Thursday, December 27, 2007

While I was away...

Ivars Godmanis became the Prime Minister of Latvia, completing the biggest political comeback in post-independence Latvia. He was the Prime Minister once before, from 1990 to 1993. That time, he left the office deeply unpopular. Before the 1993 elections, he was abandoned by most of his political allies who let him take the plame for the economic difficulties of post-Soviet Latvia. Godmanis-lead Popular Front (Tautas Fronte) went from a two-thirds majority in 1990 to 2.62% of popular vote in 1993. It looked like his political career was finished for good.

Godmanis spent some time as a manager in various companies. He then attempted to come back to politics with Latvian Way party... which soon lost all its seats in the parliament in the 2002 election and was abandoned by many of its most prominent members, just like Popular Front was abandoned in 1993. Once again, Godmanis looked like washed-up politician whose time has passed.

Then, Latvian Way merged with another struggling party, Latvia First Party. Together, they managed to get into the parliament in 2006. Godmanis became the minister of interior affairs. Back in the government, he looked reasonably competent. And, when Kalvitis' government fall in the flames of public anger, Godmanis emerged as the person to lead the new government.

We don't know what happened behind the scenes but some journalists were mentioning Godmanis as a candidate long before he was nominated. I saw a newsmagazine predicting Godmanis' nomination on October 17, a day before the famous protest against Loskutovs firing. That was almost a month before Kalvitis officially resigned. Some Latvian journalists have very good sources...

Economically, the slowdown continues. Consumer confidence index has fallen below 50% for the first time. The slowdown is not affecting anyone around me yet, though.

And Latvian U-20 ice hockey team has qualified for next year's top-division World Championships, by winning this year's Division 1B championships. Very good, our adult team needs some good younger players.

Tuesday, December 18, 2007

Away for this week

Blogging to resume December 26 or 27.

Monday, December 10, 2007

Latvian trade statistics

Latvian Statistics office reports that Latvian exports grew 23.4% year-on-year in October 2007, while imports grew only 12.1%. This is the third consecutive month of exports growing faster than imports, as the graph below shows (the green line is the exports, the red line is the imports):It's a good sign. Latvian imports are nearly twice the exports and Latvia pays for a lot of that by borrowing money from Scandinavian banks. That is something that cannot last forever and it's good that adjustment has started. It's still a long way to go, though: Latvia has only gone from importing 2.01 times its exports (October 2006) to 1.83 times its exports (October 2007). I hope the trade balances out before Latvia runs up too much of debt, but I'm far from sure about that.

In other news
from the statistics office, the inflation is up from 13.2% to 13.7%.

Sunday, December 09, 2007

Added to the blogroll

Two new English-language blogs from Estonia!

AnTyX has a mixture of posts on economics, politics and everyday life. Of particular note: the recent post about why it's legally impossible to devaluate the Estonian kroon.

Ivan vs. Jaan focuses on Russia and Estonian-Russian relations. Most recent post focuses on the Russian plans of "velvet re-privatization" (FSB-related people forcing Russian company owners to sell them).

Thursday, December 06, 2007

How do people handle devaluation fears?

A commenter asks:
How do people cope with possible devaluation fears, do they hold saving in euro's, I can't see why they wouldn't.
First of all, a lot of people don't have much savings. There' s much more debt than savings. Latvia has 140% of its annual GDP in its external debt and most of this debt has been generated by people and companies, rather than the government (whose debt is just 10% of GDP).

Out of those who have savings, some hold them in euros. (I've been advised to do that by several people.) Others just shrug off the devaluation fears. We've had devaluation rumours circulating locally in our country since February or March and nothing has happened yet... I now start seeing more people who are just disregarding devaluation rumours as background noise.
Is it allowed or common in Latvia to pay for every day things with other than a local currency?
No. But it's easy to change currencies or to have a foreign-currency account at a local bank and change the money to lats whenever necessary.

Wednesday, December 05, 2007

Retrospective on Kalvītis government

Today, Latvian prime minister Aigars Kalvītis turned in his resignation, as he promised a few weeks ago.

In a country known for coalition governments that rapidly fall apart, Kalvītis has been Prime Minister for last 3 years, since December 2, 2004. Latvia has had only one democratically elected Prime Minister, Ivars Godmanis, who served longer (from May 1990 to August 1993).

Both Kalvītis and Godmanis left the office deeply unpopular. In Godmanis case, it was the difficult economic transition from Soviet economy to market economy. The industrial production was falling by 30%/year and a lot of people were losing their jobs.

Kalvītis case is completely different. A few months ago, I came back from being abroad for many years and found a country that has changed for better. The Latvian economy has been growing at 11%/year. The inflation is rising, but people are spending more. The retail sales have been growing at around 20%/year (after adjusting for inflation), for most of Kalvītis' term. The number of Latvians leaving their country for better paid jobs in Ireland or UK is a half of what it used to be 2 years ago. I have my doubts about sustainability of those trends, but the problems with that have not started setting in yet...

Bill Clinton once famously said: "It's the economy, stupid". Kalvītis' government assumed that was the case. They were wrong.

With the economy improving, people start having other concerns. They start demanding more of their government. They have less tolerance for corruption. They become less willing to tolerate millions in government money disappearing through shaddy deals. Many of the people in Tautas Sapulce demonstration were not poor people who have been left behind by the economic boom. Rather, they were people who were comfortable in their everyday lives but wanted the government to do better. To be less corrupt and more helping to those in need. They did not want to have to say "My life is fine but the government sucks" much longer.

We will soon know who the next prime minister is. The government will probably be a re-shuffle of the current one. Kalvītis will take the blame for the past mistakes and the current coalition will attempt to make people believe that they have changed.

Tuesday, December 04, 2007

More numbers!

Opinion poll numbers, this time. The voting intentions of Latvians, according to Latvijas Fakti:
Saskanas Centrs (Harmony Centre) 10.8%
Jaunais Laiks (New Era) 7.8%
ZZS (Farmers and Greens) 6.2%
Tautas Partija (People's Party) 5.1%
PCTVL 4.5%
The most telling is this comparison:
all parties combined 48.8%
"would not vote" or "undecided/none of the above" 51.2%
One of our pollsters noted that we have not seen as big percentage of undecided voters since 1995. Back then, the main Latvian bank (Banka Baltija) was bankcrupt, people's savings were gone and country's economy was still in shambles after a difficult post-Soviet transition.

Right now... people's everyday lives are fine, the economy is great in short term (I have my doubts about medium/long term perspectives and I've written about those in detail on this blog... but the possible problems are not showing up in everyday life yet). Yet, the political elite looks progressively dysfunctional... and it's not like the opposition looks much better than the coalition, either (click here for the latest example of that).

In a weird way, it looks like what US is going through... people are fine themselves but a lot of them don't trust any side of the political divide... neither Bush nor Democrats.

Monday, December 03, 2007

November real estate numbers

This is the monthly update on how the Latvian housing bubble is deflating. According to Latio real estate agency, the average apartment price in Riga in November 2007 was 1445 Euros/m2 which is:
  • 3% less than in October 2007;
  • 16% less than in April 2007 (when the prices peaked);
  • 1.6% less than in November 2006 (this is the first month when we have a year-on-year decrease in prices).
Other real estate companies report slightly different numbers: 1433-1495 Euros/m2, but the magnitude of decline compared to April 2007 is the same.

The companies have different opinions on where it is going. Balsts and a few other realtors say that the rental prices are going up, because more people are renting instead of buying. That would make buying and then renting out profitable, thus stopping the fall in prices. Latio monthly report is skeptical about this argument.

Friday, November 30, 2007

Slowdown in Latvian economy

After the dramatic credit cutbacks by major Latvian banks a few months ago, the Latvian economy is clearly slowing down.

At the beginning of this year, at the peak of the Latvian boom, retail sales in Latvia were growing at 28% year-on-year. (It's hard to believe, but it was 28% after adjusting for inflation.) Now, October statistics are out and the increase in retail sales is down to 8.9% year-on-year. And, looking at the monthly data, the October sales are actually down 0.8%, compared to June when the slowdown begun.

