | |
| Estonia and Lithuania | 13.3 | 9.5 | 10.6 | 12.0 | 12.4 | 12.9 | |
| Other BRO countries | 9.4 | 6.8 | 6.5 | 5.3 | 4.1 | 2.5 | |
| Rest of the world | 22.2 | 19.5 | 11.4 | 13.3 | 14.8 | 17.5 | |
Latvia: Distribution of Imports by Origin
(In percent of total imports)
| 1993 | 1994 | 1995 | 1996 | 1997 | 1998 | ||
|---|---|---|---|---|---|---|---|
| EU | 27.0 | 40.7 | 49.9 | 49.1 | 53.2 | 55.3 | |
| BRO | 50.8 | 39.9 | 38.7 | 37.6 | 32.1 | 27.2 | |
| Russia | 28.1 | 23.5 | 21.6 | 20.3 | 15.6 | 11.8 | |
| Estonia and Lithuania | 13.3 | 9.5 | 10.6 | 12.0 | 12.4 | 12.9 | |
| Other BRO countries | 9.4 | 6.8 | 6.5 | 5.3 | 4.1 | 2.5 | |
| Rest of the world | 22.2 | 19.5 | 11.4 | 13.3 | 14.8 | 17.5 | |
11. Transport. The Latvian economy, in particular its transport sector, benefits from a favorable geographical location that allows it to act as a conduit for trade between Europe and the CIS. Latvia has ten ports located on its 500 kilometer Baltic Sea coast. The three largest ports - Riga, Ventspils and Liepaja - are primarily engaged in reloading of transit freight, which represents the majority of Latvia’s cargo transportation. The seven smaller ports handle local freight. Transit trade heading into the CIS primarily consists of consumer or investment goods (e.g. machinery), while transit trade coming from the CIS consist of raw materials, notably Russian oil and oil products (13 percent of Russia’s oil exports are transshipped by Latvia’s Ventspils terminal). The performance of the transport sector is closely tied to demand for imports from Russia as well as Russia’s exports to Europe and beyond.
12. Banking and finance. The Latvian banking sector is both directly and indirectly tied to developments in Russia. Latvian banks were exposed to risk through loans made to companies engaged in business with Russia as well as through holdings of Russian government securities. They were also vulnerable to rapid withdrawal of funds held by Russian (or Russia-focused) firms in the event the financial situation of these firms worsened. To the extent that Latvian firms were reliant on exporting to Russia and other CIS members, the collapse of these markets increases the risk involved in lending to these firms, leading to an increase in the global perception of Latvian risk and higher real interest rates. The stock market was also subject to pressure when exporting prospects for firms listed on the exchange were downgraded.
C. Latvia’s Economic Performance Following the Russian Crisis
13. Economic growth in Latvia was robust in 1997, with real GDP expanding by 8.6 percent (see Table 3). During 1998, this rapid pace of economic activity began to abate from the second quarter onward, indicating that a weakening Russian economy may have begun affecting Latvia well before the mid-August 1998 financial crisis. Latvia’s GDP contracted by 1.9 percent in the fourth quarter of 1998 compared to one year earlier, and by another 2.3 percent in the first quarter of 1999. The main areas of economic activity to slow have been agriculture, fishing, manufacturing, and transport, which have exported significant shares of their output to the CIS. Below, we consider first the aggregate performance of Latvian trade during 1998 and 1999, and then look more closely at sectoral developments.
