Post-referendum notes

The Latvian referendum season is now over and the country is moving on to other exciting things... like over government trying to decide how to cut 1/5 of all programs in 2009 budget, while spending 2.5 mln lats (3.5 mln euro) on renovating president's residence. As usual, everyone is outraged but that doesn't change anything.

The conclusions from the pension referendum:

1. People don't always vote for more money. Before the referendum, I made a parallel with Hungary which had a referendum on fees for doctor visits and university education this spring and voted for free services, overwhelmingly. Latvia looked like the exact parallel: government saying "The government can't afford that" (higher pensions, in our case), opposition saying "Not it can". The difference was that there was more at stake. The Hungarian fees were quite symbolic, the Latvian pension increase more substantial. Both as a benefit to people and as a cost to state budget. Yet, Latvians did not show up for the referendum. Why?
   
2. The government stepped forward. As I described in my previous post, the government did come up with its own pension increase plan, which gave roughly 1/2-2/3 of the increase promised in the referendum proposal. The retirees deserved an increase and they got one, although a smaller one.
   
3. Quiet campaign. Unlike with the Constitutional referendum (where I got bombarded with "Dissolve the parliament" message from every billboard and TV ad), this campaign was much quieter. It felt as if many of opposition's parties had quietly agreed that increasing pensions more would indeed increase the already-growing-due-to-recession budget deficit by too much. Some of them stated "We support higher pensions" in one or two interviews but did not really attempt to campaign and make sure that people show up for the referendum. Even Stokenbergs' Society for (not so) different politics spent more than 100,000 lats to advertise for gathering signatures in favour of holding a referendum and less than 10,000 lats to advertise for the actual referendum. Did they disbelieve the proposal, as well?
4. Referendum fatigue. This is the third referendum in 1.5 years, with the previous two (security laws and Constitutional changes) having no result. There's some point at which people's attention starts to turn off. Latvia may beyond that point.

With referendums over, the Latvian politics looks like it used to be. The government is unpopular and so is the opposition. If they hoped for some political gains, they were wrong. Except for ethnically Russian parties, everyone else in the opposition is now at 2-3% range in opinion polls. More than 50% of Latvians are undecided or not going to vote, and that number has been slightly increasing in the last few months.

Latvian pensions referendum is failing

Today is the referendum on a major increase in Latvian retirement benefits. Here is part 1 and part 2 of the background on the referendum, that I wrote a few months ago.

As usual with Latvian referendums, people opposed to the referendum proposition are skipping the vote, to push the turnout below the legal threshold at which the referendum is valid. So, the result will be 95%-99% "yes" but the real question is the turnout.

For the law to pass, the turnout must be at least 1/2 of the turnout in the most recent parliamentary election. That means that we need 453,730 voters, which is 30.65% of all eligible voters, for the vote to count. According to the Central Election Committee, we have:

• a turnout of 0.59% in the first hour of voting (7am - 8am);
• a turnout of 9.50% in the first 5 hours (7am - noon).

If the distribution of turnout over the day is like in previous referendums, this is insufficient. The 7am-noon turnout was:

• 41.8% of the final turnout in the Constitutional referendum a few weeks ago;
• 40.7% of the final turnout in the security laws referendum of 2007;
• 37.7% of the final turnout in the parliamentary election of 2006;
  
• 43.8% of the final turnout in the referendum on Latvia joining EU in 2003.
  

Right now, we have a noon turnout that is 31% of the necessary one. Either we have a huge number of procrastinating voters (myself, I'm still thinking whether to vote "yes" or to skip the referendum for an effective "no" vote) or (more likely) the referendum is on its way to failing.

The next update on turnout is at 4pm. In previous referendums/elections, 4pm turnout was 69%-74% of the final one. 69% of the necessary 30.65% is 21.33%. If we are substantially below that at 4pm, we can be quite sure that the referendum has failed.

UPDATE (9:30pm): 8pm turnout numbers are out and, with only two hours left in voting (8pm-10pm), the turnout is 21%. It's now safe to say that the turnout is not going to jump to 30.65% in two hours. The referendum has failed.

UPDATE (3:00am): the turnout is 347044 or 23.45% of eligible voters. Everything has been counted, except for 4 voting places in Latvian embassies in America (due to time-zone difference), which should not affect the number much. Again, the referendum has failed and by a substantial amount. I will have a post-referendum post tomorrow.

Latvian GDP, Q2 2008

Flash estimate of Latvian statistics office shows that Latvian GDP grew 0.2% year-on-year in the 2nd quarter of 2008. This was slightly weaker than 0.4% predicted by a panel of 10 experts for Bloomberg and slightly better than what I expected (I thought we will see a negative number in Q2).

Since we are at a rapid turning point, quarterly data might show the trends better. Quarter-on-quarter, the economy grew 3.2%. However, the 1st quarter is economically slow every year and the 2nd quarter always shows big growth number compared to the 1st quarter.

Here is a rough seasonal adjustment:

• over last 5 years, the average quarter-on-quarter economic growth in Q2 has been 6.1%;
• throughout the year, the average quarter-on-quarter growth is 2.3%;
• thus, economic growth is by 6.1-2.3=3.8% faster in the 2nd quarter.

Subtracting that 3.8% from 3.2% growth rate gives a seasonally-adjusted growth of -0.6% compared to the previous quarter. It's better than -1.9% that we saw in the 1st quarter (using the same methodology). But Latvia is still, very clearly, in a recession.

If the trend continues, the Q3 will have a year-on-year GDP "growth" of around -3% and, for the entire year 2008, it will be around -1%.

Added to the blogroll

A photo blog by Arnis Balcus, a well known Latvian photographer.

Economic slowdown is starting to bite

One of strange things about Latvian economy was that, even as the economy started slowing down at the end of 2007, salaries continued to increase at 30-40%/year. It appears that this trend is now over. Our statistics office has not yet released the data on Latvian salaries in Q2 2008 but there is data from the tax office:

The graph above shows how the revenue from social security contributions is changing. Since Latvian social security contributions are a fixed % of person's salary (except for very high incomes), the average salary increase should be about the same. And increases have slowed down from about 40%/year to slightly less than 20%/year. The next graph shows the same data, adjusted for inflation (which has been steadily rising):
We are at a point when salaries are no longer increasing faster than inflation. And, given the trend, in a few months, they will be increasing substantially slower than the inflation. The economic slowdown is starting to affect almost everyone.

Also, at my work, I'm starting to get questions of the type "Do you have openings in your organization?". Just a year ago, it was organizations having to look for employees, not the other way around. Things are changing and labour market is getting tighter.

In short, the economy is starting to hurt and it will get worse. Given the scale of economic inbalances in Latvia'2007, this was inevitable. I'm only hoping that this recession lasts a year or two, not 5-7 years.

Latvian song festival, a late recap

The 24th Latvian Song and Dance Festival is now over. It was the biggest ever - with 38,000 people performing. (That would be 1 out of every 60 people in Latvia on stage in some event - is there any other country that has festivals of this scale?)

We also had the biggest ever shortage of tickets to many of the festival events. The tickets for the closing concert were reportedly being re-sold at 10 times the face value. One humorist referred to that as "Song, dance and ticket-scalper festival".