The economic trend is clearly changing and the multi-year economic boom is over. It's still not clear if it will be a soft or a hard landing for Latvian economy. The opinions around me differ, with friends closer to real-estate business (which has been affected by the credit cutbacks more than anything else) being the most pessimistic (as in "It can be a vary hard landing").

Monday, November 26, 2007

More anti-inflation protests

Last Saturday, 70,000 Slovenians protested against rising inflation. This weekend saw a similar protest in Vilnius. 4,000 Lithuanians took to streets to protest against high inflation and low wages. This looks like a regional trend now.

Latvian labor unions organized two similar protests against government's budget in October but, although Latvian inflation is now at 13.2%, they gathered a smaller number of people (between 200 and 2,000, depending on whose estimate we believe). There are two possible explanations:
  1. Salary increases in the last years have been sufficient to compensate for inflation, or
  2. Latvians are so indifferent that it takes much more than in other countries until they start protesting.

Sunday, November 25, 2007

Economic news from Slovenia

Global Voices Online links to two stories about Slovenian economy:
- 70,000 Slovenians protest in Ljubljana, demanding higher wages, to compensate for rising inflation;
- The apartment prices in Slovenia have been rapidly rising (here are up-to-date numbers).

Housing bubble and rising inflation is a familiar picture to Latvians and many other countries in Eastern and Central Europe, as documented by Eastern European Economy Watch or some of my own posts.

Slovenia, however, was supposed to be the success story, immune from the overheating trends seen elsewhere. Their economic fundamentals are still quite good. But this reminds me that Latvian economy was viewed as the Eastern European success story just two years ago. ("Safe investment opportunity with 7-8%/year growth".) Too large amounts of foreign money pouring into a country in too short time can create economic bubbles quickly.

Friday, November 23, 2007

Different politics?

With Latvian politics in flux, it's virtually certain that new political parties will appear between now and the next parliamentary election.

This month, we saw the first one. It's lead by Aigars Štokenbergs and called "Society for different politics". I'm on the optimistic side about it, except that...

The promises of "new type of politics" are a bit worn out here, in Latvia. Over the last 10 years, we have seen New Party, New Era Party, New Democrats, New Centre Party (which even started with "Different politics" as its official name) ... "Different politics" now sounds like those laundry detergent ads in which they compare themselves to "regular detergent" and claim to produce much cleaner laundry. Repeated so many times by so many advertizers...

On to the substance... Aigars Štokenbergs is a Latvian millionaire businessmen who used to belong to People's Party and served as the minister of economy and regional development for one and a half years. He was on their shortlist for Latvian president this spring but the party nominated Maris Riekstins instead. Then, the relationship between Štokenbergs and the party deteriorated rapidly and he was formally expelled in October. He cited his opposition to business interests of Andris Šķēle as the reason. If that's indeed the case, I wonder how Štokenbergs managed to stay in People's Party for 8 years. Šķēle has been influential there forever.

His team includes another People's Party rebel (and another almost-presidential-candidate-from-People's Party), Artis Pabriks and several former top managers. Like Ivars Lacis (until recently, the rector of University of Latvia). They certainly have a substantial amount of managerial talent there (and, because of that, my doubts about New Era Party don't apply to them).

In terms of political ideas, they are hard to figure out. On his blog, Štokenbergs can start a sentence with asserting his right-of-center ideas and then talk about Scandinavian style welfare state as Latvia's future. How that fits together, I don't know. He either means some type of social market economy or is just trying to appeal to every possible constituency simultaneously (time-honored tradition of Latvian politics).

And he speaks of new tax on "speculative wealth". Hmm, how can a tax service distinguish between speculative and non-speculative wealth?

For now, I'm more positive about them than negative. But I can't resist making jokes about "different politics".

Thursday, November 22, 2007

On "seven fat years"

"Seven fat years" have gone empty, says this article. Inflation is completely out of control, exceeding 12%/year by the end of the year. And, from perspective of many people, it feels like 25%/year.

Sounds like Latvian opposition speaking about Latvia? Actually, it's Mikhail Kasyanov speaking about Russia. Economic trends have been similar across many countries in Eastern Europe (no matter whether they are in EU or not, or whether they are democracies or not exactly). Baltics, Bulgaria, Romania, Russia, possibly a few more...

Tuesday, November 20, 2007

On hopes and fears

Over the last months, Latvia has witnessed a rising tide of opposition to the present government. The protest against the government's attempt to fire Loskutovs and Tautas Sapulce were two manifestations of that. 7000 signatures in favour of a referendum on early elections is another. Eventually, this tide may sweep away the current coalition.

When I think of that, I'm sometimes hopeful and sometimes skeptical. In my previous post, I expressed the hopeful side. This post is about the skeptical one.

So... assume that Latvia has a new government. Not just the present coalition with a few different ministers (which we'll get in a few weeks). A government whose core consists of parties and people not represented in the current one (New Era Party and whatever else may form out of the present political storm). There are two ways how it could go wrong.

First, the new government may have the same problems as the old one. As Loskutovs-lead KNAB recently revealed, 11 members of Latvian parliament are either employing their relatives as aides or using their housing allowances to rent from relatives... quite possibly, at more than the market rate! Well, before Loskutovs was crowned as the anti-corruption hero by public, he had his own scandal with giving pay raises to his girlfriend who was also his subordinate at KNAB. Scandals of this type are not restricted to the present coalition and its supporters.

Second, they may be just a bit too eager to fight the corruption, at the cost of neglecting other issues. This charge has been repeatedly thrown at New Era Party and its appointees. Aivars Lembergs, the troubled mayor of Ventspils, has his famous battle with Ojars Grinbergs, New Era's appointee to the board of Ventspils Nafta oil transit company. Lembergs characterized Grinbergs as totally uninterested in doing anything to run the company. He was there just to fight Lembergs, not to do anything boring that might actually make the company function better. Now, do I really want my country to run by people like that?

One or the other of those two concerns have kept me from supporting New Era Party most of the time. I still have to form my opinion about the Štokenbergs-lead "Cita Politika" (Different politics) organization.

Wednesday, November 14, 2007

Away for next few days

Blogging to resume on November 18 or 19.

Saturday, November 10, 2007

Change is in the air

Some more thoughts on Tautas Sapulce, with one week delay.

When I look at the list of people who signed in support of Tautas Sapulce, last week's anti-government gathering, it feels a bit like in year 1988.

In the summer of 1988, the Latvian independence movement started. It was mainly started by intellectuals: writers, artists, journalists. Then more people joined. The new independence activists came from all walks of life. In 1991, Latvia won independence. By 1993, some of Latvian Americans, Latvian Australians, Latvian Germans came back to their home country and joined the politics. At one point, our government had 5 ministers who had recently returned to their home country after being refugees for 45 years.

Gradually, both independence activists and returnees from abroad left politics. Some of them went into business, some into foreign service, representing the country abroad. Some became judges. They were replaced by a new type of politicians, exemplified by Andris Skele. While other people were active in the independence movement, he accumulated a substantial wealth privatizing the companies in the food industry and then became the prime minister in 1995. Some of the newcomers were wealthy, like Skele. Others were career bureaucrats, who had risen through ranks. Unlike the intellectuals of late 1980s, they did not inspire passion. Rather, they would manage the country pragmatically. To everyone's benefit, so they said. To their own benefit, according to their critics.

Over the last years, some of our activists from late 1980s and early 1990s have been returning to a more active role. And, typically, they are taking a stand against the generations of politicians which replaced them. Sandra Kalniete, Girts Kristovskis, Marina Kostenecka, Aivars Endzins... they all signed the petition calling people to protest against the current government. There's also a lot of Latvian American (Canadian, Australian, etc.) returnees among the signatures.

I don't know where this is going to lead. But it certainly does not look like a " business as usual" of the type we have seen over the last 8 years. The change is in the air.

