Latvia's economy: good news and bad news

Some economic numbers. First, Latvian economy grew 12.4% in the first half of 2006 (compared to the first half of 2005). This makes Latvia one of fastest-growing economies in the world and, according to International Monetary Fund (IMF), Latvia no longer has the lowest income in the EU. Now, Poland is the last and Latvia is second to last.

The growing economy has generated more money for the Latvian government and the ongoing election campaign is full of promises to use this money to increase salaries, retirement benefits and to reduce taxes, so that everyone benefits.

The Bank of Latvia is, however, warning of "unwelcome macroeconomic imbalances". And today's "Diena" has two one-paragraph stories (hidden on page 3) which make me think that this warning is a major understatement. First, according to Bank of Latvia, the foreign debt of Latvia has reached 10.583 billion lats (about 21 billion US $). That's about 110% of Latvia's annual economic output (GDP). Most of the debt is owed by Latvian individuals and companies. Government debt is only 639 million, the remaining 9.956 billion are privately owed.

Second, Latvia keeps borrowing at an alarming rate. Latvia's current account deficit reached 17.9% of GDP in the 2nd quarter of 2006. That means that 17.9% of economic activity in Latvia was financed by money that is either borrowed or invested from abroad (mostly borrowed, I think). I am not an economist (my knowledge of economy is mainly due to reading Dienas Biznesss and other financial newspapers) but these numbers look scary to me. There is no way how foreign banks will keep lending money to Latvia at this rate. Bank of Latvia website has an article which compares the present Latvia to Czech Republic which had a three-year economic slowdown in late 1990s, after the current account deficit reaching 7% of GDP in 1997. Latvia's deficit is already much larger than that, which suggests that the consequences may be more severe as well. (Again, I am not an economist, this is mainly my numerical common sense considerations.)

I am trying to follow the ongoing crisis in Hungary, to see if there are any analogies. The Hungarian prime minister just admitted that he has been "lying about economy day and night for past two years" to get reelected and announced an unprecedented austerity program, with salary cuts and massive layoffs of government employees. I talked to a Hungarian colleague (who currently lives outside Hungary) yesterday. He was unhappy and told me about Socialist vs. Fidesz political dynamics of Hungary. I was, however, more interested in the causes of economic troubles rather than the current political crisis and he was not able to tell much about that. It is also difficult to find good sources about the Hungarian situation on the web. (Again, it's because I am more interested in the economic analysis, rather than pictures of street riots.)

My main question is: what does this all mean for Latvia? Edward Hugh, an economist and one of bloggers at the Fistful of Euros, comments: "Baltic states look to be problematic but not today and tomorrow". One can either be worried by the first part or consoled by the second part. I am more in the first category but I hope I am wrong...

Two new opinion polls

Latvijas Fakti poll from September 23 to 26 (the number in brackets is the change compared to last week):
Tautas Partija 12.6% (-0.7%)
ZZS 12.3% (+0.2%)
PCTVL 8.8% (-0.4%)
Jaunais Laiks 7.1% (-1.0%)
LPP/LC 5.9% (-0.4%)
TB/LNNK 5.8% (unch.)
Saskanas Centrs 5.7% (unch.)
Social Democrats 3.5% (+0.2%)

Projected seats in the parliament:
Tautas Partija 22 (unch.)
ZZS 21 (+1)
PCTVL 15 (unch.)
Jaunais Laiks 12 (-3)
LPP/LC 10 (unch.)
TB/LNNK 10 (+1)
Saskanas Centrs 10 (+1)

Jaunais Laiks decline is now completely confirmed. And a poll by the competing company, SKDS. (Unofficial numbers, leaked to media. Have nonsense allegations by Dzimtene had so much effect on polling companies?)
ZZS 14.8% (+3.6%)
Jaunais Laiks 9.5% (-2.5%)
Tautas Partija 9.5% (+0.6%)
PCTVL 8.1% (-1.2%)
TB/LNNK 5% (-1.0%)
Saskanas Centrs 3.8% (+1.3%)
Social Democrats 3.5% (-0.3%)
LPP/LC 3.1% (-0.4%)

Good news

During meeting with Vaira Vike-Freiberga, Canadian prime minister Stephen Harper said that Latvia is close to satisfying Canada's requirements for allowing Latvians to travel to Canada without a visa.

Excellent! My experience is that Canadian consulates are generally more reasonable than US consulates (this story is one example and I know others). Still, applications for Canadian visas are only processed in Warsaw (not Riga) and mailing a passport to Poland can be time-consuming. Hopefully, we will no longer have to do that in a few years. If only United States could follow Canada in this ....

UPDATE: Estonians are one step ahead. They can already travel to Canada without visa.

New Estonian president

Toomas Hendrik Ilves has been elected as the president of Estonia. He was born in Sweden, in a family of Estonian refugees who left Estonia, escaping from the Soviet regime. He then grew up in USA and returned to Estonia in early 1990s, after it regained independence.