I was lucky to get tickets to the opening concert - the one which got a lot of criticism afterwards. Myself, I enjoyed the concert - but not as much as some of the past Song Festival concerts. The feeling of being there with tens of thousands of other people and listening to a thousand-people choir was great. The traditional Song Festival songs, performed for 5, 10 or 20 festivals in a row, were good. But the attempts to insert something more modern into the Festival program did not quite connect with me this time.

There were several songs sung by Renars Kaupers of Brainstorm (the best known Latvian pop music band), with youth choirs in the background. I like Brainstorm but there are so many other opportunities to listen to it. Song festival is only once in 5 years and I would have liked to hear the choir more and Kaupers less.

There were also several songs composed for this festival - and they did not have the same success as the traditional favorites. But I certainly enjoyed the concert and would have gone to it again. And I understand the need for creative experiments.

In the closing concert (which I watched on TV), they went back to the traditional Song Festival repertoire and it sounded great. And every one of my friends and every critic liked it. And it was followed by the choirs singing together with the audience until at least 4am. I really wish I had been there...

UPDATE: In comments, Pierre points out that Estonian song festival has 34,000 perfomers - which would be one out of 40 Estonians performing. So, we are not unique. Maybe Baltics together are unique in this aspect. And, in any case, it's very impressive...

People's Party and pragmatism in Latvian politics

Latvian sociologist Aigars Freimanis, about People's Party (the largest party in the current coalition) and its future:

Velkot paralēles ar "Latvijas ceļu", daudzi saka, ka TP tieši tāpat ir nogājusi sev nolemto varas ciklu. Man šķiet, ka TP tomēr ir zināmā mērā īpaša. Cilvēki, kuri tajā apvienojušies vai balso par TP, ir saistīti pragmatiskām saitēm. Tās ir daudz stiprākas nekā ideoloģiskās. Lūk, šis faktors rada to īpašo situāciju, kad cilvēki nospļaujas, lamā no panckām ārā, bet tik un tā atkal iet un nobalso par... Tautas partiju. Vienīgais risks, ja kāds uz vēlēšanām uztaisa līdzīgu veidojumu, kas no jauna spētu ieintriģēt pragmatiķus.

A loose English translation:

Many say that the time for People's Party is up. But I think they are somewhat special. People who vote for People's Party do it because of a stronger-than-ideology pragmatism. They swear about it but then they again go and vote for... People's Party. Their only risk is if someone else creates a similar organization, capable of captivating pragmatically minded voters.

I am one of those pragmatically minded voters myself and I've had difficult time deciding for whom I should vote next. To put it very softly, the list of flaws for People's Party (or anyone else in the coalition) is getting longer and longer...

But then when I look at the alternatives... The main idea of a large part of opposition these days is that if we somehow got rid of Skele, Lembergs and Slesers, Latvia would turn into a paradise on earth. New Era Party looks clueless about how they would govern, except for prosecuting oligarhs. Stokenbergs "Society for Different Politics" is turning into the Society of Promising Everything to Everyone.

Only Kalniete's Civic Union looks a bit hopeful. And there's two years and three months until the next election...

Even bigger austerity package on the way...

While I was wondering whether Latvian state finances are indeed in so bad shape that they need a 100 mln lat (140 mln euros, 0.6% GDP) of budget cuts, Latvian government decided on even bigger package of cuts. Our minister of finance now says that we should expect 250 mln lats (360 mln euros, 1.6% of GDP) of cuts!

My opinion remains the same as in my previous post. There's still no evidence of major revenue shortfall. So, we have the following possibilities:

1. there's something very bad coming and I don't see that but the government does;
2. the government is seeing something very bad that is not actually happening;
3. the government is acting under behind the scenes pressure from IMF/EU/whoever else;
4. the government has decided to use the situation as an excuse to cut the bloated Latvian bureaucracy.

Developing...

Latvian real estate predictions

Throughout the bust of Latvian housing bubble, some real estate agencies have been making predictions of the type: "The prices will keep falling for 2-3 more months, for a total of another 3-5%, and then stabilize". Balsts agency may have been the one who made those more than anyone else.

Now, they've made a new prediction. They now expect another half-year of price declines, for a total of up to 10%, and then a price stabilization. As the bust of the housing bubble goes on, there is less and less of expectations that it will stop soon.

Real estate bust in Estonia

For a while, I have been looking for numbers on Estonian real estate market, to see the similarities and the differences from Latvia. But the numbers have been hard to find. In Latvia, virtually every major real estate agency releases monthly estimates of the average apartment price in Riga.

For Estonia, either I'm bad at finding such estimates or they are not made public. But, yesterday, I came across an Estonian article in which an investor calculated the averages himself. The result: advertised prices have declined 23% in last 14 months. This is quite similar to Latvian numbers that I reported on this blog.

The big question is how many Eastern European countries will get affected. I talked with a Slovak colleague last week. And what I heard about the market in Bratislava sounded remarkably like Riga before the bubble burst. But, again, it has been difficult to find statistics that are directly comparable to Latvian ones...

Ireland rejects Lisbon treaty

A referendum in Ireland has rejected the Lisbon treaty that reforms the European Union. I'm glad that they did.

The proponents of the Lisbon treaty will claim that it's unfair for Irish, less than 1% of EU's population, to prevent the treaty from coming into force. But, as pointed out by Dave Kopel,

The very fact that only 1% of the EU's population was allowed to vote on a treaty [...] was itself an illustration of the enormous "democratic deficit" of the EU in general, and the Lisbon Treaty in particular.

There could be more countries rejecting the Lisbon treaty in referendums, if there were any other countries holding referendums on it. What can one think about the EU leadership which had one treaty ("EU constitution") rejected in referendums and then decided to avoid that by simply not holding referendums on the next one? They fully deserved what they got in Ireland this week.

The pro-Lisbon side will also complain that the existing EU treaties don't allow to expand the union to more than 27 countries. Technically, it's accurate. But it's easy to write a 1-to-2 page document amending the clause that limits EU to 27 countries and a few more related clauses. What EU leadership did is, they tried to package 398 pages of other stuff and slip it past the voters, using "we can't expand EU to more than 27 countries" as an excuse. Again, they deserved what they got.

Yes!

Latvian women's basketball team qualifies for 2008 Summer Olympics, with an 84:26 win over Angola in the last qualifier. They will the first Latvian team in any of the olympic team sports (basketball, football, voleyball, etc.) to play in Summer Olympics, since Latvia regained independence in 1991. (Our mens ice hockey team has been in Winter Olympics twice, in 2002 and 2006.)

Major austerity measures coming in a few months?

Yesterday, Latvian government announced plans to cut more than 100 mln lats (140 mln euros) of spending from this year's budget. The cuts will be mainly to purchases by state organizations and to public administration expenses. A detailed plan is being developed and a vote on spending cuts is expected to be later in the summer.

It's a big amount in cuts. The basic Latvian state budget (excluding social security and municipal budgets) is around 3.5 bln lats (5 bln euros) and, by the time when the changes are passed, most of that will already be spent.

I'm not sure if I agree with this plan. There is no shortfall in Latvian tax revenues yet. State Revenue Service monthly data for first 4 months of 2008 show revenue in two months below the plan and in two months above the plan. On the whole, the tax revenues for first 4 months are a negligible amount of 1.5 mln lats (2 mln euros) below the plan. This hardly justifies such a drastic action...