Thursday, November 08, 2007

Latvian inflation at 13.2%

Central Statistic Bureau reports that inflation reached 13.2%/year in October 2007. In comparison, it was 10.1%/year in August and 8.2%/year in May. It looks like we're in a nasty inflationary spiral.

This is beating the worst expectations. A few months ago, then-still-a-minister Aigars Štokenbergs predicted that the inflation will reach 14-15%/year by the end of 2007. I didn't believe him back then but now... the reality may be even worse by December.

The trend is similar across many Eastern European countries. Estonia has inflation of 8.5%/year now, up from 5.7%/year in August. The Latvian numbers are, however, one of the worst... and I've no idea when this spiral will end.

UPDATE (a few hours later): Parex Asset Management is trying to calm the people by pointing out that the usual beginning-of-heating-season increase in heating costs came one month early this year. As a result, October's yearly inflation numbers include two once-a-year heating price increases, one from November 2006 and another from October 2007. Good point, but even adjusting for that only decreases 13.2%/year to 12.7%/year.

And, if today's dinner bill is an indication, the inflation has not made my friends to spend less. Quite the contrary.

Wednesday, November 07, 2007

Latvia, Estonia, real estate

Estonian blogger Davix has some interesting graphs on apartment prices in Tallinn, Estonia. The overall trend is the same as in Latvia: the prices peaked in Spring and are now slightly more than 10% off the peak prices.

The trend did not surprise me, but the numbers did. From the graph, the October price looks around 1490 Euros/m2 which is the same as Latio's estimate for Riga, except that... Latio's numbers is average of old (Soviet era) apartments while Davix averages Soviet era apartments and (more expensive) new construction.

So, if one did apples-to-apples comparison (which I can't do because I don't have Estonian statistics separated by time of construction), Tallinn apartments will probably be about 20% cheaper than Riga. At the same time, Latvian salaries are 25% below the Estonian ones.

And Estonians are still complaining about the housing bubble. If they have a bubble, Latvia has a mega-bubble!

Monday, November 05, 2007

Is Latvia like US now?

David Brooks, one of my favorite New York Times columnists, had a recent column in which he wrote:
American voters are generally happy with their own lives. [...] Researchers from Pew found that 65 percent of Americans are satisfied over all with their own lives — one of the highest rates of personal satisfaction in the world today.

On the other hand, Americans are overwhelmingly pessimistic about their public institutions. That same Pew survey found that only 25 percent of Americans are satisfied with the state of their nation.
The political issues in Latvia are very different from US but it feels exactly the same way. Most of people whom I meet are happy with their lives. Typically, they are better off than they were 5 or 10 years ago.

At the same time, our political elite looks increasingly dysfunctional. It's hard to find anyone who trusts Kalvitis' government. Opposition does not look much better - if New Era Party was capable of convincing people that they can govern better, they would have won the last election. Right now, if "none of the above" was an option on Latvian ballots, it would win the election - by a large margin.

Saturday, November 03, 2007

Tautas sapulce

Today is the big public gathering (Tautas Sapulce) in Doms' square to protest against political corruption in Latvia and the present government. Aleks will probably have a first hand report from there when it's over. A few of my colleagues also planned to go there.

I watched it for a while on TV. It was quite impressive. Doms' square looked full and TV reported 8,000-9,000 participiants. It was snowing (Latvia is having first snow this morning) and cold but people were there, mostly under umbrellas, to express their unhappiness with the Latvian government.

It was quite unlike anti-government protests in other countries. Several choirs have come to the protest and short speeches by public figures alternated with collective singing of Latvian songs. It looked very peaceful and, unlike with protests in many other countries, it was absolutely clear that this protest will never turn into a riot. Yet, people were quite resolved and firm that our government must change.

When listening to speeches by opposition politicians, we wondered: will they actually be better? My family has never been Kalvitis' fans. Yet, today they ended up chuckling at the opposition speakers. There is a gap between speaking eloquently about how moneyed interests are having too much influence on Latvian politicians... and actually being able to govern better. Our opposition has a lot of the first skill. But they have not convinced us about the second. And when I see Latvian opinion polls that show New Era (the main opposition party) at 11.2% of public support, despite the unpopularity of Kalvitis' government, I conclude that a lot of Latvians feel the same way.

Thursday, November 01, 2007

October real estate numbers

The Latvian real estate bubble kept deflating in October, with apartment prices down another 2%, to 1490 Euros/m2, according to Latio real estate agency. The prices are now 13.5% below the peak of 1720 Euros/m2 reached in April. However, they are still 6% higher than one year ago (October 2006).

The new construction is slowing down and only one new project in Riga has been announced in September. Other real estate agencies report similar trends.

Wednesday, October 31, 2007

VVF's new job

Four months ago, Vaira Vīķe-Freiberga finished her second term as the Latvian president (probably, she was the best Latvian president ever and most of Latvia was sad to see her go). But VVF did not stay retired for long.

Vaira Vīķe-Freiberga is now the new president of European Research Area Board, a group of experts that will advise EU on scientific research and make policy suggestions to European Commission. It's an advisory role but an important one.

While looking for information on her new appointment, I came across similarly-named
European Research Council which distributes EU funding for research. Their website has the preliminary results of their first grant competition. Latvia did not do well at all and, even in terms of submitted grant proposals, we were the last.

Latvian governments did underfund research quite badly for 12-15 years (from Godmanis government in early 1990s until a few years ago) and we are still seeing the consequences of that. Things have been changing for better in the last few years (I hope the next government continues that) but it will take a while to undo the damage from 12-15 years of underfunding.

Monday, October 29, 2007

September Latvian credit market numbers

The numbers on Latvian home loans for September 2007 have been published and they confirm the trend observed in my previous post. In September, Latvian banks issued 64.9 mln lats of new home loans, 19.5% less than in August and less than a half of what the monthly amount used to be up to June 2007 (140-170 mln lats per month):People in real estate business are already complaining and referring to government's anti-inflation plan as "home construction industry destruction plan". I think the decrease is mainly due to management decisions by Latvian banks (which must be under a strong pressure to decrease lending, after all the negative information about Latvia in international financial press) rather than the anti-inflation plan. But decreasing the amount of new loans by a half can be devastating to the construction industry, no matter what the causes of this decrease are.

Also, if the trend continues, expect a strong slowdown in the rest of Latvian economy. Decreasing the available credit this quickly, by so much, has to have a strong impact. A substantial fall in home prices (beyond the 14% decline that has already occured) and an impact on a lot of other things, as well.

Thursday, October 25, 2007

(Rare) praise for Kalvitis government

Yesterday's Financial Times had a half-page article on Page 2 about Latvia's political situation. It had a large picture of last week's protest near parliament, a summary of issues around Loskutovs and other things one would expect.

What surprised me was this evaluation of Kalvitis' government policies on inflation and economic overheating, by David Orchard of Moody's rating agency:
They have done enough. For many years it was all talk and no action. Finally they are doing something.
It coincides with what I think. After a massive criticism from both Latvian press and international financial organizations, Kalvitis' government is starting to get its economic policies right. In a month or two, Kalvitis will likely be gone and Latvia will have a new government. I hope the new government keeps doing the right things, as far as economy is concerned.

Monday, October 22, 2007

The end of the Eastern European housing bubble?

The Latvian housing bubble has been one of the main topics on this blog recently. By now, the bubble seems to be over. The apartment prices have declined 14% in last half year and are still falling.

According to Irish Independent, the same thing has happened in most of Eastern Europe. Latvia, Estonia, Lithuania, Poland, Hungary, Bulgaria... all those countries have their housing prices falling. And some Irish investors are having problems because of that...

Thursday, October 18, 2007

Morten Hansen to blog at L-Diena...

Here is his blog. Morten Hansen, who teaches at Riga branch of Stockholm School of Economics, is one of best experts on Latvian macroeconomics. Should be interesting...

In his first post, Hansen describes Latvia as the "most interesting economy in the EU these days". I interpret "interesting" as "could end up well, could end up not so well". Economies with problems are not interesting and obvious disasters are not interesting, either.

