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Country Commercial Guides FY 2000: Latvia Report prepared by U.S. Embassy Riga, released July 1999 Note*

CHAPTER II. Economic Trends and Outlook

Since re-achieving independence, Latvia has adopted a comprehensive reform package, involving price and trade liberalization, privatization and macroeconomic stabilization. Latvia's private sector accounts today for 65% of the GDP, and 69% of the employment. In 1998, the inflation was down to 2.8% from 7.0% in 1997 (13% in 1996), and the 1999 inflation has settled at 2.9. The government's estimate for the annual inflation in the year 2000 is 3 percent. Latvia's national currency Lat is freely convertible and has appreciated against world currencies. In order to remain stability, Lat is loosely pegged to the SDR.

The growth of the Latvian economy slowed considerably in 1998 due to the financial crisis in Russia. GDP grew by only 3.6 percent, which is less than half of the rate in 1997. The growth was driven mainly by private consumption that was up by 6 percent. In the first quarter of 1999 the on-year change in GDP was -2.3 percent. While the industrial output has continued to decline due to the Russian crisis and was in September 1999 11.6% below the level reached a year earlier, the financial experts still predict 1 percent growth in GDP for 1999. In the summer of 1998 the IMF recommended budget cuts in Latvia in order to balance the declining GDP and the increasing foreign debt. The implemented cuts started to show their effect during 1999: Fitch IBCA re-assigned a reasonably favorable credit rating for Latvia; trade figures with Western Europe and the United States were encouraging; FDI increased, and unemployment showed signs of decrease.

Latvia has no controls on import, export, nor use and conversion of foreign currencies, making investment and repatriation of profits exceptionally easy. Latvian government has adopted modern laws establishing copyrights, patents, trademarks and intellectual property rights protection.

The privatization of medium-sized and large enterprises that commenced in 1994 is almost completed. The Latvian Privatization Agency adopted a case-by-case approach regarding the methods of privatization. In most of the larger enterprises, several methods were combined, including international tenders, direct sales, public auctions and public offerings on the stock exchange. The government has expressed its intention to accelerate the remaining privatization of both the electrical monopoly Latvenergo, the Latvian Shipping Company and the telephone company Lattelekom in 2000.

The amount of FDI grew considerably in 1996 and 1997 due to the intensive privatization. This growth declined by some 50 percent in 1998 and amounted to 4 percent of GDP. This was partly due to the Russian crisis and a tendency to hence postpone huge investment projects, especially in industries linked with exports to CIS, e.g. food and textile industry and electric engineering. The major investments in 1998 were made in the financial sector and in the wholesale-retail trade, and the main investment sectors in 1999/2000 will be energy and transportation due to the privatization of the large remaining state enterprises. In the first quarter of 1999, FDI to Latvia amounted to 6.4 percent of GDP, an approximately one percent's decrease from 1998.

Latvia's key imports are mineral products, raw materials and energy sources that have been imported mainly from Russia, and machinery and electrical equipment that is imported from the EU and the U.S. The main trade partners are Germany with 16 percent, United Kingdom with 13 percent and Finland with 10 percent of total imports to Latvia. Imports to Latvia increased by 19 percent during 1998. The EU's growing share in trade with Latvia amounted to 57 percent of export and 55 percent of import in 1998. In the first five months of 1999, the trade deficit narrowed by 19 percent compared to 1998, exports declined by 10 percent and imports by 14 percent.

The total imports from U.S. in 1998 amounted to approximately USD 65 million. During the first six months of 1999, the approximate imports from U.S. amounted to USD 24 million. The best prospects for U.S. exports are IT equipment including telecommunications equipment, electronic components and electrical machinery, light industry equipment, transportation vehicles and pharmaceutical products.

Latvian government has set a political goal to fulfill the conditions for EU membership by 2002. The schedule and concrete tools for this goal are outlined in the National Program for Integration into the European Union. Latvia was accepted into the WTO in 1998 and became a full member in February 1999.

One of Latvia's strongest business attractions is its location as a commercial, financial and transportation hub for Russia/Baltic region. Just over a third of Latvia's population is concentrated in Riga, which is the largest city in the Baltics. Latvia has a well-developed road network carrying traffic from the main Latvian ports eastward and from north to south along Via Baltica.