Also, the Latvian economy is slowing down rapidly and cutting the government spending at this moment can make it even worse. (In their announcement, the government promised to do the cuts in a way that affects the economy least, but how much of that is actually possible?) Our government was very slow with the measures to keep the economy from overheating and it looks like they might be equally slow with stimulating it, when it slows down.

UPDATE (6/12): A more detailed report claims that the government needs to cut expenses by 263 mlns lats (375 mlns euros) if they want to maintain the plan budget surplus of 1% GDP, as planned, and by 108 mlns if they want to have no surplus but no deficit. If that's the case, the cuts are somewhat justified but I still don't see the evidence of 263 mln revenue shortfall...

UPDATE (6/16): After 5 months, the overall state budget shows a surplus of 273 mln lats. It's true that there are more purchases made at the end of year (slowness of Latvian government institutions) but I still don't see how one would get from a surplus of 273 mln to a deficit of 108 mln in the remaining 7 months.

Developing...

Society for not-so-different politics

"Society for Different Politics" is one of the new Latvian political parties, lead by People's Party's defectors Aigars Štokenbergs and Artis Pabriks and a group of high-level managers, mainly from finance sector.

They have been one of the driving forces behind the pensions referendum, which would increase the old-age pensions dramatically. Now, they've released the rest of their economic platform. They would like to:

• cut the personal income tax from 25% to 20%, effective 3 months from when they get into the government.
  
• cut the corporate income tax for smaller companies from 15% to 10%.

The first proposal alone would cost 200 mln lats (280 mln euros) per year which is 1.2% of Latvia's GDP. That comes in addition to their pension increase proposal which would cost 0.8-1% of Latvia's GDP.

They claim that they will pay for that by firing 22% of Latvia's civil servants, also in their first 3 months in government. Trimming down Latvia's bloated bureaucracy would be good for the country but doing that on such a large scale in such a short time would be both dangerous and legally impossible (there is a lot of protections for civil servants in Latvian labour law).

So, "different politics" is degenerating into promising everything. Tax cuts, benefit increases, all at the same time, with no realistic proposal of how to pay for that. If there is anything "different" here, it's that the unrealistic promises of previous parties were a bit more modest than "Society for Different Politics".

I think that the ex-bankers at the leadership of the "Society" are perfectly aware that the numbers don't add up. (And Štokenbergs himself was one of the few people to predict inflation at 13-14% last year, so, I trust his numbers skills as well.) What they will actually do, if they get to power... I don't know.

Revised Baltic GDP data for the 1st quarter of 2008

All three Baltic countries have now updated their Q1 2008 GDP numbers. Here they are, all in one place. First, year-on-year numbers:

• Estonia: +0.1% (revised downwards from +0.4%);
• Latvia: +3.3% (revised downwards from +3.6%);
• Lithuania: +6.9% (revised up from +6.4%).

Since the Baltic economies are at a turning point, quarter-on-quarter numbers may be more meaningful. Here is Q1 2008 compared to Q4 2007, seasonally adjusted:

• Estonia: -0.5% (revised up from -1.9%??? what sort of adjustment is that???);
• Latvia: -1.9% (since our statistics office does not do seasonally adjusted GDP, this is my own rough adjustment);
• Lithuania: +0.2% (revised up from -0.2%).

To summarize, both Latvia and Estonia are in an economic contraction, due to an aftermath of the credit/housing bubble. Lithuania is also sliding in the same direction, but slower. (Since the boom was smaller/later in Lithuania, the bust may also be smaller.)

And I am still wondering how Statistics Estonia turned their initial -1.9% quarter-on-quarter number into -0.5%. It just doesn't make sense...

Diena in trouble?

Diena is one of the two largest Latvian language newspapers. Recently, many Diena subscribers have been getting letters offering free half-year subscriptions. Find a friend who does not subscribe to Diena and that friend gets the newspaper for half a year, free of charge.

To myself, this reminds of North America, where newspaper sales have been falling for the last 20 years, with people abandoning the newspapers for other sources of news. The emergence of the Internet as a news source is accelerating this trend. North American newspapers have gone to offering themselves nearly free of charge and relying on advertising for revenues. But this strategy has not helped.

Are we seeing a repeat of this story in Latvia? The number of people subscribing to newspapers in Latvia is falling rapidly. (In particular, Diena's subscriptions have fallen by 14.7% compared to last year.) Offering free half-year subscriptions is way more generous that any promotional action ever done by any Latvian newspaper. Unlike the other Latvian newspapers, Diena is owned by a Swedish media multinational who can afford generous promotional actions to keep the newspaper alive.

In other news, Diena's editor-in-chief, Sarmite Ēlerte, resigned today, after being with the newspaper for more than 18 years (16 years as the editor-in-chief). When resigning, Ēlerte claimed that she wants to have a break after presiding over several major changes in the newspaper recently.

My opinion is that too much of Diena reporting recently has felt like LETA/AP news stories that are available free of charge on news websites. To survive in the Internet age, newspapers need to distinguish themselves from the free content that is available online.

I've also been somewhat unhappy with positions taken by Diena, for essentially the same reasons that LETA's blogger Maris Zanders in his post. (It's a very eloquant post - he says what I think but better than I would say it myself.) But I don't think that their troubles with the number of subscribers is due to that.

May real estate numbers

Arco Real Estate agency reports that the average apartment price in Riga was 1276 Euros/m2 at the end of May. This is:
- 2.6% less than at the end of April 2008;
- 9.2% less than at the end of 2007.
- 21.2% less than at the end of June 2007.
Arco did not release month-by-month numbers for the first half of 2007. But the other real estate agencies (like Latio, whose numbers are now paid-subscription-only) observed a slight drop in May and June 2007, as well. Based on that, we get 23-24% decline compared to peak prices (March-April 2007).

The fall in Latvian real estate prices has been more than anyone, including myself, expected. And it keeps going on...

For me, it's good because I'm still looking for an apartment and there's much more reasonably priced options now. What a difference one year can make...

UPDATE (6/6): Estimates by other real estate companies range from 18% decline year-on-year (Oberhaus) to 27.2% decline (Latio). My impression is that the higher estimates are the more accurate ones.

Latvian pensions referendum, part 2

Brief summary. Latvian retirees are the biggest group of people who have been left out during the recent economic boom. While Latvian salaries have been growing at (an unsustainable rate of) 30%/year, the government has limited the increases in retirement benefits to the inflation rate or slightly above it. Combine that with the fact that the recent inflation has been particularly high for many basic food items... and a lot of older people are having trouble making ends meet without assistance from their children.

Current state, in numbers. Under the current system, retirees are guaranteed a minimum pension in the amount from 49.5 lats/month (70 euros) to 76.5 lats/month (109 euros). The smaller amount, 49.5 lats/month, is for people who contributed to Latvian social security system for less than 20 years (or not at all, like Janis Kleinbergs). The bigger amount, 76.5 lats/month, is for people who have contributed for 40 years and more.

The actual pensions depend on person's income before retirement and are usually more than the minimum (but still less than one would need to live on). At the end of 2007, the average pension was 124 lats/month (177 euros).