The whole L-Diena set of business and economy blogs is getting better and better. I recommend it for any economy-interested readers who read in Latvian. (Morten Hansen is the only English language blogger there so far...) And, if L-Diena could add RSS feeds, it would be even better...

Tuesday, October 16, 2007

US embassador speaks out

US embassador to Latvia, Catherine Todd Bailey gave a speech at the University of Latvia today, on the shared values of Latvia and US and the current corruption issues in Latvia. I'm too busy to write about it in detail... but here is the text of the speech.

The usual suspects in Latvian media and politics have already started spinning it, by cherry-picking quotes to fit their view of the world, or making up arguments why the speech is not relevant. Read the speech instead of reading their reports. Or read both and contrast them. (At least one quote that is going around in Latvian language media is a very loose translation of the original.)

Sunday, October 14, 2007

Swedbank (owners of Hansabanka) downgraded

Forbes reports:
Deutsche Bank has downgraded Swedbank to 'hold' from 'buy' with a maintained target of 239 skr, citing the increased risk of a hard landing in the Baltic economies and especially in Latvia.

In a note to clients, Deutsche Bank said Swedbank's management have reacted too late and have few tools to manage the economic slowdown in Latvia, especially as it believes inflation there will be above 10 pct into 2008.

Swedbank owns Hansabank, the largest banking group in the Baltics, and is at risk from a possible devaluation of Latvia's currency, the lat.

Hansabanka is Latvia's largest bank and has issued 3.65 bln lats (5.2 bln euros) in credits (27.7% of all bank credits in Latvia). With lat/euro exchange rate fixed and money flowing freely between Latvia and abroad, the Bank of Latvia has essentially lost control over the fiscal policy in Latvia. Hansabanka and other major Scandinavian-owned banks (SEB, Nordea, DnB Nord) are the ones who determine it.

Until the beginning of this year, Hansabanka was lending loosely, with more than half of its loans being financed by money from abroad (e.g., its owner, Swedbank). This contributed to the housing bubble and Latvia's huge current account deficits. Then, the financial analysts started getting worried and now Hansabanka is under pressure to cut back.

Hansabanka has already cut the amount they issue in Latvian home loans 5-10 times. This downgrade means they are unlikely to increase it back soon (even if the Latvian government relaxes its restrictions on lending). So, housing prices are not going to rebound in the next few months. And cutbacks of this scale imply that we might see a very substantial slowdown in Latvian economy in general.


U.S. visas: a positive experience

Several times, I have written about the problems that Latvians (and other Eastern Europeans) have with obtaining US visa when they want to travel to United States. I have heard many stories of Latvians who have been refused US visa for no good reason. Both from my friends and from newspapers. (I've read that Latvian hockey star Martins Karsums could not obtain visa when he first wanted to play in US in 2002.)

I went to US embassy in Riga a few days ago, to apply for a visa for a short work trip to US. I had a better experience. Everyone was polite. I had my visa the next day. Unlike in 2002, I did not see anyone else being treated unfairly.

Maybe, the times are changing. In the last year, only 1.33% of Latvian visitors to US illegally overstayed their visa. The remaining 98.67% should not be treated with suspicion when they come to US embassy to apply for visa. And US embassy in Latvia may have understood that.

Funny news story

The city of Riga buys 120 cell phones from a company named "Bīstamie sakari" (translation: "Dangerous affairs" or "Dangerous communications"). I hope the cell phones don't turn out to be dangerous.

Thursday, October 11, 2007

Notes from Latvia

Some observations from a few weeks back in Riga:
  • Traffic is much worse. 5 years ago, I could get home without traffic jams easily. Not any more.
  • Same about (intercity) buses and trains. In July, Aleks had a post on how he spent 3 hours standing on overfull bus from Riga to Ventspils. I thought "he had an extraordinarily bad experience". No, I now have to think carefully which bus to take... so that I don't end up with a similar experience myself.
  • Everyone is complaining about inflation being at 11%... but it seems that people are spending more rather than less. They are driving more, travelling more and so on...
  • It looks like Riga has substantially more small children than a few years ago. In a future post with numbers, I'll discuss what is happening to Latvian birthrates...
And our political disputes and scandals are getting really bad, but I don't even feel like talking about them... I will write about that, but not today.

Bank of Latvia is becoming worried...

about the state of the credit market. As I wrote a few days ago, Latvian banks have cut the amount of home loans that they issue by a half in last few months.

The chairman of Bank of Latvia, Ilmars Rimsevics, just said the following:
  • Bank of Latvia is watching the slowdown in new credits;
  • If the slowdown is too fast, it may damage the Latvian economy;
  • In that case, Bank of Latvia may consider relaxing the restrictions on new lending.
With the economy being as dependent on foreign credits as in Latvia, it's hard to figure a good way out...

Saturday, October 06, 2007

August credit market numbers

Beside housing prices, I have been following another housing related statistic: increase in home loans issued by Latvian banks. Over the last two months, the change has been quite dramatic:
In August, Latvian banks added 78.182 million lats to their home loan portfolio. In contrast, they issued about 170 million lats of new loans per month in the beginning of this year.

As I argued in one of my previous posts, the Latvian housing boom has been largely fueled by readily available credit. In the past few years, the Latvian banks were increasing their home loan portfolios agressively, by 80% a year. Easier credits enabled people to pay larger amounts for apartments and houses, increasing housing prices by 60% a year.

Now, this process may have come to end. Judging the by graph above, a very abrupt end, with banks issuing only half as many loans as they used to a few months ago. (And, according to Latio, the former market leaders, SEB and Hansabanka are issuing 5-10 times less home loans than they used to.) There's less credit available and, if the trend persists, people will be unable to buy apartments and houses at the current prices. Sellers will be unable to sell and may have to postpone the sale or sell for less.

The decline in available credit has been much more abrupt than I thought. (And, given the subcrime credit scare in US and its impact of the world financial market, it may get even worse.) The impact of that on the Latvian housing prices and broader Latvian economy remains to be seen. Developing...

Friday, October 05, 2007

Latvian political scandals getting stranger every week...

Two weeks ago, Indulis Emsis resigned as the Speaker of the Latvian parliament, opening the way for a completely unknown person named Viesturs Daudze. We are now learning more about the scandal that lead to Emsis' resignation and it gets more and more bizarre...

As most Latvians know by now, the story started in October 2006 when Emsis got his briefcase stolen in the parliament building. According to Emsis, he had 10,000 US dollars in cash in that briefcase. The investigators found out that the briefcase was stolen by a waiter from the parliament cafe. But, instead of 10,000 dollars, they recovered only 6,000.

Emsis changes his testimony and says that he only had 6,000 dollars in the briefcase. (He now claims that he did that so the case would get to the court more quickly - and he could at least get 6,000 of his dollars back more quickly.) Prosecutor's office is not happy about him giving contradictory testimony. They conclude Emsis has lied under oath at least once and start a criminal investigation against him - for perjury. Emsis resigns.

It all sounds strange to me. A major politician changing testimony just to get 6,000 dollars back a few months early? Prosecutor's office prosecuting someone for what looks like a minor change in what they said? (Or is there something else that Emsis is not saying?) This scandal (and other things that are happening in Latvia right now) is leaving me more and more puzzled...

Friday, September 28, 2007

Back to Latvia

I have returned to Latvia, after being in North America for a very long time. I will continue blogging and I might even keep "Latvian abroad" as the name for my blog, since being away from Latvia has shaped my opinions and beliefs to a substantial degree.

The topics for the blog will stay the same: Latvian economy, society and politics. Now, when I'm in Latvia, I might add some pictures from here to my blog.

Thursday, September 27, 2007

September real estate numbers

The Latvian real estate bubble continues deflating. Balsts real estate company estimates that the average Soviet-era apartment price in Riga is now 1557 euros/m2, 2% less than in August. Combined with 12% decline in previous 4 months, this means that the prices are 14% off the peak level achieved in April. The real estate speculation is now moving on to Bulgaria and other countries in Southeastern Europe. (Even Latvian real estate portals are advertizing properties in Bulgaria a lot.)