Close to 10% of population of Baltic states became refugees in 1944 and 1945. My father's family, small farmers from Central Latvia, nearly left the country as well, but they changed their mind a few hours before boarding a ship for Sweden. Some of the former refugees and their children came back in 1990s and some of them are very influential in the local politics. All three of the current Baltic presidents (Ilves, Vaira Vike-Freiberga and Valdas Adamkus) are former refugees.

I expect Ilves will be a very good president for Estonia. In Estonian and Latvian political system, the president's main role is to represent the country abroad. (The domestic political power belongs to the prime minister.) After living abroad for 40 years, Ilves knows the world outside Estonia very well. And he did well as the minister of foreign affairs for Estonia in 1990s. During the last years, Vaira Vike-Freiberga was the most internationally active president in the Baltic states and the unofficial spokesperson for the region. In a few months, this role will likely pass to Ilves. (Of course, it depends on whom the Latvians elect as Vike-Freiberga's successor. But how many of our candidates can match Ilves?)

Estonia has a fairly unusual (read: bizarre) election system. First, the parliament votes. If a candidate gets a 2/3 supermajority in the parliament, he/she is elected. (That has never happened so far.) Otherwise, the election goes to the Electoral College, which is composed of all the members of parliament and one representative from each municipal government. (Yes, Tallinn (population 400,000) and Ruhnu (known in Latvian as Ronu sala, population less than 100) both have one representative each. As a result, Electoral College is completely controlled by rural Estonia.)

This system was put in place in early 1990s. I was told that it was designed to prevent a specific person, the ex-communist Arnold Ruutel, from winning the presidency. The designers of the system thought that Ruutel could win a majority in the parliament but not in the Electoral College. That was a miscalculation. In 2001, Ruutel won the Electoral College. (It's amusing to watch how those tricks with electoral system can backfire... Ruutel might have lost a simple majority vote in the parliament in 2001.)

The election went to the Electoral College this time, as well. For a while, Estonian media were trying to guess which members of College will vote which way. Both Ilves and Ruutel camps claimed they had a majority of the Electoral College on their side. At the end, Ilves won, 174-162.

September opinion poll

My previous post on August opinion poll attracted some interesting comments from a professional survey statistician. Briefly, 9.5% in an opinion poll which polls 1000 people corresponds to a confidence interval [7.7%, 11.3%]. As a result, 1.3% change in Jaunais Laiks rating (from 10.8% in July to 9.5% in August) is not statistically significant to make any conclusions, although 2.2% drop from June to August might have been significant enough.

Meanwhile, Latvijas Fakti have released their September poll. Jaunais Laiks has dropped a little bit more, which confirms that the drop in August poll was not a statistical error. The numbers are:
Tautas Partija 13.3% (+3.5%)
ZZS 12.1% (+0.6%)
PCTVL 9.2% (-1.2%)
Jaunais Laiks 9.2% (-0.3%)
LPP/LC 6.3% (+1.2%)
TB/LNNK 5.8% (-0.8%)
Saskanas Centrs 5.7% (+1.0%)
Social Democrats 3.3% (-0.5%)

Projected seats in the parliament:
Tautas Partija 22 (+6)
ZZS 20 (+1)
PCTVL 15 (-2)
Jaunais Laiks 15 (unchanged)
LPP/LC 10 (+2)
TB/LNNK 9 (-2)
Saskanas Centrs 9 (+1)
Social Democrats 0 (-6)

The change is compared to August poll.

For the first time, the current minority government (TP+ZZS+LPP/LC) is projected to win more than a half of seats (52 out of 100), contrary to the Eastern European trend of voting out the government at every election. But I still think that "let's vote this corrupt government out" mood is going to prevail, once again. But who is going to benefit from it? Jaunais Laiks is no longer the anti-corruption outsider party and Social Democrats have their share of scandals from 2001-2005 Riga city government. Senior Citizen Party? They are still at 1.4% in the opinion poll but who knows...

It's official:Vaira Vike-Freiberga is running for UN Secretary General

Yesterday, the three Baltic nations nominated Vaira Vike-Freiberga for the UN Secretary General. She has been discussed as a candidate since at least March. Now, it's official. The biggest problem for her might be Russia's veto power. Russian media have already characterized Vike-Freiberga as "completely unacceptable" to Russia (because of her outspoken advocacy of Latvian interests, which are often in conflict with what Russia wants).

Latvian presidency candidates

No later than in June 2007, Latvia will elect its new president. The constitution does not allow our current president, Vaira Vike-Freiberga, to run for another term and, no matter how much Latvians value Vike-Freiberga, we will not change the constitution for her. Today, New Era party announced Sandra Kalniete as its candidate for the next president. Officially, she is the first candidate.