The referendum proposition. The referendum proposition would increase the minimum to 135 lats/month (192 euros) for people who have worked less than 20 years and to 202.5 lats/month (288 euros) for people who have worked more than 40 years. Thus, minimum pensions would almost triple.

I would calculate the average pension under the new law, but there's no statistics on the web about the distribution of Latvian retirees by the number of years worked. A rough estimate puts the average guaranteed minimum at 175-180 lats/month (250-260 euros).

There's 5-10% of retirees who get more under the current law. For the rest, the new minimums will be more than their current pensions. So, the average pension will be 180-185 lats, just slightly more than the average guaranteed minimum.

That makes it an increase of pensions by 45-50%, by January 2009 when the new law comes into effect. It's a huge increase and that's how the people writing the law intended.

Inflation effect. When the referendum proposition was written, Latvian inflation had not taken off yet. Now, the inflation is running at 17.6%/year. This means that this year's inflation adjustments will increase the pensions by slightly more than 20%. (The number comes out to more than inflation because the formula for pension increase also includes the salary growth which is at 28%/year now.)

So, when the law comes into effect at the beginning of 2009, the increase in average pension will be 20-25% instead of 45-50%.

Cost.This would cost 140-170 mln lats (200-250 mln euros) per year. That's 0.8-1% of Latvia's this years GDP and is substantially more than any of instances of "wasteful spending" (e.g. National Library or "the most expensive bridge in Europe") that the opposition has critisized the government for.

Given that a lot of retirees have a real difficulty making ends meet, I'm inclined to support a substantial increase in pensions. But it's an expensive thing.

Government's counter-proposal.Trying to fix the situation/to disperse the public anger, the government has come up with its own scheme for increasing pensions, by introducing a pension supplement of 1 lat/month (1.4 euros) times the number of years the person has contributed to the social security system.

If this gets adopted, both the average increase in pensions and the cost will be roughly the same as under the referendum proposition.

Summary. The meager Latvian pensions will see an increase of about 20%-25%, under either government or referendum proposals. The differences between the two are now primarily in the details of how the increase is distributed.

Even though the differences between government's proposal and the referendum propositions are much smaller than they used to be, I expect both sides to run a heated debate, along the lines of "Government will starve the senior citizens" and "Referendum will destroy the budget and the pension system"...

Latvian pensions referendum, part 1

Latvia will soon have a referendum on increasing the state-provided old age pensions. This is the first of the two posts on what exactly is happening. In this post, I will summarize the politics around the referendum. The financial side will be discussed in the second post, which will follow in a few days.

The organizers. The referendum initiative originates from a group lead by Janis Kleinbergs, a Latvian who spent most of his life in Venezuela and returned to Latvia a few years ago. He filed for Latvian retirement benefits and discovered that, since he has not been employed in Latvia at all, he was only eligible for the minimum benefit which was about 60 euros/month at that time.

Kleinbergs felt insulted by such a meager pension. He might have had savings from Venezuela or other income (as one can see from his property declaration which shows a substantial amount of property). But his country paying him 60 euros/month... that was insulting. And some other people may have to live on similarly meager pensions and (unlike him) have no sizable savings from Venezuela.

Kleinbergs became the leader of the Party of Retirees and Senior Citizens and run for parliament in 2006. The party gathered 0.79% of popular vote. Then, in summer 2007, he, together with other members of his party started gathering signatures for a referendum that would drastically increase the minimum pensions.

The signature campaign. The Party of Retirees and Senior Citizens had almost no money for advertising nor access to major media. As a result, most of Latvians (including myself) did not know that there was a signature campaign underway. Nevertheless, they gathered 8000 signatures between July 2007 to February 2008.

Then, in February 2008, the Latvian parliament decided to increase the fee for notarizing the referendum signatures from 2 lats (3 euros) to 10 lats (14 euros). They only needed 2000 more signatures but the hurdle just got higher...

Stokenbergs jumps in. At that point, the pro-referendum campaign gained another supporter, "Society for Different Politics", lead by the People's Party's defector Aigars Stokenbergs. With Stokenbergs' fortune (he's a real estate millionaire) and now much larger media coverage, the missing 2000 signatures were gathered in 3 days.

Why so late? "Society for Different Politics" was founded in November 2007 and only jumped into the campaign in February 2008. Under the more benovelent interpretation, Stokenbergs and his people were busy with other matters. Under the more cynical interpretation, they were initially opposed but then decided to score some publicity points by attaching themselves to a cause that was popular with people and was probably going to a referendum anyway but not supported by any of the major parties.

The rest of the story. Since 10,000 signatures were successfully gathered, Latvian government had to take over the organization of the signature process. (Here is an explanation of the Latvian signature process.) 170,342 more signatures were gathered in government-organized signature places. This substantially exceeds the required minimum of 149 thousands (10% of eligible voters), so, a referendum will be held.

Who supports it? Kleinbergs-lead Party of Retirees and Senior Citizens and Stokenbergs-lead Society for Different Politics have been very vocal. Stokenbergs has spent 100 thousand lats (140 thousand euros) of his personal money for advertizing and this law is now the defining issue of his future party. Most of other opposition parties (New Era Party and Harmony Centre) also support it but less vocally.

Who is opposed? All the parties in the governing coalition claim that the proposed law will break the budget and destroy the existing pension system. From the opposition parties, Sandra Kalniete-lead Civic Union party also opposes the proposed law, saying that referendums are not the right way to decide retirement benefits.

Does anyone believe the government? Since I don't have any polling data, I have to use unscientific information from our last family gathering. People supporting government's position (that the proposed law is a catastrophe) were in minority but it was a substantial minority.

When will we have the referendum? There are several formalities that should be completed, like Central Election Committee verifying the validity of the signatures. Given the typical amounts of time for that, the referendum might be in September, unless the constitutionality issue comes up.

Constitutionality issue. Referendums on money issues are dangerous, since people are likely to vote for unfeasible combinations of lower taxes and higher benefits. In order to prevent that, the Latvian Constitutional Assembly of 1922 put in the following article into the Constitution:

73. The Budget and laws concerning loans, taxes, customs duties, railroad tariffs, military conscription, declaration and commencement of war, peace treaties, declaration of a state of emergency and its termination, mobilisation and demobilisation, as well as agreements with other nations may not be submitted to national referendum.

They don't mention retirement benefits, since those did not exist back in 1922, when the Constitution was written. But the current referendum affects budget in a substantial way and could be recognized unconstitutional because of that.

Who decides the constitutionality? Probably, the Constitutional Court. But nobody knows for sure, since we have never had any referendum proposal that could be questioned, based on Article 73.

Part 2 to follow in a few days...

Latvians disappointed with all political parties, including the opposition

The May opinion poll on how people would vote now, from Latvijas Fakti:

Harmony Centre 10.4%
Farmers and Greens 6%
People's Party 5.5%
Latvia First Party/Latvia's Way (LPP/LC) 5.1%
Civic Union (Kalniete and Kristovskis) 4.3%
For Human Rights in United Latvia 3.6%
New Era Party 3.6%
Štokenbergs-Pabriks party 3.5%
Fatherland and Freedom/LNNK 2.9%
---------------
total for all parties 52%
undecided or would not vote 48%

The coalition remains unpopular, as it has been for at least a year. Two months ago, it looked like the newly founded Kalniete-Kristovskis and Štokenbergs-Pabriks parties might gain support. But, now, they are losing voters as well. Apparently, not too many people share my enthusiasm for the Civic Union. And supporting the popular referendum for increase in retirement benefits has not helped Štokenbergs' and Pabriks' popularity much.