However, the prices are still up 2% compared to January 2007, up 20% compared to August 2006 and up 90% compared to August 2005. The real estate prices were growing extremely fast for the last few years and, in comparison to that, the current decline has been quite slow.

There is a potential for further price declines. The prices for newly built apartments in Riga are substantially higher than in other Baltic capitals or even Latvian towns at just 20km distance from Riga. The most likely explanation is that much of new construction in Riga has been priced according to what buyers would pay at the peak of the bubble (rather than the actual construction costs). I suspect some of new construction prices includes profits of 20% or so.

As buyers and banks become more cautious, the developers may end up settling for smaller profits and lowering the prices. Having newer apartments at lower prices would then bring down the prices for older apartments as well...


Tuesday, September 25, 2007

Latvians in Ireland and UK, the numbers, part 3

Earlier, I did two posts on the number of people who have left Latvia for Ireland and UK. To summarize them briefly, Latvia lacks reliable statistics on this topic. Latvian statistics office only records the people who report their move to the authorities, obtaining a number of about 5,000 emigrants per year which is a major underestimate. Newspapers occasionally claim 100,000 or even 200,000 emigrants from Latvia to UK and Ireland and, in neighbouring Lithuania, one source has claimed that 500,000 Lithuanians have left for a better life abroad.

To find some reliable numbers, I looked at the statistics from UK and Ireland. Both of them maintain detailed records of how many Eastern Europeans arrived to work there. There are 25,956 Latvians who have registered with Irish authorities from May 2004 (the date when Latvia joined EU) and July 2007 (the most recent month for which they have data). UK reports 34,460 Latvian workers arriving there up to end of June 2007. Those are substantial numbers of people, although they are less than the wildest claims by media.

Also, looking for a better life in Ireland or UK is far from being specific to Latvians. There are substantial numbers of Poles, Slovaks, Lithuanians there, as well. Latvia, however, has the second highest emigration rate in EU8. (Lithuania is the only country with a higher emigration rate.) By breaking down the numbers by year, we can see that the emigration is rapidly decreasing and the number of people who left Latvia in 2007 only a half of what it was in 2005.

Irish and UK data have one thing missing in them. Both countries register people who arrive there. They don't record whether those people are still there or not. So, we know that there were 60,000 Latvians who worked in UK or Ireland at some point... but some of them may be back in Latvia now.

Now, there is a new set of data. In April 2006, Ireland had a census, recording everyone who was in the country on the census day. Here are the numbers:
55,076 Poles
19,912 Lithuanians
11,105 Latvians
7,377 Slovaks
4,371 Czechs
2,994 Hungarians
The number of Estonians and Slovaks was too small to make the press release. Comparing those numbers with the registration statistics, we see that 62% of Latvians who registered with Irish authorities were still there on the Census Day. For other countries, the similar percentage ranged from 38% (Slovakia) to 64% (Czech Republic).

Quite a few of those people who move to Ireland, stay there. But quite a few people also return to Latvia (or Poland and Estonia). Sometimes, the life in Ireland only looks better from a distance.

The data is from the last year. If the same trend is still true today, the number of Latvians who have moved to UK or Ireland and are still there, should be in the 30,000-40,000 range. Substantial but far from 100,000 numbers that get thrown around in the news.

Sunday, September 23, 2007

They nominated whom?

Latvia is going to have a new speaker of the parliament. And, if the coalition which has governed Latvia for the last year does not break up in the next 20 hours, it will be Gundars Daudze.

You have never heard of him? Neither have I.

The previous speaker of the parliament, Indulis Emsis, resigned on Friday, after prosecutor's office started a criminal investigation about him giving a false testimony in some Ventspils-related matter. Neither Emsis nor prosecutors are commenting on the matter. (Prosecutor's position is "We do not comment on ongoing investigations". Emsis' position is "I've never given a false testimony, on any matter." In the process, Emsis made a few colourful quotes. One of those was translated to English by Aleks. In another quote, Emsis compared himself to a mouse being chased by a cat.)

Prior to his resignation, Emsis had a long political career. From an enviromental activist in late 1980s, to Minister for Environment in 1990s (he was quite popular in that position) Prime Minister in 2004 and speaker of Saeima in 2006 and 2007 (he was less successful in those positions).

The new nominee is a complete unknown. The Union of Farmers and Greens, the party of Emsis and Daudze, has 18 members of the Latvian parliament. Out of those 18, there are 12 I've heard about before. The party decided to nominate one of the other 6. Daudze has served in the parliament for slightly less than a year and has been a doctor before. Google search turns up a few articles in which he's commenting on medical matters and not much else.

That reminds me of another Latvian doctor, Valdis Zatlers, who went from a complete unknown to President in 7 weeks. Given the mudslinging nature of recent Latvian politics, Latvian political parties are increasingly nominating unknowns for country's top positions, in hope that opposition will find it more difficult to find dirt about a person who has not been in politics for long.

A little more and we'll have an entire government consisting of political unknowns... actually, I already had that feeling in 2004 when Kalvitis' government was announced.

Friday, September 21, 2007

Return of the Soviet Union

Paul Goble has an interesting story about how the Soviet Union is coming back to Russian Internet. That is, an increasing number of Russian websites choose to have .SU (Soviet Union) extension instead of the normal .RU (Russia).

For example, the website of Putin's youth organization, Nashi is at, instead of They are still longing for the old Soviet Union. And, with Russia becoming more assertive militarily, it gets a bit scary...

Thursday, September 20, 2007

Inflation gap between the three Baltic states

Inflation is the top economic story in Latvian news these days. (Large current account deficits are harder to explain to general public.) The year-on-year inflation just topped 10% and, in a call-in poll of "Kas notiek Latvijā?" TV show, 97% answered that think the government should resign. (Call-in polls are not scientific and "Kas notiek Latvijā?" audience may skew significantly more to pro-opposition side than general Latvian population. Nevertheless, that sentiment is widespread, even if it's not 97% in general population.)

Inflation has been rising in both of other Baltic countries, but significantly less. It's now 5.5% in Lithuania and 6.4% in Estonia. Why Latvia?

There are a few factors that get mentioned all the time and one that gets overlooked. The currencies of the three countries had their exchange rate to Euro fixed at different times. Estonia fixed the exchange rate to German mark which became Euro. Latvia had a peg to a currency basket and switched to Euro peg in December 2004, in preparation for the switch to Euro (which is indefinitely postponed now). Lithuania fixed the rate to dollar and then switched to Euro in early 2002.

Latvia happened to switch at the time when Euro was very high compared to other currencies. Lithuania switched when Euro was around its lowest point ever.

It made quite a difference. Latvian exchange rate is 1Euro=0.70 lats. If Latvia had switched at the same time as Lithuania, it would have been 1Euro=0.55 lats. If Latvia had pursued the Estonian strategy of pegging to Euro from the beginning, it would have been around 1Euro=0.60 lats. By switching in 2004, Latvia unintentionally devaluated its currency, pushing both prices and salaries in euros down by 15-20% from what they would have otherwise been. As a result, the gap between Latvian and EU salaries became bigger than in the other two countries. With bigger gap, the rise in salaries and prices has been bigger.

I wish I could figure out how much of the inflation gap between Latvia and the other two Baltics is due to this effect and how much is due to other reasons...

Amusing entry on my visitor counter

Someone from European Central Bank came to this blog, searching for "bear Latvia Estonia". They found my entry on the chocolate bear.

I'm still wondering if they were looking for information on the chocolate bear or the type of bears that could cause a financial crisis in Latvia...

Wednesday, September 19, 2007

Latvian government finally does something!

For the last few weeks, I've been quite disappointed with the Latvian government. Prime Minister calling people to save more and spend less and, at the same time, parliament and president's office unveiling 2008 budget requests that included major pay increases for their staff. According to their logic, everyone is supposed to spend less, except for people who work in the parliament or president's office...