Latvia: Real GDP Growth by Activity
(Annual rate of growth, percent)
Latvia: Real GDP Growth by Activity
(Annual rate of growth, percent)
| 1998 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | Q1 | Q2 | Q3 | Q4 | Q1 | ||
| GDP | 3.3 | 8.6 | 3.6 | 8.9 | 5.6 | 2.1 | –1.9 | –2.3 | |
| Agriculture | –5.3 | 4.9 | –4.8 | –1.3 | –4.9 | –7.8 | –1.5 | –1.4 | |
| Fishing | –5.7 | –24.7 | –1.3 | 20.9 | 15.6 | –15.9 | –32.4 | 6.1 | |
| Industry | 2.9 | 13.7 | 3.0 | 16.6 | 9.5 | 0.4 | –11.1 | –14.5 | |
| Mining | 2.4 | 8.6 | 5.8 | –4.9 | 44.0 | –10.0 | 5.7 | –34.6 | |
| Manufacturing | 4.1 | 17.1 | 3.4 | 21.0 | 12.1 | –0.2 | –15.3 | –17.3 | |
| Electricity, gas and water | –1.9 | –0.7 | 1.1 | –1.0 | –6.8 | 5.4 | 5.8 | –0.1 | |
| Construction | 5.3 | 8.2 | 11.1 | 8.0 | 6.1 | 21.1 | 8.0 | 10.0 | |
| Services | 5.0 | 7.5 | 4.7 | 6.4 | 5.7 | 3.6 | 2.9 | 3.3 | |
| Wholesale and retail trade | 0.8 | 13.9 | 20.4 | 21.1 | 24.4 | 22.8 | 13.5 | 11.4 | |
| Transport, storage and | 13.6 | 7.4 | –1.3 | 3.1 | –1.4 | –5.3 | –1.5 | –3.5 | |
| Communications | |||||||||
| Financial intermediation | –8.0 | 4.0 | –0.8 | 8.7 | 2.5 | –6.7 | –6.3 | –1.1 | |
| Real estate and business | 6.8 | 9.3 | 3.2 | 3.0 | 2.1 | 4.2 | 3.5 | 18.8 | |
| Services | |||||||||
Latvia: Real GDP Growth by Activity
(Annual rate of growth, percent)
| 1998 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | Q1 | Q2 | Q3 | Q4 | Q1 | ||
| GDP | 3.3 | 8.6 | 3.6 | 8.9 | 5.6 | 2.1 | –1.9 | –2.3 | |
| Agriculture | –5.3 | 4.9 | –4.8 | –1.3 | –4.9 | –7.8 | –1.5 | –1.4 | |
| Fishing | –5.7 | –24.7 | –1.3 | 20.9 | 15.6 | –15.9 | –32.4 | 6.1 | |
| Industry | 2.9 | 13.7 | 3.0 | 16.6 | 9.5 | 0.4 | –11.1 | –14.5 | |
| Mining | 2.4 | 8.6 | 5.8 | –4.9 | 44.0 | –10.0 | 5.7 | –34.6 | |
| Manufacturing | 4.1 | 17.1 | 3.4 | 21.0 | 12.1 | –0.2 | –15.3 | –17.3 | |
| Electricity, gas and water | –1.9 | –0.7 | 1.1 | –1.0 | –6.8 | 5.4 | 5.8 | –0.1 | |
| Construction | 5.3 | 8.2 | 11.1 | 8.0 | 6.1 | 21.1 | 8.0 | 10.0 | |
| Services | 5.0 | 7.5 | 4.7 | 6.4 | 5.7 | 3.6 | 2.9 | 3.3 | |
| Wholesale and retail trade | 0.8 | 13.9 | 20.4 | 21.1 | 24.4 | 22.8 | 13.5 | 11.4 | |
| Transport, storage and | 13.6 | 7.4 | –1.3 | 3.1 | –1.4 | –5.3 | –1.5 | –3.5 | |
| Communications | |||||||||
| Financial intermediation | –8.0 | 4.0 | –0.8 | 8.7 | 2.5 | –6.7 | –6.3 | –1.1 | |
| Real estate and business | 6.8 | 9.3 | 3.2 | 3.0 | 2.1 | 4.2 | 3.5 | 18.8 | |
| Services | |||||||||
14. Foreign trade. Merchandise export growth slowed considerably between 1997 and 1998, from 22 percent to 10 percent per annum in lats terms. This slowdown was primarily due to a contraction in CIS markets, to which exports fell by 29 percent. It is worth noting that this decline was dominated by a 41 percent drop in exports to Russia, with Latvian exports to other CIS countries contracting by only 2 percent over the year and actually growing in the fourth quarter (Table 4). Exports to non-CIS countries remained buoyant, most notably increasing by 27 percent to the EU. In the first quarter of 1999, total exports were down 13 percent year-on-year, while exports to the CIS remained more than 60 percent lower than one year earlier.