At some point, some political movement will be able to earn the trust of Latvian voters. But I really don't know how, what type of political movement or how many years in the future that will be...

How Eastern European immigration is changing the Eurovision Song Contest

Results of Ireland televote:

• 1st place (12 points) - Latvia;
• 2nd place (10 points) - Poland.

Overall, Latvia did OK this year, getting points from 15 different countries, most of which had no obvious connection to us. But Ireland was the only 1st place vote that we got and I'm sure Latvian-Irish had a substantial role in that.

"Soviet Story" and "Young Russia"

It appears that a simple mention of crimes committed by Stalin's regime is enough to set some pro-Kremlin people in Moscow on fire. Or, more precisely, it's enough to make them set things on fire.

Edvīns Šņore, a young Latvian director, recently completed a documentary The Soviet Story, which details crimes of the Soviet regime. The funding for the documentary was provided by the European Parliament and it premiered there on April 9. The documentary is showing in Latvia now and might show in a few other Eastern European nations.

Young Russia (Rossija Molodaya) is a political youth organization in Russia. They are lead by Maxim Mischenko, a member of Russian parliament from Putin's United Russia party and the movement appears to be something like the infamous Nashi. When they learned about the documentary, they staged a protest near Latvian embassy in Moscow, complete with a hanging and burning of a doll of the director Edvīns Šņore:
Besides showing their unhappiness, "Rossija Molodaya" also demanded that Latvia bans the showing of The Soviet Story. I guess they are unaware of the freedom of speech...

UPDATE: I highly recommend reading Edward Lucas' column on the same topic from the Economist. Also, if anyone is looking for the "Soviet Story" homepage, click here.

Headlines that I don't believe

Today's Diena (in Latvian): Better relations with Russia might prevent Latvia from its GDP growth falling as low as in Estonia.

Response: Quarterly GDP has decreased by the same 1.9% in both countries. The year-on-year numbers are only different because the decrease started earlier in Estonia.

Latvian retirement benefits referendum goes ahead

The signature gathering is over for the referendum proposition on a major increase in the retirement benefits (supported by Štokenbergs' "Society for Different Politics"). Reportedly, there are 170,342 signatures, 21 thousand more than the required minimum of 149 064 signatures.

So, we might have two referendums this summer: on the constitutional amendment allowing to dissolve the parliament and this law. More on that later.

(Almost) Baltics-wide recession alert

Economic "growth" in the 1st quarter of 2008, compared to Q4 2007, seasonally adjusted:

• Estonia: -1.9%
• Latvia: -1.9%*
• Lithuania: -0.2%

The reasons behind this are the same in all 3 countries. They all boomed in the last 7 years, helped by cheap credit from Scandinavian banks. Now, the developing credit bubble pushed the banks to cut bank on credit, triggering a recession. Events in Lithuania are a few months behind Latvia and Estonia but seem to be in the same direction.

Several other Eastern European countries (Romania, Bulgaria, possibly also Slovakia and others) show economic trends similar to pre-recession Baltics and might get affected, but there is no sign of recession there yet.

*Since Latvia's statistics office only releases seasonally unadjusted numbers, Latvia's number comes from my own back-of-the-envelope seasonal adjustment. The numbers for Estonia and Lithuania are official.

UPDATE (9/6): all three Baltic nations have updated their initial estimates of 1st quarter GDP. Here is a new post with the updated numbers.

Ice Hockey World Championships, a summary

Latvia - USA 0:4
Latvia - Canada 0:7
Latvia - Slovenia 3:0
Latvia - Finland 1:2
Latvia - Norway 4:1
Latvia - Germany 3:5

After the first two games, it looked like we'll have to fight hard to avoid relegation. Then, it looked like we could make the quarterfinals. At the end, neither of those two possibilities happened. Well, that's how it has been for most of the last 12 years. 11th place, in which we finished, is quite close to the long-term average of our team.

Our hockey federation's goal was to make the top 10 and, before the tournament, they said that head coach's Oļegs Znaroks' job may be in jeopardy if the goal was not reached. Since the team only narrowly missed getting into top 10, I think Znaroks should be allowed to continue.

Vladimir Krikunov, Znaroks' consultant from Russia, suggested that Latvia improves the team by giving Latvian citizenship to some Russian players:

Even Belarus with its well-developed local championships lacks local player resources. In the last years, they have added six naturalized Russians to their national team. [..] Nothing bad will happen if one or two players from Russia appear on the Latvian team.

I'm skeptical on this idea. Importing one or two players from Russia would not hurt, but it might not help that much either. Russian hockey stars have no reason to play for Latvian national team instead of Russia. And IIHF rules against team-switching would prohibit any Russian player who has ever played an official game for the Russian team (even if that was 10 years ago or even on Russian team in Under-18 World Championships) from playing for a different country, even if they obtained that country's citizenship*.

So, we'd be left with importing second-tier Russian players and I really doubt whether those would be able to take our team anywhere higher than the current 11th place. And it's more fun to root for the homegrown players whose games I have followed since they were in junior hockey. I hope they stick with them.

*I was slightly wrong here. IIHF allows country-switching in this case, but only if the player has played in the national championships of his new country for at least 4 consecutive years. From Latvia's perspective, it's equivalent: our national hockey league is pretty weak and it would be very hard to get any highly skilled foreign player to stay there for 4 years.

Latvia-Germany, 3:5

At 2:15am this morning, a substantial fraction of the country was glued to the TV sets for the decisive hockey game between Latvia and Germany. If Latvia managed to tie the game, we would advance to quarterfinals (because of our 4-1 win against Norway one day earlier).

Germany has been a difficult opponent for Latvia recently. I still remember 2002 Winter Olympics (also taking place in North America and also on after-midnight live TV in Latvia) in which Latvia's hopes for quarterfinals were dashed by bigger, more physical German players which succesfully pushed the Latvians out of their way on the ice. I was a bit afraid of something like that happening again.

I was right, but only partially. It looked like Germans were physically stronger and they won most of the battles near the boards. But Latvia scored first and they would find ways to use their skills to beat Germans again later. After 47 minutes, it was 3:2 Latvia. Just 13 more minutes and we could even allow one goal in and still make quarterfinals...

But, then, Germany scored three goals in 5 minutes. 5:3 Germany. The last minutes were full of penalties and included a fight between Latvians and Germans with almost everyone on the ice involved.

Signs that something is rotten in Latvian politics...

Political scientist Ivars Ijabs, talking to New Era Party leadership, in a public meeting:

It would make more sense for New Era Party to join the governing coalition, if they simultaneously entered the coalition in the Riga City Council. It would improve the financial state of New Era Party members and make the participiation in the next elections easier.

When an anti-corruption party starts getting advice like that from sympathetic political scientists...

Latvia-Finland, end of the game

We lost. 1-2. But if that last shot by Berzins had gone in or something else has gone our way... It was close.

