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...