Latvia: Growth of Merchandise Exports
(In lats terms, annual rate in percent)
Latvia: Growth of Merchandise Exports
(In lats terms, annual rate in percent)
| 1998 | ||||||
|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | 1998 | ||
| TOTAL | 29.5 | 17.7 | 3.9 | –6.8 | 10.0 | |
| EU | 32.9 | 23.7 | 24.5 | 29.0 | 27.3 | |
| CIS | 12.2 | –9.1 | –44.7 | –62.6 | –29.4 | |
| Russia | 13.2 | –10.7 | –55.7 | –86.9 | –40.6 | |
| Other CIS | 9.8 | –5.9 | –15.5 | 5.3 | –2.0 | |
| Rest of the world | 46.4 | 37.1 | 24.5 | –1.5 | 24.6 | |
Latvia: Growth of Merchandise Exports
(In lats terms, annual rate in percent)
| 1998 | ||||||
|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | 1998 | ||
| TOTAL | 29.5 | 17.7 | 3.9 | –6.8 | 10.0 | |
| EU | 32.9 | 23.7 | 24.5 | 29.0 | 27.3 | |
| CIS | 12.2 | –9.1 | –44.7 | –62.6 | –29.4 | |
| Russia | 13.2 | –10.7 | –55.7 | –86.9 | –40.6 | |
| Other CIS | 9.8 | –5.9 | –15.5 | 5.3 | –2.0 | |
| Rest of the world | 46.4 | 37.1 | 24.5 | –1.5 | 24.6 | |
15. Import growth remained high in 1998 at 19 percent, but eased somewhat from its 24 percent growth rate in 1997 (Table 5). Given the significant depreciation of the ruble and of other CIS currencies in late 1998, one would have expected Latvian imports from the CIS to increase significantly post-August 1998. However, this has not been the case. In fact, already from the second quarter onwards Latvian imports from Russia began to decline on a year-on-year basis, culminating in a contraction of 21 percent in the fourth quarter and a more than 40 percent drop in the first quarter of 1999. One explanation for this is that traditional business relations may have been upset by the financial turmoil that hit Russia in August. As bank accounts were frozen, Russian firms may have found it more difficult to execute normal business transactions. Another possible reason is that the crisis has driven trade into the unrecorded sector, thus lowering the official tally of imports. A third possibility is that importers have sought other sources of supply in markets with less uncertainty.
Latvia: Growth of Merchandise Imports
(In lats terms, annual rate in percent)
Latvia: Growth of Merchandise Imports
(In lats terms, annual rate in percent)
| 1998 | ||||||
|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | 1998 | ||
| TOTAL | 33.0 | 25.2 | 21.0 | 2.4 | 18.9 | |
| EU | 45.4 | 26.7 | 23.7 | 6.8 | 23.6 | |
| CIS | 8.0 | 1.5 | –8.4 | –12.3 | –3.6 | |
| Russia | 2.0 | –7.3 | –12.4 | –20.5 | –10.4 | |
| Other CIS | 34.2 | 29.7 | 4.6 | 23.8 | 22.3 | |
| Rest of the world | 31.4 | 37.8 | 36.1 | 4.9 | 26.1 | |
Latvia: Growth of Merchandise Imports
(In lats terms, annual rate in percent)
| 1998 | ||||||
|---|---|---|---|---|---|---|
| Q1 | Q2 | Q3 | Q4 | 1998 | ||
| TOTAL | 33.0 | 25.2 | 21.0 | 2.4 | 18.9 | |
| EU | 45.4 | 26.7 | 23.7 | 6.8 | 23.6 | |
| CIS | 8.0 | 1.5 | –8.4 | –12.3 | –3.6 | |
| Russia | 2.0 | –7.3 | –12.4 | –20.5 | –10.4 | |
| Other CIS | 34.2 | 29.7 | 4.6 | 23.8 | 22.3 | |
| Rest of the world | 31.4 | 37.8 | 36.1 | 4.9 | 26.1 | |
16. Agriculture and fishing. The importance of agriculture and fishing has declined considerably over the course of the transition period, so that by 1997 these sectors accounted for only 8.2 percent of GDP. Nevertheless, products originating in these sectors accounted for nearly 15 percent of total merchandise exports in 19971, primarily focused on Russia and other CIS markets.2 Both sectors performed poorly in 1998, contracting by 5 percent and 1 percent, respectively.