After the hopeless 0-7 loss against Canada, I started thinking that this team was not as good as the one we used to have 5-10 years ago. I might have been wrong. On a good day, they can have a close game with a world-class team like Finland.

Now, two more games against Germany and Norway. If Latvia plays like they did today, we can win.

Latvia-Finland, 1st period

Wow! I've never seen anything like this...

Shots on goal: Finland 36 - Latvia 5.
Score: Latvia 1 - Finland 0.

In more detail:

• Lauris Darzins skates around Finnish goal and puts the puck in the net 1:27 in the game;
• A few minutes later, Latvia makes a mistake clearing the puck while shorthanded and earns delay of the game penalty (meaning we are now 3 against 5 Finns);
• Finns take 10-15 shots on Latvian goal during two minutes that they are 5-on-3. Edgars Masalskis saves us all the time;
• Overall, we've picked up 8 two-minute penalties for every possible minor infraction (including delay of game and too many men on ice);
• I'm quite impressed with our penalty-killing. It's agressive and, when it does not help, Masalskis comes to rescue;
• Overall, Finland is the more skilled team but it's much more equal than I expected.

2nd period to start soon...

Latvian economy gets even worse

Latvian Statistics Office reports that Latvian economy grew 3.6%/year in the 1st quarter of 2008. This is far worse that anyone predicted.

To put this into perspective, Latvian GDP in Q4 2007 was 8.1% bigger than in Q1 2007. So, we have 4.5% decrease from Q4 2007 to Q1 2008. Some of that is, of course, seasonal. The Christmas shopping season contributes to the economy in 4th quarter substantially, every year.

Unfortunately, our statistics office does not release seasonally adjusted numbers. So, I had to do a rough adjustment myself. In last 5 years on average, we have had 0.3% decrease in GDP from Q4 of one year to Q1 of the next. This should be compared with the average 9.5% year-on-year growth which translates to roughly 2.3% quarter-on-quarter on average throughout the year. So, the typical Q4-to-Q1 growth is 2.3%+0.3%=2.6% less than the average quarter-on-quarter.

Making that adjustment gives 4.5%-2.6%=1.9% quarter-on-quarter economic contraction which is still very bad.

Caveat #1: One should also adjust for different number of working days (Easter was in March this year and is in April most years) and even different number of days in Q1 (we had February 29 this year). And that gets too complicated for me to do it myself...

Caveat #2: this is the "quick estimate" which will be revised in a month. One quarter ago, Edward Hugh argued that "quick estimates" may be off in rapid turning points as this one. He was right: last quarter's "quick estimate" was 9.6%/year and the final one was 8%/year. Let's hope that the current estimate is off in the other direction. (After all, statistics office might have tried to avoid a mistake similar to last quarter and ended up overcorrecting in the other direction.)

But, in any case, we are clearly having a substantial economic contraction.

On Latvian hockey fans

Many articles have been written about Latvian hockey fans and their devotion to their team. About 1000 of them travelled to Halifax, Canada for this year's world championships. Others are trying to catch 2:15am Latvian time (8:15pm Halifax) games on TV.

The Latvian hockey fever started in mid-1990s when Latvia was up-and-coming team. It made the top-division world championships in 1997 and managed to tie both that year's champion (Canada) and silver medal winner (Sweden) in its first tournament. A bit more and we might playing for medals - so it looked in those days.

Last 4 years have been mostly downhill from Latvia. From our independence in 1991 until early 2000s, we had the same group of players at the core of our team. Now, almost all of them have retired and we essentially have a new team. Fewer NHL players (only one this year and he is an enforcer). Less impressive list of foreign teams for which our players play. And we are not even close to being able to tie Canada again. The gap between us and the leading teams has grown bigger.

But the fan devotion is still there, even though the team is not doing so well. A surprisingly large number of my friends are staying awake for 2:15am TV games. Win or lose - we are with our team.

Ice Hockey World Championships

We won 3-0 against Slovenia last night. For those hockey fans who stayed awake for 2:15am TV broadcast from Canada, it was a nervous experience.

For first 30 minutes, Latvia outplayed Slovenia completely. Once, the commentator misspoke "Latvia has one minute left on its powerful" during a Slovenian powerplay. It was an understandable mistake - Latvia was attacking more than Slovenia, even when we had one less man on the ice.

After 30 minutes, shots on goal were 23-5 in Latvia's favor. But the scoreboard was still 0-0. Slovenian goalie saved him team a lot of times. Our team hit the goalpost at least twice. Our team was awarded a penalty shot, which we missed...

Then, Slovenian defender pulled Guntis Galvins down on the ice with his stick. Our team got the second penalty shot of the game and they finally scored. One minute later, another goal. 2-0 Latvia.

The second half of the game looked less lopsided. Slovenia started attacking more and they got some scoring chances. But Latvia was still the better team on the ice. At the end, it was 3-0, with the last goal going into empty net 28 seconds before the end of the game.

Now, Latvia moves on to the 2nd round and Latvian fans are preparing for one more 2:15am broadcast from Canada (as well as two games at more reasonable times).

Latvian economy gets worse

Our statistics office reports that Latvian industrial production declined 5.5% year-on-year in March 2008. The previous numbers show that this trend goes back to 2007 but it is getting worse and worse. The decrease in industrial output was also observed in Estonia.

I'm usually a "cautious optimist" but, with these numbers, even I can't find any causes for optimism. Well, except for Latvian export statistics that show exports increasing by double-digit %. Both myself and some economy experts from Latvian banks are puzzled about how that fits together with decline in industrial production. Here are some explanation attempts, none of which seems to fit together.

Attempt #1: There is no export growth. It's just inflation in export prices!

Response: Inflation for Latvian export prices is around 5%/year, far less than the domestic market inflation. (With foreign customers, it's much more difficult to increase the prices by 20%...) And export growth has been around 20%/year in nominal prices, which would translate to 15%/year in inflation-adjusted prices.

Attempt #2: The domestic consumption is falling and the goods that would be consumed domestically are exported.

Response: The domestic consumption is falling slower than the industrial production. Retail sales were down by 3.6%/year in March and have only been declining year-on-year for 3 months. In contrast, industrial production has fallen by more % and longer.

Attempt #3: With the real-estate bubble collapsing, the domestic market construction-oriented industries are imploding while exporters are doing fine.

Response: I almost wrote a blog post on why this is so. But the breakdown of latest numbers by industry shows decreases for a number of industries which have no obvious link to the struggling Latvian construction industry. And news reports say that several exporters are in trouble.

Attempt #4: There's no export growth! It's a giant scam to extort VAT refunds from the Latvian tax service.

Response: Latvia has its share of "criminal entrepreneurs". So, VAT refund fraud is possible. But I don't see any indication that it has increased this year (or any reason why it should have increased).

Attempt #5: Latvian statistics are totally messed up.

Response: Well, since we can't come up with a better explanation...

Disgusted

Disclaimer: if you easily get disgusted by stories about what happens to your food before you buy it, you might want to skip over to the next post.

Maxima is the biggest supermarket chain in Latvia. They have a low-cost, low-quality image in Latvia and, for the last months, they've been trying to shed the "low-quality" part. Until recently, they were somewhat successful. Then, they plastered Riga with posters saying "Salad-washing is a myth!".

