Published: January 16, 2009
Latvia’s capital, Riga, has been the scene of days of riots after a peaceful anti-government demonstration by an estimated 10,000 people turned violent in mid-January.
Protesters blamed ministers for the country’s increasing unemployment, accused them of incompetence in dealing with the severe economic recession, and demanded the dissolution of the parliament.
In the past few months, Latvia’s economy has been severely hit by the global credit crunch. The country’s leading local bank, Parex Bank, had to be nationalised in December, and the government had to be bailed out with a €7.5bn bail-out from the IMF and EU in the same month.
“This is like a pretty bad hangover after a party”, says Lars Christensen, chief analyst at Danske Bank in Copenhagen. “There is no doubt that the situation is dire. We hope that things will be able to improve in 2010. For now, 2009 looks like it’s going to be a very challenging year in terms of economic growth. Of course we are likely to see a significant rise in unemployment and this economic setback leads to increased political unrest.”
Christensen continues, “The problem is, you have to implement very strict austerity measures and in our view those measures are necessary. There is nothing else to do. But that might be very hard to explain to the wider public when the government of the country, for years and years, had told the public that everything was fine. And suddenly you have to make very large austerity measures. I think there is a huge challenge for the Latvian government to steer through this critical situation.”
Other eastern European countries, most recently Bulgaria, have also seen riots as citizen’s increasing frustration with the economic downturn is expressed in anti-government demonstrations. In December, Greece was hit by three weeks of riots, and there have also been violent protests in Iceland and Russia.
To try and mitigate the recession, the Bank of Latvia has reduced its deposit interest rate from 3% to 2%, to try and encourage banks to lend more to customers.
Some economists say that a devaluation of the currency would be an easier way to stimulate growth, but Rimsevics is adamant that the ailing state economy should not devalue its lat currency.
GDP has dropped very sharply and it might grow as much as 8-10% year-on-year. The Bank of Latvia estimates that Latvia’s gross domestic product will decrease by 5% in 2009. Latvia is set to join the eurozone by 2012.
In January, Moody’s rating agency gave a negative outlook for the Latvian banking system. Moody’s vice-president and senior analyst, Kommo Rama, says “the economic downturn, which is already well underway, is now likely to be more severe than previously anticipated and thus have an adverse impact on the banking system’s asset quality”.
All three Baltic States have now introduced austerity measures. Lithuania may also slide into a recession in 2009 and is thinking of approaching the IMF for assistance if the economy gets worse. The government’s decision could be known by the end of March.
Lithuania’s capital Vilnius has also seen demonstrations of thousands of people as the political backlash to the credit crunch gathers strength. So far, Lithuania’s GDP has held up higher than Estonia and Latvia’s, though analysts are pessimistic here too.
“We have seen the Estonian economy being nearly as pear-shaped as the Latvian economy. Lithuania is doing a little bit better. But it probably only takes an amount of time before Lithuania is catching up with the economic crisis”, says Christensen.