17. Manufacturing. Real output increased by a robust 17 percent in 1997 over 1996, and output accounted for 19 percent of GDP. During the course of 1998, growth slowed considerably, from 21 percent in the first quarter, to a 15 percent contraction in the fourth quarter (annual growth rates), for an annual increase of 3.4 percent The contraction in manufacturing accelerated during the first quarter of 1999 to an annual rate of 17 percent. This can be linked to the slowdown in demand from Russia and other CIS markets, as discussed in greater detail below. Table 6 summarizes the performance of manufacturing exports by sector and destination.
Latvia: Growth of Selected Manufacturing Exports, 1997–98
(In percent, in lats terms)
Latvia: Growth of Selected Manufacturing Exports, 1997–98
(In percent, in lats terms)
| EU | Russia | Other CIS |
Rest of the world |
Total | Share in total exports, 1997 |
Russian share in each category, 1997 |
|
|---|---|---|---|---|---|---|---|
| Wood and wood products | 24 | –7 | 8 | 30 | 24 | 30 | 1 |
| Textiles and textile articles | 33 | –28 | –34 | 14 | 14 | 16 | 16 |
| Prepared foodstuffs | –9 | –51 | –36 | 40 | –27 | 10 | 56 |
| Machinery and mechanical | 1 | –34 | –13 | –10 | –17 | 9 | 40 |
| appliances | |||||||
| Base metals | 56 | –87 | 123 | 30 | 26 | 9 | 12 |
| Chemical and allied industry | 15 | –42 | –6 | 23 | –2 | 7 | 30 |
| products | |||||||
| Pulp of wood, paper and | 107 | 20 | 6 | 29 | 25 | 3 | 30 |
| paperboard | |||||||
| Transport vehicles | –23 | –35 | –1 | 23 | –13 | 2 | 36 |
| Plastics and rubbers | 122 | 5 | 31 | 28 | 46 | 1 | 25 |
| Miscellaneous manufactured | 41 | –67 | 74 | 41 | 25 | 4 | 16 |
| items | |||||||
| All merchandise exports | 27 | –41 | –2 | 25 | 10 | 100 | 21 |
Latvia: Growth of Selected Manufacturing Exports, 1997–98
(In percent, in lats terms)
| EU | Russia | Other CIS |
Rest of the world |
Total | Share in total exports, 1997 |
Russian share in each category, 1997 |
|
|---|---|---|---|---|---|---|---|
| Wood and wood products | 24 | –7 | 8 | 30 | 24 | 30 | 1 |
| Textiles and textile articles | 33 | –28 | –34 | 14 | 14 | 16 | 16 |
| Prepared foodstuffs | –9 | –51 | –36 | 40 | –27 | 10 | 56 |
| Machinery and mechanical | 1 | –34 | –13 | –10 | –17 | 9 | 40 |
| appliances | |||||||
| Base metals | 56 | –87 | 123 | 30 | 26 | 9 | 12 |
| Chemical and allied industry | 15 | –42 | –6 | 23 | –2 | 7 | 30 |
| products | |||||||
| Pulp of wood, paper and | 107 | 20 | 6 | 29 | 25 | 3 | 30 |
| paperboard | |||||||
| Transport vehicles | –23 | –35 | –1 | 23 | –13 | 2 | 36 |
| Plastics and rubbers | 122 | 5 | 31 | 28 | 46 | 1 | 25 |
| Miscellaneous manufactured | 41 | –67 | 74 | 41 | 25 | 4 | 16 |
| items | |||||||
| All merchandise exports | 27 | –41 | –2 | 25 | 10 | 100 | 21 |
Food products and beverages. This is the largest sector within manufacturing, accounting for 39 percent of total manufacturing output in 1997. Prepared foodstuffs were also the third largest item overall in merchandise exports, with a share of 10 percent. The sector is heavily dependent on exports to the CIS, which accounted for roughly three-quarters of exports in 1997, including a 56 percent share for Russia. In 1998, total exports in this category fell by 27 percent, including a 47 percent drop in exports to the CIS (51 percent drop in exports to Russia). Exports to the EU fell as well, by 9 percent. Imports of food products increased by 22 percent overall in 1998, with growth coming both in imports from the EU (17 percent growth) and imports from Russia (47 percent growth). These developments indicate that Latvian food exporters may have lost competitiveness.