Latvian press was also upset (including newspapers that usually support the current coalition). As a result, on Monday, the prime minister Kalvitis came out with a sharp criticism of pay raise requests by the parliament and president's office.

Moreover, Kalvitis revealed a new set of austerity measures, which may include limiting the pay increases across the entire public sector to the inflation rate for 5 years, to create a budget surplus that would help Latvia withstand possible financial storms.

It's a major change. EU, IMF and others have been calling Latvia to restrain spending and form a sizeable budget surplus for at least half year. In response, Kalvitis government has been trying to create an appearance of doing something without actually doing much. Now, Kalvitis government is doing something substantial for the first time.

They are already running into opposition. Parliament is complaining that their staff is underpaid and need 26% pay increase. Other government offices are complaining about the plans to review their spending, as well. And, if the pay freeze extends to teachers and doctors, we may see strikes or people just leaving schools and hospitals. (Unlike already overpaid staffers at president's office, they actually need pay raises and I hope the government does not let the classrooms be empty and patients untreated.)

My opinion of Kalvitis' government is now a bit higher than a week ago. But it may take a few more rounds of public criticism to get them to do what they should be doing.

Friday, September 14, 2007

Thursday, September 13, 2007

This week's Latvian economy statistics

Latvian exports in July increased by 23.7% compared to last year, to 328.3 mln lats (470 mln euros), while imports increased by 39.3%, to 717.5 mln lats (1.02 bln euros). So, the Latvian trade deficit sets another record and Latvia is now importing 2.2 times more than it's exporting. My common sense says that this trend can't last for long. But it's lasting longer than I expected. (I was already saying "it can't last like this" 3 years ago when Latvia was importing 1.7 times more than exporting.)

Latvian analysts say that it's even worse, since most of increase in exports has been because of the price increases (15% on average), rather than Latvia actually increasing exports. Well, at least other countries are still buying Latvian products at higher prices.

Meanwhile, the inflation in Latvia is now at 10.1%. Our prime minister is calling people to save more money and spend and borrow less... The rest of the country is busy finding examples how the government itself is not living up to that, to show that the prime minister is a hypocrite. And there is a lot of examples. The current government is quite a PR disaster. (In terms of actual policies, there is not much they can do to decrease the inflation, for reasons described in this post.)

Welcome to Romanian readers

Welcome to all Romanian readers of this blog! Here is the list of all my posts on Latvian housing bubble and here is the list of all my posts on Latvian economy (includes housing bubble posts and other things).

If you know good English-language sources on Romanian housing bubble or Romanian economy in general, let me know. I've heard there are some similarities in what is happening in our countries now. And I'm curious to learn more.

Tuesday, September 11, 2007

Found on the web: about 40 Latvian beers

A story about beer-tasting in Latvia, by British travellers. Conclusion: Latvia has many smaller breweries making interesting beer. Unlike some other countries in the region which primarily have multinational-produced bland beer.

This was found via Baltic Visitor, a blog devoted to travel in Baltics (which I'm adding to my blogroll).

Monday, September 10, 2007

Latvian credit market developments

Latvian economy has experienced fast growth and major inbalances recently (to the point that Latvia is now 1st on the list of countries vulnerable to a financial crisis). This has been largely fueled by large amount of low-interest credit from abroad, most of which has gone into consumption, rather than productive investment.

Latvian-language media have started to break down the role of various banks in this process. This blog post by Gatis Kokins, vice-president of Parex Banka, has a graph of loan portfolio increase for various banks in 2007 vs. increase in deposits by their customers. Two of the Nordic-owned banks (Hansabanka and Nordea) have had loans increasing 4 times as fast as deposits. So, 75% of their borrowing has been financed from abroad.

The print edition of Diena newspaper also has a graph which breaks down the increase in home loans in 2007 by month and bank. There are interesting trends there. Two biggest Scandinavian-owned banks (Hansabanka/Swedbank and SEB Unibanka) have now cut back on lending in a major way. Their loan portfolio increase in July is 3-6 times less than it was in January. Meanwhile, the next two banks (Norwegian owned DnB Nord and Finnish owned Nordea) have increased their lending by about 50%.

When some Nordic-owned banks decides that the Latvian economy is overheating and they should cut back, others view it as a chance to grab a bigger market share. Developing...

Sunday, September 09, 2007

Marches and riots

Over the last week, Latvia saw a controversy over a "Russian March" proposed by several activist groups. On the surface, the Russian March looked like a regular demonstration for the usual ethnically Russian concerns (bigger role for Russian language in Latvia, more liberal citizenship laws, etc.). A closer look revealed several reasons for concern.

First, the event had the same name as a sequence of ultra-nationalist demonstrations in Russia, in 2006 which had often turned violent. And that did not look like a coincidence. One of organizers was Latvian National Democratic Party, lead by Yevgeniy Osipov, a former member of Russian National Unity, a Russian ultra-nationalist organization with neo-Nazi undertones. Reportedly, Osipov used to have a fair amount of neo-Nazi symbols on his webpage a few years ago (which have now been removed).

And even the official poster of the event looked quite threatening, with a violent looking bear under a text "Russians don't surrender!"
Given all that and the recent "Bronze Soldier" riots in Estonia, everyone was weary. Riga City Council decided not to allow the march because of possible violence and the court upheld the decision.

At the end, there was a demonstration in a city park instead of a march. About 150 demonstrators showed up, surrounded by a significantly bigger crowd of bystanders, journalists and police. They chanted "Russians don't surrender" but there was no violence.

The only violence on Saturday unexpectedly came from a different source. About 500 drunk soccer fans from Northern Ireland, in Riga for Latvia-Northern Ireland game. They started by breaking chairs and dishes in outdoor cafes and finished by throwing a brick and other objects at the arriving police cars. Riga has seen some instances of tourist misbehaviour recently but this was by far the worst one.

Luckily, our soccer team managed to punish the North Irish fans for that by winning the game 1-0.

Saturday, September 08, 2007

This week in Latvian economy

S&P has issued a ranking of the countries that are most vulnerable to adverse conditions in international financial markets. Latvia is in the unfortunate 1st place, followed by Iceland, Bulgaria, Turkey and Romania. Lithuania is substantially further down the list. I would be curious to know how Estonia ranks compared to Latvia but, unfortunately, S&P did not include Estonia in the ranking.

I still think my analysis of why Latvia will avoid the worst case scenarios is right, but Latvia being 1st on a list like this is alarming.

Meanwhile, Latvian finance minister says that they intend to have a surplus of 0.2% GDP in the 2008 state budget. IMF and EU had called for a much larger 4% surplus in 2008.

A country which is doing well at the moment but is vulnerable (like Latvia now) should be having a larger surplus so that it has reserves in case if a financial storm hits it. Unfortunately, Latvian government does not see that. There were rumors of some fairly strong austerity measures a few months ago but, given the new budget announcement, those rumors must have been false.

Wednesday, September 05, 2007


Well, it appears that Latvian basketball team is capable of any surprises, including not so good ones.

We were supposed to win Portugal today. Portugal is not exactly a basketball country. Instead, our team was behind for almost the entire game. For first half, they were 3-5 points behind. I was saying to myself: we will catch up. At one point, they did. They had a small lead, for a half-minute or so. But it did not last.

Then, in the fourth quarter, Portugal took a 17-point lead. It was no longer the question who would win. It was the question by how much. If Portugal wins by less than 15 points, Latvia would still have a chance of advancing to the next round if Spain wins Croatia later tonight. If they won by more than 15 points, Latvia would be out immediately.

At the end, it was 77-67 and our basketball team is now waiting for the outcome of Spain-Croatia and pondering how they managed to lose to Portugal for the first time in Latvian basketball history.

UPDATE: Croatia won Spain by one point (with Croatia scoring the winning basket 3 seconds before the game was over) later on Wednesday and Latvia was eliminated. The coach of the Latvian team resigned on Thursday.

Monday, September 03, 2007

We win!

Latvia-Croatia 85:77. First-ever win against Croatia in an official game. Good beginning to Eurobasket 2007!

