Transcript of Conference Call On Latvia, Resident Representative in Riga

IMF News, July 22, 2010

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Published: July 22, 2010

IMF Board decisions and immediate actions

IMF Executive Board completed the Third Review of Latvia’s program and approved the disbursement of around 105 million euros.
The Letter of Intent (authorities’ policy intentions) was released just over an hour before the call.
The European Commission completed its review earlier in the week; IMF and EC cooperate closely on program issues.
The IMF Board also concluded the 2010 Article IV consultation; a public information notice was expected “probably later today or tomorrow.”

Economic developments and key indicators

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.
Exports grew 35 percent year-on-year in May.
Registered unemployment has started to come down to just over 15 percent.
Unemployment on the labor force survey measure is around 20 percent.
Current account position described as a “massive surplus” at the time of the call.
Reserves are flowing in and international reserves are described as “strong.”

Policy measures and reform agenda

Government has implemented very strong policy actions under the Stand-by Arrangement, achieving very large savings on the budget deficit while increasing social safety net spending, financing workplace employment schemes, temporary jobs programs, and training.
Main steps agreed:
- Stick to the 2010 budget.
- Prepare a menu of options for the 2011 budget to put the deficit on a declining path so that the Maastricht criteria can be met in 2012.
- Euro adoption targeted in 2014.
- Strengthen the financial sector, including developing a transformation plan for the mortgage and land bank.
- Encourage private debt restructuring by removing tax barriers and legal barriers.
Emphasis that closing the remaining competitiveness gap will require further wage and price adjustment, productivity gains, and structural reforms—consistent with the authorities’ fixed-exchange-rate regime.

Banking sector, foreign bank commitments, and external support

Several large foreign-owned banks (identified as the main foreign-owned banks, likely the top four) sent letters to the FCMC restating their commitment to remain involved in Latvia and to meet regulatory requirements.
Observations on foreign bank behavior:
- No disorderly de-leveraging or large balance-of-payments outflows from these banks.
- Banks’ exposure dynamics noted as “something like 15 percent” compared to a fall in output of 18 percent (reported as an illustrative comparison in the call).
- Recapitalization by foreign banks noted as upwards of 800 million euros.
Available external support noted as up to 7.5 billion euros; government estimated it might need only 5 billion euros of the total rescue package. IMF view: availability up to 7.5 billion euros is important; drawing less is a positive signal of strength.

Forecasts, outlook, and risks

IMF and European Commission growth number for 2010 cited as minus 3.5 percent.
IMF expected to be “cautiously optimistic” and to revise forecasts upwards in the coming weeks and months, but emphasized uncertainty given European developments.
Short-term outlook: growth expected to pick up in the second half of 2010 and into 2011; the minus 3.5 percent for 2010 reflects recession at the end of 2009.

Engagement with authorities and program modality

Program reviews occur every few months; each review results in a new Letter of Intent that sets out the government’s intentions.
IMF expects to work closely with the incoming government; “renegotiating all the deals” is not anticipated—rather, the new government will decide on the fiscal adjustment path using the menu of options prepared by the Ministry of Finance and sign a new Letter of Intent.
Program goals highlighted: reduce deficit to 6 percent next year and to 3 percent the year after that to ensure debt sustainability and timely euro adoption.

Transcript of conference call held in Washington, D.C., Thursday, July 22, 2010. Mark Griffiths, Mission Chief for Latvia, and David Moore, Resident Representative in Riga, participated.