Wood and wood products. Latvia is richly endowed with woodlands and enjoys a 45 percent forest coverage. In 1997, the wood industry accounted for 19 percent of total manufacturing output. It is a highly export-oriented sector, with 90 percent of output being exported in 1997, representing 30 percent of Latvia’s total merchandise exports.3 Roughly 90 percent of wood sector exports were destined for the EU, and less than 1 percent to Russia. Therefore the downturn in Russia only had a minor impact on exports in this sector. In fact, total exports in this category expanded by 24 percent in 1998. Latvia’s wood sector shows good potential to increase its production of higher value-added goods. Furniture exports have increased rapidly in recent years, growing at an average annual rate of 20 percent since 1994.
Textiles. Apparel and textiles accounted for 12 percent of manufacturing production in 1997. Roughly 68 percent of its output was exported in 1997, thus making the textile sector Latvia’s second largest export category with 16 percent of total merchandise exports in 1997, of which 60 percent went to the EU and 26 percent to the CIS (16 percent to Russia). During 1998, textile exports to the CIS fell by 30 percent (28 percent decline to Russia), while exports to the EU rose by 14 percent. Total exports in this category grew 14 percent in 1998.
18. Transport sector. Output in the transport, storage and communications sector accounted for 15 percent of GDP in 1997. Turnover of cargo in Latvian ports grew from 45 to 50 million tons during 1997, and output rose by 7.4 percent (Table 7). In 1998, despite a 4 percent increase in cargo turnover, output contracted by roughly 1 percent. This presumably reflects the change in the composition of goods that pass as cargo through Latvian ports. The value of Russian imports transiting through Latvia, which tend to be higher-end consumer goods and thus command higher transport, processing and storage fees, dropped off considerably after August 1998.4 Although total merchandise exports from Russia fell during 1998 and early 1999, oil and other raw material exports have increased.5 The transport sector continued contracting in the first quarter of 1999, at a rate of 3.5 percent. Transport service receipts have been declining in recent years and did not contract dramatically in 1998 (Table 7). This trend can partly be explained by the fact that an increasing number of Latvian ships have changed their registration from Latvian flags to cheaper “flags of convenience”.
Latvia: Cargoes Loaded and Unloaded at Latvia’s Ports
(In millions of tons unless otherwise noted)
Latvia: Cargoes Loaded and Unloaded at Latvia’s Ports
(In millions of tons unless otherwise noted)
| 1998 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | Q1 | Q2 | Q3 | Q4 | Q1 | ||
| Cargoes loaded | 41.9 | 46.7 | 48.6 | 11.9 | 11.4 | 12.2 | 13.0 | 11.8 | |
| Dry cargoes | 12.4 | 16.6 | 19.7 | 4.9 | 5.3 | 4.8 | 4.6 | 4.4 | |
| Liquid cargoes | 29.5 | 30.0 | 28.9 | 7.0 | 6.1 | 7.4 | 8.4 | 7.4 | |
| Cargoes unloaded | 3.1 | 4.0 | 3.7 | 1.3 | 1.2 | 0.8 | 0.5 | 0.6 | |
| Total cargo turnover | 45.0 | 50.7 | 52.3 | 13.2 | 12.6 | 13.0 | 13.5 | 12.4 | |
| Transport service receipts ($US mn) | 533 | 515 | 488 | 122 | 117 | 101 | 149 | n.a. | |
Latvia: Cargoes Loaded and Unloaded at Latvia’s Ports
(In millions of tons unless otherwise noted)
| 1998 | 1999 | ||||||||
|---|---|---|---|---|---|---|---|---|---|
| 1996 | 1997 | 1998 | Q1 | Q2 | Q3 | Q4 | Q1 | ||
| Cargoes loaded | 41.9 | 46.7 | 48.6 | 11.9 | 11.4 | 12.2 | 13.0 | 11.8 | |
| Dry cargoes | 12.4 | 16.6 | 19.7 | 4.9 | 5.3 | 4.8 | 4.6 | 4.4 | |
| Liquid cargoes | 29.5 | 30.0 | 28.9 | 7.0 | 6.1 | 7.4 | 8.4 | 7.4 | |
| Cargoes unloaded | 3.1 | 4.0 | 3.7 | 1.3 | 1.2 | 0.8 | 0.5 | 0.6 | |
| Total cargo turnover | 45.0 | 50.7 | 52.3 | 13.2 | 12.6 | 13.0 | 13.5 | 12.4 | |
| Transport service receipts ($US mn) | 533 | 515 | 488 | 122 | 117 | 101 | 149 | n.a. | |
19. Banking and financial sector. While banking indicators do not suggest that there has been a major deterioration in loan portfolios since the onset of the crisis, the banking system has become significantly more fragile. The Riga Stock Exchange Price Index (RICI) had peaked at nearly 1000 in mid-October 1997, but as a result of global market sentiment turning against emerging markets, it dropped more or less continuously over the following year, reaching roughly 400 by the end of July 1998. The devaluation of the ruble did not have any immediate dramatic effect on the Latvian stock market, but the index continued to fall, bottoming out at 150 in later October 1998. Since then the stock market has remained depressed, and had only risen to 165 by the end of June. Turnover has fallen considerably and averaged roughly $221,000 per day during the first half of the year, with daily turnover volumes as low as $50,000. Market capitalization only represented 11 percent of GDP at the end of the second quarter.