Sunday, September 02, 2007

August real estate numbers

Balsts real estate company reports that apartment prices in Riga decreased by another 2.9% in August. The housing prices are now 12% below the peak level of April 2007 (but still a lot higher than in a year or two ago). People in Riga say that one recently finished highrise has all windows dark (meaning nobody is actually living there). Developer's website for that highrise shows 25% of apartments as sold or reserved and 75% still available.

Balsts predicts another 3-5% decrease in prices in the next 2 months, followed by stabilization. I expect a bigger decline.

July lending data are out, under the headline "Home loans increase by 75.6% in a year". Monthly data show a different picture, however. The home loans increased by 107 million lats (153 million euro) in July which is considerably less than 140 million lats/month increases in April-June and much less than 187 million lats/month in January-March. The banks are getting worried about the overheating economy and the possible housing bubble and are cutting back on new loans.

At some point, this should result in slowing down the rest of economy, as well. But for now, there is no signs of that yet.

Friday, August 31, 2007

On financial storms, part 2

Click here for Part 1 of this post.

Just like East Asia in 1997, Latvia has very high current account deficit and a lot of credits in foreign currency (euro in Latvia now, dollars in East Asia in 1997). This lead to a devastating financial crisis in several Asian countries 1997. In this post, I will describe two reasons why (I think that) such crisis is unlikely in Latvia.

First, Bank of Latvia is well-prepared to defend to present exchange rate of 1euro=0.7 lats. In 1997 Thailand, the crisis started by exchange rate of Thai baht plunging from 25 baht/dollar to 56 baht/dollar. This put extreme pressure on people and businesses which had borrowed in dollars. Many of them went bankrupt because their baht incomes were worth much less dollars but the amounts of dollar loans were still the same.

As of July 2007, Bank of Latvia has the foreign currency reserves worth 5.1 bln US dollars. This is comparable with the amount of lats in circulation and Bank of Latvia should be able to maintain the present exchange rate even if people rush to exchange lats for euros.

Speculative attacks on currencies use borrowed money. If speculators want to crash the exchange rate of Thai baht, they borrow money in bahts and exchange it for dollars, until there is no party willing to exchange dollars for bahts. Then, the exchange rate falls. Eventually, some of borrowed money is exchanged back at a lower exchange rate to repay the loans. The rest is speculators' profit.

The problem with doing that in Latvia is borrowing a sufficiently large amount of lats. In more developed financial markets, one can easily borrow large amounts for speculative transactions. Latvia, however, has very little in terms of financial markets. The banking system is oriented towards everyday transactions and borrowing the lat equivalent of 5.1 bln US dollars for speculative purposes is between very hard and impossible.

The second distinction between Latvia now and East Asia in 1997 is the nature of foreign currency inflows. If foreign money is withdrawn from a country in a panic, that can trigger a financial crisis. Some investments are harder to withdraw than others. As Martin Wolf said, "factories do not walk" (if an investor has purchased a factory, it is difficult to sell it in a panic and leave the country with money). Foreign investment into Latvia has been more in shopping centres than in factories. However, shopping centres are about as unlikely to walk as factories.

For the last years, most of foreign currency inflows have been through Latvian banks borrowing money from abroad. This is more worrisome but a fair amount of this borrowing has been from Scandinavian banks that own the respective Latvian banks. As a result, Scandinavian banks are interested in stable long-term future for the Latvian banks and are less likely to withdraw their loans suddenly.

The third distinction is that financial markets have been less stormy in recent years and have tolerated much larger imbalances then before. This can, however, change anytime. But, based on first two distinctions, I'm optimistic about Latvia.

That being said, the Latvian boom of last few years will probably subside. To use an analogy from Asia, Hong Kong avoided a financial crash in 1997. Yet, a colleague from there tells me that there was a marked difference between pre-1997 Hong Kong (optimistic, flush in money for any reasonable project) and post-1997 (people squabbling over much smaller amounts of funding). There were people who had been abroad for a while, went back around 1997 and were quite disappointed with life there post-1997. And it's worse in the industries which boomed in 1997. For example, the salaries for Hong Kong construction workers now are half of what they were in 1997.

Wednesday, August 29, 2007

On financial storms

There had been some comparisons between Latvia's economy now and that of East Asian countries (e.g. Thailand) before 1997 Asian financial crisis. In both cases, the country experienced very fast economic growth and had a big current account deficit (10% of GDP in 1996 Thailand, over 20% in Latvia now). As we now know, Thailand's boom ended with collapse of its currency, baht and a severe economic crisis in the following years. Similar things happened in several other Asian countries, shortly after Thailand.

What does this mean for Latvia? Discussions with Edward Hugh lead me to exploring what economists think about the causes of 1997 crisis in Thailand. In particular, it lead me to this paper by Paul Krugman, written a few years after 1997.

Interestingly, I can relate Krugman's theory to what has happened in Latvia over the last 10 years. Krugman develops a mathematical model of country's economy which leads to a conclusion that it can be in two stable states:
  • high-trust state in which investment takes place and banks lend money freely;
  • low-trust state in which domestic businesses are nearly bankcrupt and banks are unwilling to lend them money.
The low-trust state sounds very much like Latvia of mid-1990s in which credit was mostly unavailable. The high-trust state is Latvia of today. In 1997, a sequence of unfortunate events lead Thailand's financial system to collapse from the high-trust state into the low-trust state. The consequences were felt for a long time: in 2005, the average income in Thailand was less than in 1997.

The positive message from Krugman's paper is that crises of this form are not inevitable. They don't automatically happen once the current account deficit exceeds some magic number. Rather, current account deficit (and also large debt in foreign-currency, another similarity between Thailand'97 and Latvia'2007) are signs that the economy is vulnerable and might be less able to withstand a sequence of unfortunate events ("financial storm") pushing it into a downward spiral.

I've tried to think if such a financial storm could occur in Latvia now. I think no. There are some substantial differences between Thailand and Latvia. I will write on those in another post tomorrow but the most important one is that Bank of Latvia has the reserves to maintain the current exchange rate between the Latvian lat and EUR. (Thailand's crisis started with Baht plunging from 25 baht/dollar to 56 baht/dollar.)

Thursday, August 23, 2007

Found on the web

One day in Latvia. On August 31, 50 professional photographers and many more volunteers will take photos all around Latvia, to create a snapshot of everyday life in Latvia.

The first such event took place 20 years ago, on August 31, 1987. 30,000 pictures were taken. Here is a selection of those. Back then, nobody had any idea what surgeon Valdis Zatlers will be doing 20 years later...

Wednesday, August 22, 2007

Latvian housing market: the current state

An increasing number of people are coming to this blog via google, searching for "Latvian housing crisis" or something like that.

I would not call it a crisis (not yet, though it could become one in the future) but here is the current situation. After rising more than 60% in year until April 2007, the Latvian housing prices have dropped 8% since then. The number of "For rent" ads has been steadily increasing, as sellers choose to wait and rent out the apartments instead.

Diena newspaper has two blogs: one by a journalist who is trying to sell his apartment and another by a person who is trying to rent a place. Both of them are having difficulties. If we believe the blog comments, the rental apartments get rented out quickly, often for a price roughly equal to a mortgage payment when buying a similar place at the current prices. So, there are people who could make the mortgage payments... but they chose to wait with buying or (most likely) don't qualify for mortgage under the new stricter bank requirements.

Banks have been a big part of both rise and fall in the housing prices. Since April, the amount of money issued in new mortgages has declined. By now, managers of all 4 biggest Nordic owned banks have admitted that they are deliberately cutting back on new loans, because of the concerns about severe overheating in the Latvian economy. Hansabanka (owned by Swedbank) who is by far the biggest lender in Latvia has cut back the most.

There are claims that the smaller locally owned banks are expanding their lending and giving loans to people who are turned down by big banks. I have no data on that but the press releases from Latvian association of banks show decline in total lending by all banks combined. So, even if smaller banks are increasing their lending, the increase is not big enough to compensate for cutbanks by Hansabanka etc. And if this happens to be a mirror image of what happened before the prices peaked. It was the local banks who had the stricter standards then, while Hansabanka&Co were increasing their market share with easier loans.

