Transcript of Conference Call On Latvia, Resident Representative in Riga
July 22, 2010Washington, D.C.
Thursday, July 22, 2010
DAVID MOORE, Resident Representative in Riga: Hello from the IMF office in Riga. And welcome to the conference call with Mark Griffiths in Washington. I’ll hand over to Alistair Thomson in our External Relations Department.
ALISTAIR THOMSON, IMF External Relations Department: Yes, good morning. And thank you for dialing in to this call. I’m in Washington, D.C., at IMF headquarters with Mark Griffiths. Thank you, David.
First of all, Mark’s going to say a few words about yesterday’s board meeting and the decision on the Third Review. And then we’ll go, in a few minutes, into some question and answers with the journalists who are participating. Mark.
MARK GRIFFITHS, Mission Chief for Latvia: Okay. Thank you. Yesterday the IMF Executive Board met. It completed the Third Review of Latvia’s program. It approved the disbursement of around 105 million euros.
The Letter of Intent, which sets out the authorities’ policy intentions, was released just over an hour ago. The European Commission completed its review a little bit earlier this week, and we cooperate very closely with them on all program issues.
Now, the IMF Board also concluded the 2010 Article IV consultation yesterday, and we hope to issue a public information notice on that soon -- probably later today or tomorrow.
Now, in terms of the review, what’s been happening? Well, the government has taken very strong policy actions under this Stand-by Arrangement. This has helped stabilize the economy, restore confidence, and spillovers from the financial turbulence in Europe have been limited in Latvia.
The government has had to achieve very large savings on the budget deficit, but it has also sought to protect the poorest people by increasing social safety net spending, to finance actively the workplace employment schemes, and also temporary jobs programs and training. So it’s really doing a lot there, and we encourage it to continue with this, and to do more.
Economic developments, I think, are good. The economy has come through a very difficult period, but is performing much better. Industrial production in May is up 13 percent year-on-year. Retail sales since the end of last year are up 5.5 percent, seasonally adjusted. I mean, it’s very strong. Exports grew 35 percent year-on-year in May.
Unemployment, registered, has started to come down to just over 15 percent, but it’s still a cause for concern because on the labor force survey measure it’s around 20 percent.
But the economy is performing much better because of what the authorities have been doing.
Now, looking forward, the government is committed to steps to support a recovery in growth and continue progress towards euro adoption.
Main steps agreed include sticking to the 2010 budget, preparing a menu of options for the 2011 budget that can put the deficit on a declining path so that the Maastricht criteria can be met in 2012, and then the euro adopted in 2014 -- which would be a great success for Latvia, to make that happen. That’s why the adjustment needs to be done.
Secondly, they’re taking steps to strengthen the financial sector, including developing a transformation plan for the mortgage and land bank. And by strengthening the financial sector, that makes people’s deposits safe, and it also sets the stage for a return to credit growth and to economic growth, and lower unemployment.
Finally, they’re taking steps to encourage private debt restructuring, removing tax barriers and legal barriers there. And as a result of doing that, we again hope that credit can pick up, and that will help support a return to growth. That’s why it’s important.
So, with those opening remarks, that’s where we are. That’s the agenda ahead, and that’s why the Fund completed the review.
MR. THOMSON: Thank you, Mark. And now we turn the line over to questions from participating journalists.
QUESTIONER: In the Lithuanian Article IV report it says that using CGER (Consultative Group on Exchange Rates) methodologies, the Lithuanian exchange rate is overvalued maybe by 6.6 percent. Using that methodology, what does the exchange rate reflect in Latvia? Is it overvalued? Undervalued? How does it look now?
MR. GRIFFITHS: Thank you. I think the key question here is what’s happening to Latvia’s competitiveness. And we see a substantial improvement in Latvia’s competitiveness position.
Given the deep recession that Latvia has gone through, and the huge improvement in the current account -- it’s a massive surplus right now -- estimates are very uncertain. But we judge that a competitiveness gap still remains -- a small one, but one that still remains.
That said, we’re confident, that it can be closed with further wage and price adjustment, through gains in productivity, and through structural reforms. And that’s consistent with the authorities’ choice of the fixed-exchange-rate regime.
Now, with that strategy we’re seeing exports rising -- a 35 percent year-on-year increase in May -- sustained current-account surpluses, and also reserves are flowing in. And all of these have improved confidence in the strategy and in the exchange-rate peg.
QUESTIONER: I wanted to ask, what will be the negotiation process with the new government? And will it have to renegotiate all of the deals with the IMF?
