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.

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.

(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.

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...

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...

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.)

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.

Developing...

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.

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...

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...

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...