20. Construction and retail trade. When the incomes of those directly involved with trade to Russia and the CIS declined, their reduced spending power in turn acted as a brake on growth in sectors without strong direct ties to the CIS. These spillover effects appear to have set in by the fourth quarter of 1998. In construction, the annualized real growth rate slowed considerably in the fourth quarter, although it was still 8 percent and recovered to 10 percent in the first quarter of 1999 (Table 3). The pace of activity in retail and wholesale trade, where growth was running at over 20 percent per year in the first three quarters of 1998, fell to 14 percent in the fourth quarter and 11 percent in the first quarter of 1999. Financial intermediation already began contracting in the third quarter, possibly reflecting the immediate effect of the collapse in CIS export markets.
D. Spillover Effects on Wages and Employment
21. In the initial years of transition, employment in Latvia contracted by more than one-third as state enterprises were privatized and restructured.6 At the end of 1996, employment started growing, reaching 1.05 million by the end of the third quarter of 1998. The immediate effect of the Russian crisis on Latvian employment was small, resulting in a one percent reduction (annualized basis) during the fourth quarter. Unemployment rose from 7.4 percent in August to 9.2 percent in December 1998. The increase in the number of unemployed between September and December 1998 was larger than total job losses, indicating that labor market entrants (e.g. recent graduates) were also having trouble finding employment. By April 1999, unemployment had risen further to 10.2 percent.
22. Latvia has traditionally exhibited large regional discrepancies in labor market performance, with Riga and the port city of Ventspils enjoying significantly lower unemployment than other cities and regions. Those districts bordering Russia were already exhibiting above average unemployment rates in early 1998 (Table 8). These rates did not rise much after the onset of the crisis in August. Conversely, unemployment has risen dramatically in two major port areas (Ventspils and Liepaja), which possibly reflects the contraction in Russian imports transiting through Latvia.
Latvia: Regional Unemployment
(Percent of the labor force)
Latvia: Regional Unemployment
(Percent of the labor force)
| 1998 | 1999 | ||||
|---|---|---|---|---|---|
| March | June | September | December | March | |
| Average | 7.1 | 7.2 | 7.6 | 9.2 | 10.1 |
| Major Cities | |||||
| Riga | 3.2 | 3.2 | 3.7 | 4.8 | 5.6 |
| Daugavpils | 7.9 | 8.4 | 8.9 | 10.6 | 11.5 |
| Jelgava | 8.8 | 8.5 | 8.7 | 9.4 | 10.6 |
| Jurmala | 6.3 | 6.0 | 6.8 | 9.5 | 10.3 |
| Liepaja | 8.2 | 9.1 | 10.4 | 14.2 | 16.0 |
| Rezekne | 11.4 | 11.0 | 11.5 | 15.7 | 16.1 |
| Ventspils | 3.6 | 3.9 | 5.4 | 7.5 | 8.6 |
| Districts bordering Russia | |||||
| Aluksne | 10.9 | 10.8 | 11.5 | 11.5 | 11.4 |
| Balvi | 21.7 | 21.8 | 21.9 | 22.1 | 23.2 |
| Gulbenes | 9.7 | 9.9 | 10.4 | 10.2 | 10.4 |
| Kraslavas | 21.5 | 21.5 | 22.2 | 23.2 | 23.7 |
| Ludza | 18.4 | 19.1 | 19.5 | 19.9 | 20.8 |
| Preilu | 22.0 | 22.9 | 22.3 | 23.2 | 23.8 |
| Rezekne | 28.3 | 27.5 | 27.5 | 28.2 | 29.1 |
Latvia: Regional Unemployment
(Percent of the labor force)