MR. GRIFFITHS: We work very closely with the current government, and we look forward to working with the new government. I think “renegotiating all the deals” is a bit strong, and not really appropriate. What happens on the program is that each few months we complete a review, and a new Letter of Intent is signed. And that will set out the government’s intentions, and the new government’s intentions.
And I think what’s key is getting the deficit down to 6 percent next year and at 3 percent the year after that to make sure that debt is sustainable, and that Latvia joins the euro on time. And also, returning the economy to growth.
The Letter of Intent sets out a number of ideas to do that. The authorities -- the Ministry of Finance -- are working on a menu of options to help with the fiscal adjustment. It’s going to be up to the new government to decide how to do this, and we look forward to working closely with them on doing that, with a new Letter of Intent.
QUESTIONER: I have a question: the Letter of Intent, point 19, page seven, says several large foreign banks have restated their commitment to remain involved in Latvia in letters sent to the FCMC (Financial and Capital Markets Commission). Are they only restating their commitment? They’re not giving any new commitments? They’re not saying that they’re going to have new commitments for exposure to Latvia? And it says “several large banks.” Are we to assume that that’s all of the big Swedish-owned, or Nordic-owned banks?
MR. GRIFFITHS: Thank you. I think, yes, it’s the main foreign-owned banks. I think it’s the top four. I can’t be completely certain, but I think it’s the top four. As it says in the text of the Letter, they are commitments to stay involved in Latvia, and to meet all the regulatory requirements.
I think what’s key there is that the Nordic banks have really done quite a good job of maintaining their exposure. When we look at the numbers, compared to the decline in output that Latvia’s gone through, banks have really done quite well in this area. Their exposure has not fallen by as much as that. I can’t give precise figures, but it’s something like 15 percent -- something like that -- when you measure it, compared to a fall in output of 18 percent, but a cumulative fall much worse. And also some deflation, as well.
So they’ve done pretty well there. You haven’t seen large balance-of-payments outflows from these banks. There’s been no disorderly de-leveraging. And reserves are quite healthy. So they are committed to maintaining that.
I think also very important is the amount of recapitalization which foreign banks have done -- I think upwards of 800 million euros. And that’s a sign of their commitment to staying in Latvia and to being part of a successful program.
QUESTIONER: I have one question about the fact that the Finance Ministry has said that Latvia might need only 5 billion euros of the total rescue package, how does the IMF look at this fact? Whether you think that this amount will be enough for Latvia to keep market confidence?
MR. GRIFFITHS: I think what’s more important is what is available. And I think it’s up to 7.5 billion euros. So that’s what’s available. If Latvia is able to draw less than that, I think that’s a very positive sign, a very encouraging sign.
The government has built up considerable deposits, so it’s well placed. Market tensions are down. Interest rates have come down. CDS (credit default swap) spreads have come down. International reserves are strong. So this is a sign of strength, the fact that not all of the money has to be used. But it’s there just in case it’s needed. And that also adds confidence. So I think this is a success, and we’re very happy with this.
MR. THOMSON: Next? David, do you have any more questions in the office in Riga? Okay, so if there are any journalists on-line with questions, I’d invite you to ask them now.
QUESTIONER: One quick question -- whether IMF has changed some forecasts follow-up in an economy during this Third Review?
MR. GRIFFITHS: I think we are going to be changing forecasts slightly. The numbers will be coming out. I think we’re in line now with the European Commission growth number of minus 3.5 percent for 2010. Those numbers were agreed with the authorities a few weeks ago.
And I think since then, the developments continue to be broadly positive. So we will be hoping to revise those upwards in the coming weeks and months.
I think there’s a lot of uncertainty out there, developments in Europe. So it’s not a good time to be changing forecasts right now. But I think we have a cautious forecast of minus 3.5 this year, growth coming in the second half of this year more strongly, and into 2011.
The minus 3.5 this year really reflects recession at the end of last year. Growth through this year should be starting, so I think we’re cautiously optimistic on our projections. Yes, the outlook should be getting better.
MR. THOMSON: Thank you, Mark. So, if there are any more questions, please ask them now. And, if not, we’ll wrap up the call. We will be posting a transcript of this call within, hopefully, the next 24 hours or so, and that will appear on IMF -- on www.imf.org, and it will be linked on the Resident Representative’s site.
So thank you very much for taking part, those reporters in Riga, David, reporters who dialed in on line, and, here, Mark Griffiths, Mission Chief for Latvia in Washington. Thank you, and have a good day.
MR. MOORE: Thank you all.
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