I used to think that "salad-washing" meant washing lettuce before making a salad out of it. I was badly wrong. It means taking unsold prepared salad which is beyond its expiry date (for example, rasols, which consists of potatoes, meat, pickles, beans and mayonaise) and putting it under running water to wash away the old dressing (mayo, in this case). After that, they put a new dressing on the salvaged meat and vegetables and sell it as new salad.

Maxima was trying to assure people that this is an urban legend, via posters and TV commercials. Unfortunately, former employees started coming forward with their stories of how they had to recycle expired food into food labelled as new. The stories have been all over Latvian news for last few days.

So, Maxima has shot itself in a foot. Before this, there were a few thousands of people gossiping about Maxima practices. Now, it's most of the country discussing whether expired salads indeed get washed. And if that's true, Maxima deserves every bit of the bad publicity they've gotten.

On the positive side, I've been buying prepared salads in stores other than Maxima (I didn't have a good image of them - even prior to this). And I've not had any health or even taste problems. So, maybe these practices are isolated to one store chain after all...

UPDATE (5/28): Maxima is so committed to disproving the rumours that they are setting up webcams in their production facilities, so that anyone can check on them over the Internet. Are they innocent, after all?

A Latvian political party that I can believe?

One week ago, the first of the new Latvian political parties was officially established. Sandra Kalniete and Ģirts Valdis Kristovskis are now the leaders of the Civic Union (Pilsoniskā savienība) party. There are several reasons why I feel hopeful about their organization:

1. In her interview after the first party congress, Kalniete said that Civic Union will be the party that tells the hard truths to the voters, instead of always saying what the voters want to hear. And, judging by how she was talking about the issues, that might actually be true, to a substantial degree.
2. The party congress featured several supporters whom I highly respect. Like Juris Vidiņš, the 1980s leader of Helsinki-86. Human Rights Group Helsinki-86 was the first organization in Latvia to oppose the Soviet regime openly, back in 1986, when such opposition could still result in imprisonment. Being part of Helsinki-86 required a lot of courage.
3. I have some (distant) friends who might be joing the new party. They have not been active in politics before but are highly competent civil servants. If the new party ends up attracting people of this type, they will do well on the competence side.

The skeptical side of me says that a fair amount of Latvian politics gets scripted. After all, I saw the rumours about Kalniete and Kristovskis starting a new party in Latvian press at least three months before the two quit their previous parties. On the other hand, I don't believe in people who stood up to the Soviet regime like Juris Vidiņš being part of a script. And, overall, I'm more optimistic about the new organization than skeptical...

Signs of real estate crash in Latvia

Latvian real estate prices have been falling for one year by now. Apartments are now cheaper by 20-30%. And, recently, we've seen some new developments:

• Parex Asset Management, one of leading financial companies in Latvia, has established 'Baltic Distressed Property fund'. The fund plans to raise 25 mln euros to buy real estate from owners in financial trouble.


• Edgars Šīns, the head of Latio real estate, predicts possible foreclosures for 40,000 households. That's 20% of all households with mortgages. Only 17% households in Latvia have mortgages, so, that would be 3.4% of all households - but that is still a big numbers. Šīns has called for a massive government intervention to prevent a possible collapse in real estate.
  
  The government thinks Šīns is exaggerating the situation. In any case, a government bailout could be very unpopular with general Latvian public. (Since only the wealthiest 17% have mortages in Latvia, the remaining 83% might not like their money going into a bailout of people who are richer than them. Or even a bailout of people who used to be richer than them before the real estate started falling.) Others are questioning Šīns math as well and it's plausible he has inflated the number of possible bankrupcies by a factor of 2 or 3.
  

Two alarming news stories

In today's news:
- Lauma, the main Latvian lingerie producer, plans to lay off 100 workers and move the manufacturing to cheaper countries (Russia or Ukraine);
- Laima, the main Latvian chocolate producer, may temporarily stop production after the consumers have cut back on the more expensive sweets. (The company denied the report.)

Both companies have been around for very long time and have succesfully weathered the transition from Soviet Union to the market economy. Just like the electrical equipment manufacturer Rebir which closed earlier this year.

So, it's quite alarming sequence of news stories. Statistically, though, the March 2008 unemployment rate was at 4.9%, just barely above the all time-low of 4.8% reached in November 2007. The next months will show whether the news stories represent a change of the trend or not.

Referendum on early election moves ahead

Yesterday was the last day when one could sign for a referendum on a constitutional amendment that would allow to dissolve the parliament and hold early elections via (another) referendum. About 225,000 people, or 15% of eligible voters signed for the referendum. Wow!

So, the necessary signatures have been gathered and we will have the referendum in a few months. The government now has every reason to be afraid. This is a referendum on a constitutional principle but most of people did not sign for a abstract right to dissolve the parliament. Rather, they signed up because they don't like the current parliament.

The passage of the constitutional amendment is uncertain. The Latvian constitution puts a very high bar for constitutional referendums, by requiring more than 50% of eligible voters to vote "yes". And, for last few parliamentary elections, the turnout has been 60-70% of eligible voters and not all of those hate the current coalition.

Still, there is a chance it will pass and I'm now wondering if the coalition will try to preempt that. There is another version of the amendment circulating around, which also introduces referenda on early elections but sets stricter requirements on the number of votes to dissolve the parliament. The coalition could pass that in parliament, hoping that that will satisfy some of the unhappy voters.

This play was done once before, for 1999 retirement benefits referendum, when the parliament appeased the voters by passing a weaker version of referendum proposal. Some voters still showed up for the actual referendum to vote for the stronger proposal. But there were not enough of them for the proposal to pass.

IMF predicts six lean years for Latvia

They expect Latvian economic growth to slow down from 10.2% in 2007 to 3.6% in 2008 and then 0.45% in 2009 and 0.28% in 2010. By 2013, the economic growth will rebound but only to 3.0%/year.

So, the cumulative growth in six years from 2008 to 2013 will be around the same as the one year growth in 2007. This is the most negative economic forecast on Latvia I've seen so far but, sadly, it's plausible.

The IMF report is here, LETA news summary is here. Both Lithuania and Estonia are expected to experience sharp slowdowns as well, but not as sharp as Latvia.

UPDATE (11/04): All/almost all Latvian financial experts think that the forecast is overly pessimistic. Given that we are already in recession in terms of quarter-on-quarter growth, I find 3.6%/year in 2008 quite plausible. (I would not even be surprised if we do even worse in 2008.) I do hope (and think) that we will rebound faster than the IMF estimate for 2010-2013, though.

Financial Times article on Latvia

A commenter on my previous post points to a Financial Times article on Latvian housing market (which does a good job surveying the situation) and asks me to comment on this:

Consequently property prices have fallen by a quarter since last spring but asset quality remains good because only 17 per cent of households – typically the wealthiest – have mortgages, according to Hansabanka.

I think Hansabanka's argument is flawed. What matters is the ratio between the mortgages and the income. Latvia's mortgage debt-to-GDP ratio is around 34%. Combine that with only 17% of households having mortgages and what you get is 17% of households having quite a lot of debt compared to their incomes. Even if those are mostly the wealthiest 17% of people.