| 1998 | 1999 | ||||
|---|---|---|---|---|---|
| March | June | September | December | March | |
| Average | 7.1 | 7.2 | 7.6 | 9.2 | 10.1 |
| Major Cities | |||||
| Riga | 3.2 | 3.2 | 3.7 | 4.8 | 5.6 |
| Daugavpils | 7.9 | 8.4 | 8.9 | 10.6 | 11.5 |
| Jelgava | 8.8 | 8.5 | 8.7 | 9.4 | 10.6 |
| Jurmala | 6.3 | 6.0 | 6.8 | 9.5 | 10.3 |
| Liepaja | 8.2 | 9.1 | 10.4 | 14.2 | 16.0 |
| Rezekne | 11.4 | 11.0 | 11.5 | 15.7 | 16.1 |
| Ventspils | 3.6 | 3.9 | 5.4 | 7.5 | 8.6 |
| Districts bordering Russia | |||||
| Aluksne | 10.9 | 10.8 | 11.5 | 11.5 | 11.4 |
| Balvi | 21.7 | 21.8 | 21.9 | 22.1 | 23.2 |
| Gulbenes | 9.7 | 9.9 | 10.4 | 10.2 | 10.4 |
| Kraslavas | 21.5 | 21.5 | 22.2 | 23.2 | 23.7 |
| Ludza | 18.4 | 19.1 | 19.5 | 19.9 | 20.8 |
| Preilu | 22.0 | 22.9 | 22.3 | 23.2 | 23.8 |
| Rezekne | 28.3 | 27.5 | 27.5 | 28.2 | 29.1 |
23. Wage growth has more or less reflected the varied impact of the Russian crisis on different sectors of the economy (Table 9). For Latvia as a whole, real wage growth halved between 1997 and 1998, from 12 to 6 percent. Sectors heavily dependent on exports to Russia—notably fishing, manufacturing and transport—experienced little if any real wage growth during 1998, while sectors more insulated from international trade (e.g., construction and domestic trade) enjoyed significant real wage gains. Since the August crisis, wage growth has been driven by the public sector. Between end-September 1998 and end-March 1999, real public sector wages grew at an annual rate of roughly 10 percent, whereas private sector wages only increased by slightly more than 2 percent (annualized basis).
Latvia: Growth of Real Wages
(In percent, annualized basis)
Latvia: Growth of Real Wages
(In percent, annualized basis)
| 1996 | 1997 | 1998 | 1999-Q1 | ||
|---|---|---|---|---|---|
| Whole economy | –6.3 | 12.1 | 6.1 | 5.1 | |
| Public sector | –6.3 | 12.6 | 7.7 | 10.0 | |
| Private sector | –6.3 | 11.6 | 5.8 | 1.7 | |
| Agriculture, hunting and forestry | –7.8 | 9.7 | 7.9 | 4.0 | |
| Fishing | –17.7 | 20.1 | –32.5 | –8.1 | |
| Industry | –2.4 | 12.1 | 1.8 | 0.1 | |
| Mining | 17.4 | 6.7 | 2.4 | 7.7 | |
| Manufacturing | –3.5 | 12.6 | 0.6 | –1.8 | |
| Electricity, gas and water supply | 1.9 | 8.5 | 9.0 | 8.8 | |
| Construction | –16.1 | 21.2 | 11.7 | 2.5 | |
| Wholesale and retail trade | –12.7 | 12.5 | 8.4 | 5.1 | |
| Hotels and restaurants | –17.3 | 18.8 | –5.3 | –3.0 | |
| Transport, storage and communications | –5.0 | 8.1 | –0.2 | 1.6 | |
| Financial intermediation | 7.7 | 16.9 | 10.7 | 4.3 | |
| Business services | –5.5 | 13.7 | 17.0 | 14.8 | |
| Public administration | –7.4 | 13.3 | 11.3 | 11.7 | |
| Education | –7.2 | 9.7 | 11.0 | 13.4 | |
| Health and social work | –8.0 | 7.6 | 9.9 | 17.9 | |
| Other community services | –3.6 | 11.1 | 7.1 | 11.6 | |
Latvia: Growth of Real Wages
(In percent, annualized basis)
| 1996 | 1997 | 1998 | 1999-Q1 | ||
|---|---|---|---|---|---|
| Whole economy | –6.3 | 12.1 | 6.1 | 5.1 | |
| Public sector | –6.3 | 12.6 | 7.7 | 10.0 | |
| Private sector | –6.3 | 11.6 | 5.8 | 1.7 | |
| Agriculture, hunting and forestry | –7.8 | 9.7 | 7.9 | 4.0 | |
| Fishing | –17.7 | 20.1 | –32.5 | –8.1 | |
| Industry | –2.4 | 12.1 | 1.8 | 0.1 | |
| Mining | 17.4 | 6.7 | 2.4 | 7.7 | |
| Manufacturing | –3.5 | 12.6 | 0.6 | –1.8 | |