Unofficially, 6-7 other candidates are discussed. Last week, I read an interview by Martins Bondars, a long-time aide to Vaira Vike-Freiberga. The Latvian president is elected by the parliament and the behind-the-scenes consultations about candidates are going on. The 7 leading candidates mentioned by Bondars are:

• Sandra Kalniete (1953) - one of leaders of Latvian independence movement in late 1980s, then embassador to several countries, then the minister for foreign affairs from 2002 to 2004.
• Andris Piebalgs (1957) - a slightly lower-profile member of the independence movement who also became an embassador and is now the Energy Commisionar for the European Commision.
• Ojars Kalnins (1949) - Latvian American activist, Latvia's embassador to US from 1993 to 1999, now leads the Latvian Institute, an organization devoted to promoting Latvia's image abroad. (Curious fact: the previous head of Latvian Institute was Vaira Vike-Freiberga, prior to her being elected as the president.)
• Ivars Lacis (1949) - professor of physics, the current rector (chancellor) of University of Latvia.
• Artis Pabriks (1966) - originally political scientist with Ph.D. from University of Aarhus (Denmark), currently the minister of foreign affairs of Latvia.
• Janis Jurkans (1946) - the first minister of foreign affairs for Latvia. Has recently claimed that he plans to quit politics.
• Zaneta Ozolina (1957) - political scientist, aide to Vaira Vike-Freiberga.

The shortlist is of surprisingly high quality (compared to say, candidates nominated by various parties in 1999). I would be happy with any of the first five candidates. I would not like to have Jurkans as the president, though, despite myself having voted for him in parliamentary election once. I know nearly nothing about Ozolina.

Sandra Kalniete belongs to Jaunais Laiks (New Era) party. Artis Pabriks belongs to Tautas Partija (People's Party). Janis Jurkans belongs (or used to belong) to Tautas Saskanas Partija (People's Harmony party). The rest of candidates are non-partisan and have no obvious links to a particular political party. In Latvian politics, that may actually be an advantage. If the next parliament is as fractured as this one, the candidate will need support from at least 3 different parties to win. And many political parties may find it easier to support a neutral candidate than someone from another party. (Particularly, if it's a party they are not on good terms with. Sandra Kalniete may have hurt her chances by joining New Era a few months ago.) That is how Vaira Vike-Freiberga was elected in 1999. Almost no one was voting for another party's candidate and then she emerged as a neutral figure who could draw support from 3 parties.

August opinion poll comments

First, the numbers are unofficial. Latvijas Fakti decided not to release them. This has some bizarre pre-history. A few weeks ago, Dzimtene party claimed that their true popularity is about 10 times higher than in Latvijas Fakti polls (11% instead of 1.2%) and asked the Latvian anti-corruption office to investigate Latvijas Fakti. Dzimtene is a moderately obscure party which recently attracted attention by nominating Vadim Putin (who has similar name but is not related to Russian president Vladimir Putin) as a candidate to Latvian parliament. That smelled like a publicity stunt and Dzimtene's claim about opinions polls being wrong has a similar smell. Some of people involved in Dzimtene have a history of such stunts and there is nothing surprising here. Nothing, except for the reaction of Latvijas Fakti. They said they are tired of people questioning their polls and decided not to release the most recent poll. (I wonder if that means that some more influential party is unhappy as well... Dzimtene is too obscure to merit such strong reaction.) Their decision was a pity because I respect Latvijas Fakti and their numbers. But, a few days later, newspapers got hold of the numbers and, now, everyone knows them.

Second, the big story is Jaunais Laiks (New Era) falling from the first place in July to the fourth place in August. Neatkariga Rita Avize (NRA), a newspaper hostile to New Era, credits the fall to their publication of transcripts of phone conversations between a businessmen who was being investigated by the tax service and senior New Era members. The businessmen was seeking for a help against the investigation and he was getting somewhat symphatetic response from New Era people. New Era Party has the same opinion about the reasons why they fall to the fourth place in the opinion poll, except that they call it as a "smear campaign by NRA".

I think they both may be reading too much into a small change in polls. New Era numbers have declined only by 1.3%. For a poll of 1000 people, that's 13 people and the probability of polling company accidentially choosing 13 less supporters of New Era this time is not the small. According to a calculation by this blogger, the probability of such event is 5-10%, meaning that New Era numbers would get underestimated by 1.3% once every 10-20 months. As long as there isn't another opinion poll confirming the change, it may just be random noise in data.

August opinion poll

From Latvijas Fakti polling agency, via today's Diena newspaper.

ZZS 11.5% (+1.1%)
PCTVL 10.4% (unch.)
Tautas Partija 9.8% (+0.9%)
Jaunais Laiks 9.5% (-1.3%)
TB/LNNK 6.6% (-1.4%)
LPP/LC 4.9% (-0.2%)
Saskanas Centrs 4.7% (-0.6%)
Social Democrats 3.8% (+0.7%)

Projected seats in the parliament:
ZZS 19 (+2)
PCTVL 17 (-1)
Tautas Partija 16 (+1)
Jaunais Laiks 15 (-4)
TB/LNNK 11 (-3)
LPP/LC 8 (unch.)
Saskanas Centrs 8 (-1)
Social Democrats 6 (+6)

The previous poll is here. There are some interesting events surrounding the current poll (the numbers are unofficial because the polling company refused to release them!). More on that in a few days.