I've been wondering for a while if cheaper credits from abroad would somehow find their way into Latvian credit market, defeating the cutbacks by Hansabanka&Co. This has not happened on a large scale yet and, given the overall situation in world financial markets, is becoming less and less likely.

Sunday, August 19, 2007

Chocolate bear

Since I've had so many heavy real estate/economy posts recently... here is something less serious:

This is a 36kg chocolate bear, produced by Laima, the main Latvian chocolate producer.

The story behind it started last April when a brown bear swam on a piece of ice from Latvia to the Estonian island of Ruhnu, 37km away from Latvia. The bear was on the island for 4 months and it managed to avoid multiple attempts to catch it, until disappearing (swimming back to Latvia?) in August.

One year later, Laima produced the chocolate bear and gave it as a gift to the people living on the Ruhnu island. They have not eaten it yet... instead, they arranged for an artist to produce a plaster copy of the chocolate bear, for a permanent display on the island. When the plaster copy is ready in mid-September, they will finally eat the chocolate bear.

Tuesday, August 14, 2007

Away for the next week

Blogging to restart on August 20 or 21.

Monday, August 13, 2007

Latvians in Ireland and UK: the numbers, part 2

One week ago, I wrote about the statistics how many Latvians have left for Ireland and UK. This is the continuation, on how these numbers have changed between 2004 and now. The first graph shows the number of Latvians who have moved Ireland for first time, according to Irish authorities:
To make the comparison between the years fair, I have divided the number of people who arrived in each year by the number of months for which we have data. (For 2004, that would be 8 months after Latvia joined EU in May 2004. For 2005 and 2006, 12 months. For 2007, 6 months because we don't have data for the rest of the year yet.)

The immigration from Latvia to Ireland is clearly decreasing. Slowly in 2006 and then more quickly in 2007. The numbers from UK show a similar trend.

The second graph compares the trends in various countries. To keep it simple, I compared two years, 2005 and 2007. Here are the immigration rates (the number of people arriving in Ireland, divided by the population):
The red lines show the rates for 2005, the blue for 2007. For all three Baltic states, the numbers have significantly decreased. It appears that the present economic boom is making people substantially less interested in leaving their country.

Accidentially, the Latvian business magazine LD had the cover story "Latvians start returning from Ireland" last week. (The link is to the picture of the magazine, the story itself is only in the print edition.)

Saturday, August 11, 2007

More on US visas

As I wrote before, USA passed a new law that may result in visa-free travel for Latvians to United States by 2009. Maybe. Or not. Depending on some fine print and other things.

Latvia and five other Eastern European countries are not happy about that and have officially declared their disappointment. The news story about that has an interesting quote from a (Polish) employee of the US embassy in Poland. He/she recommends people to schedule their visa interviews for Friday. Consular officials are in a better mood on Fridays, because of upcoming holidays and deny visas to less people. (Here is the original Polish source for the quote.)

US claims that visas are being denied because the embassy officials are unsure whether people will return to Poland afterwards. Well, in Latvia, I have witnessed a number of denials to people who did not have any intention of staying in US illegally.

Wednesday, August 08, 2007

Added to the blogroll

Window on Eurasia, by Paul Goble, one of best Eastern Europe experts in United States.

I grew up reading translations of Goble's opinion columns in Diena newspaper. I was really glad to discover that he now has a weblog and posts almost daily!

Some posts I particularly recommend:
- Russia’s Second Post-Soviet Generation Very Different from First - the first generation is people who came of age in 1990s, the second in 2000s and the values of the two generations differ quite a bit. After reading this, I wonder if the same trends can be seen in Latvia as well.
- Ethnic Russian regions nurture seccessionist ambitions and Regional Identity Trumps Ethnicity, RF Patriotism in Siberia- about the possibility that some parts of Russia may secede in the future.
- How the Chuvash ‘Discovered’ America – And Other Notions from New Russian Textbooks - some very strange ideas have made their way into Russian schools.

Tuesday, August 07, 2007

Direct flights between Latvia and North America?

LETA agency reports that Air Baltic, Latvia's national airline, is shopping around for Boeing 757 airplanes. Meanwhile, Riga airport is extending its runway so that they could receive intercontinental flights.

I've flown from North America to Latvia and back a lot in last 10 years. Typically, it involves flying from Riga to some major North European airport (London, Franfurt, Copenhagen), then, from there to North America. And there might be another change of planes in North America, if the final destination airport does not have direct connections to North Europe. Some of those trips have been quite exhausting for me.

A direct flight from Riga to, say, New York would make things much easier. There was one in early 1990s, thanks to Latvian American businessman Georgs Mikelsons, the founder and CEO of American Trans Air. When Latvia became independent, American Trans Air started a New York-Riga flight (with a stopover in Belfast, Northern Ireland). The flight did not quite fit together with the rest of ATA's flight network, though, and was discontinued a few years later.

Another flight was started in 2005, by Uzbekistan Airways, which chose Riga as a stopover point for their Tashkent-New York flights. I do get a bit nervous about their safety standards, though. (I don't know anything specifically about Uzbekistan Airways but a number of airlines from Russia and CIS have problems in that aspect.) In contrast, I feel perfectly safe flying Air Baltic.

The growth of Riga airport in last years has been extremely impressive. The number of passengers has more than tripled in 4 years and there has been a lot of new flights to new destinations. And direct flights between Latvia and North America no longer look impossible.

UPDATE (31/08): In comments, a reader says:
Hello, my wife flew Uzbek Airlines from New York to Riga and back last year. It was a great experience from start to finish. Due to us having two young boys, it's so much easier to fly non-stop than to have layovers. I've never heard anything about Uzbek Airlines having quality problems.
I'm glad to hear that. If I need to travel from Riga to New York, I might try Uzbek Airlines.

UPDATE 2: I am told that Latvians from Latvia are a bit cautious about the Uzbek Airlines flight (in the same way that I was when I wrote this post), while Latvian Americans fly it in large numbers. And their experiences with flying Uzbek Airlines are good.

Sunday, August 05, 2007

Latvians in Ireland and UK: the numbers

Two weeks ago, I wrote about Latvians (and other Eastern Europeans) who have left Latvia to work in Ireland and UK. Here is what the numbers are. Both Ireland and UK maintain detailed statistics on the number of Eastern Europeans who have arrived there. In Ireland, the new residents have to obtain PPS numbers (Irish counterpart of Latvian personas kods or US Social Security Number) and the government tracks the number of those. Here are the data:

In UK, the Eastern Europeans who work there have to register through Worker Registration Scheme (WRS). Here are their numbers:
It's not quite 1.5 or 2 million of Poles in UK that some newspapers have reported. I mentioned that number in my previous post, but, when I look at it again, it turns out that 1.5-2 millions include Poles who have visited UK as tourists. The actual number of Polish workers in UK is 393,000 but that is still quite big.

And both in Ireland and UK, Poles outnumber the other Eastern Europeans. That is not surprising since Poland has much more people than any of the other countries. Here is what the numbers look as a percentage of population for the respective countries:
It's actually Lithuanians who have been the quickest to leave their country. 3.3% of Lithuania's population has ended up working in UK or Ireland. (Since UK only registers those foreigners who work there, the percentage of working-age Lithuanians who have left is probably 5-6%.) Latvia is second, with 2.5% of population gone. Slovakia is third and Poland is fourth. That surprised me a bit, because there are so many newspaper stories about Poles in UK and hardly any about Slovaks. Estonia is fifth. The emigration rates from Hungary, Czech Republic and Slovenia are much smaller.

Curiously, UK data say that more than half of arriving Eastern Europeans intend to work there for 3 months or less. So, some of people counted in those graphs may have actually gone back. I wonder if that actually happens or whether people are lying on their worker applications for some strange reason.

I will have another post with numbers from UK and Ireland in a few days, including a new trend that has not been noticed by the media yet...