| Electricity, gas and water supply | 1.9 | 8.5 | 9.0 | 8.8 | |
| Construction | –16.1 | 21.2 | 11.7 | 2.5 | |
| Wholesale and retail trade | –12.7 | 12.5 | 8.4 | 5.1 | |
| Hotels and restaurants | –17.3 | 18.8 | –5.3 | –3.0 | |
| Transport, storage and communications | –5.0 | 8.1 | –0.2 | 1.6 | |
| Financial intermediation | 7.7 | 16.9 | 10.7 | 4.3 | |
| Business services | –5.5 | 13.7 | 17.0 | 14.8 | |
| Public administration | –7.4 | 13.3 | 11.3 | 11.7 | |
| Education | –7.2 | 9.7 | 11.0 | 13.4 | |
| Health and social work | –8.0 | 7.6 | 9.9 | 17.9 | |
| Other community services | –3.6 | 11.1 | 7.1 | 11.6 | |
E. Conclusions
24. The dramatic contraction of exports to the CIS—by 75 percent during the fourth quarter of 1998 and the first quarter of 1999—has had a significant slowing effect on the Latvian economy, with growth falling by roughly 5 percentage points during 1998. The fact that Latvia’s exports to the EU and other areas of the world continue to grow, and that exports to CIS markets apart from Russia appear to be recovering, indicate that many Latvian producers remain internationally competitive.7 However, firms that were highly dependent on the Russian market, most prominently those in the agricultural and food processing sectors, have seen their demand collapse. Given the dramatic decline in the value of the ruble and a pessimistic outlook for growth in Russia, demand from this market is likely to remain depressed. Latvian producers will therefore have to further diversify their trade away from the CIS if they are to remain viable. This is neither easy nor can it be done rapidly, and will require intensified efforts in improving marketing and sales. During the interim adjustment period, export growth will remain slow compared to recent years. But the medium-term outlook for export growth, and hence for economic growth, remains favorable for Latvia.
Exports originating from agriculture or fishing comprise live animal and animal products, vegetable products, fats and oils, and prepared foodstuffs.
In 1997, Russia accounted for the following shares of Latvian agriculture-related exports: live animals and animal products, 42 percent; vegetable products, 24 percent; fats and oils, 41 percent; and prepared foodstuffs, 56 percent.
Exports of wood and wood products also include unprocessed timber, which is not included in manufacturing sector output.
Russian merchandise imports amounted to $9.6 billion in the fourth quarter of 1998 and $9.4 billion in the first quarter of 1999, compared to $18.1 billion in the first quarter of 1998 (Russian Economic Trends, June 1999).
In the first four months of 1999, Russian oil exports totaled 45.9 million tons, compared with 43.1 million tons for the same period in 1998 (Russian Economic Trends, July 1999). Ventspils Nafta, Latvia’s primary oil transshipment facility, reportedly reloaded 5.4 million tons of oil and oil products in the first quarter of 1999, slightly higher than in the first quarter of 1998. In the second quarter of 1999, the terminal reloaded 5.7 million tons, which was 1.5 million tons more than one year earlier.
Employment fell from 1.39 million in early 1992 to 1.01 million in late 1996.
See Chapter III for analyses of Latvia’s competitiveness.