There's no sign of large scale problems with Latvian mortgages at the moment, but Hansabanka's claim why problems should not happen looks flawed to me.

Real estate - April 1st edition

To those who read in Latvian, this collection of real estate ads may be quite hilarious.

Latvian political realignment, an update

By next election, the Latvian political scene will probably look very different from what it was in 2006. The situation is still very fluid. We have several new parties forming (at least 2, possibly even 4) and it's not clear which of them will succeed and which will fail.

The two confirmed new parties are:
- The "Democratic Patriotic Union" consisting of Sandra Kalniete's group that left New Era Party on January 31 and Girts Kristovskis group that left Fatherland and Freedom about a week later. The party claims to be right-of-center and patriotic but not nationalist. (The exact semantic of "patriotic but not nationalist" keeps escaping me. I think it's just an attempt of gaining nationalist-minded voters without alienating ethnic Russians.) The party also continues New Era's anti-corruption and clean government rhetoric. (As this opinion poll shows, they might effectively destroy New Era Party by taking over its voters.) Personality-wise, the party is heavy on creative intelligentsia and Latvian Popular Front/Latvian Way politicians of early 1990s.
- The "Society for Different Politics" of People's Party defectors Aigars Stokenbergs and Artis Pabriks. Although defecting from right-of-center party, they've quickly moved to left and now support a referendum on major increase in old-age pensions. Shades of the recent Hungarian referendum. Stokenbergs also supports other increases in social spending and higher taxes on rich. Sometimes he sounds unabashedly leftist but then he says that he is "not left-of-center, just left of other Latvian parties". (Again, the usual Latvian strategy of trying to appeal to all constituencies simultaneously.) Behind the leaders, there is a collection of former high-level managers from both public and private sectors, which suggests that the party might be quite pragmatic if it gets to power.

Two new parties that may or may not materialize:
- "Christian Social Union", lead by PR specialist Kristians Rozenvalds (I've heard the name more than once, but I've forgotten in what context) and supported by the leadership of Latvian Catholic Church. They haven't yet decided about forming the party but they already have a blog for it (in Latvian).
- An unnamed group lead by Guntis Ulmanis who was Latvia's president from 1993 to 1999. During his presidency, Ulmanis was more an object of jokes than respect. That was, however, a while ago and he is now viewed more like a respected retired politician. And he claims to be leading a group of mostly young academics and small-business people. They don't know if they want to be a party but they are trying to work out a 20-30 year plan for Latvia's future.

And a group of people who are concerned about "excessive social liberalism and its destructive influence" intend to establish an Institute for Support of Conservative Ideas. The institute is supported by prominent People's Party's members and is supposed to counter the influence of liberal Soros-funded thinktanks and activist groups. It's a change for People's Party. Until now, they looked like an amorphous group promising everything to everyone (and, according to their critics, serving interests of a group of agrobusiness people behind the scenes). Now, they are suddenly interested in developing an ideology.

I don't know how this all will end but we are certainly witnessing an early stage of a major political realigment.

Positive Latvian economy statistic

Latvian exports grew by 18.1% year-on-year in January 2008 while imports grew by 3.1%. As a result, the Latvian trade deficit is now at 247.5 mln lats (353 mln euros) per month, the lowest level since May 2006.

So, the Latvian trade imbalance is correcting itself but slowly. The multi-billion-dollar question is: will Scandinavian banks have the patience to provide enough credit for Latvia until the trade balance is fine? Given the recent developments, I have some doubts about that...

Latvians to be able to travel to US without visa? Maybe, it will happen...

Today, Estonia and Latvia signed a memorandum of understanding with US which "sets the two countries on a path of entry to US visa waiver program". The memorandums do not contain an explict date when visa-free travel will start. But there is a chance that it may happen already at the end of 2008.

I've written about visa horror stories a few times on this blog. By now, US is the only Western nation that requires visas from Latvian citizens. Canada and Australia have added Latvia to their visa-free travel programmes over the last year and they have not seen much of illegal immigrants. (The fear of illegal immigration is the main reason for requiring visas.) Why work illegally in a faraway country if UK, Ireland, Sweden and many other European high-income countries allow Latvians to live and work there legally?

Hopefully, we will be able to travel to US without a hassle of getting visa soon...

Song festival: sold out

Latvian Song Festival is the biggest cultural event that Latvia has. It is rooted in Latvian national movement of late 19th century and is held once in 5 years. Choirs and folk dance groups from all over Latvia come to Riga for concerts featuring joint performances by 12,380 singers and 13,400 dancers (numbers from the 2003 festival). Almost everyone in Latvia who sings in a choir or dances in a folk dance group is there. It's very large and very impressive.

The tickets for this year's festival went on sale on Monday. I learned about it Monday afternoon. But then, most of the tickets were sold out. Every ticket allocated for sales over Internet was gone. Ticket offices had long lines. 36,000 tickets sold out by 3pm on the first day.

The Song festival has always been a popular event but not like this. Five years ago, I was able to get good tickets just a few days in advance (and, for one event, even a few hours before). Now, with everyone rushing to get the tickers... I'll be left with watching all the main concerts on TV.

Latvia is in recession

Today, Latvian Statistics office revised its estimate for economic growth in Q4 2007 downward to 8%. It sounds still good but only until you look at it in the right way....

The right way is to break down the growth by quarters of 2007, as Edward Hugh did in this post. Doing that with the revised estimate gives:

• Q1 2007 (compared to Q4 2006): +2.4%
• Q2 2007 (compared to Q1 2007): +2.7%
• Q3 2007 (compared to Q2 2007): +2.8%
• Q4 2007 (compared to Q3 2007): 0.0%.

Our prime minister is still predicting 6% growth (down from his earlier 7.6%) for 2008 but I think it's a major overestimate.

Latvia is in an extremely sharp economic slowdown. It's not yet felt here in everyday life, but, soon, it will be.

In another bad news story, Latvian Statistics estimates that inflation is at 16.7%/year now. Most of last month's inflation is, however, taxes on tobacco and higher heating costs. So, the local inflationary spiral may be just simply bad, not horribly bad.

From a joint press conference of Latvian and Estonian PMs

Andrus Ansip, Prime Minister of Estonia:

I do not see in Latvian statistics transit flows that have been redirected from Estonian ports to Latvia. So, probably they won't build a monument to me in Ventspils [the main Latvian port city] - no reason for that.

Sure, it's just an accident that transit flows through Latvian ports started growing right around the Bronze Soldier incident in April 2007:
A matching denial from our PM, Ivars Godmanis:

I have never said that [when asked whether Latvia could become a new "window to Europe" for Russian investors who can't use Estonian ports for political reasons]

Aaah, the illusion of united Baltics standing up to Russia...

Consumption boom? What boom?

This is a few days old but I have not seen it covered elsewhere. Latvian Statistics office reports that retail sales in Latvia decreased by 0.7% in January 2008 (compared to January 2007).

Just a half year ago, sales were growing by 24%/year and every area of the Latvian economy was booming. Now, the boom is over and the economy is slowing down at a breathtaking speed. I suspect nobody has a good idea what will happen next.

Estonia is heading in the same direction. Lithuania is still booming. My guess is that they are about half a year behind Latvia.

Devaluation fears? What devaluation fears?

For last 3 weeks, Bank of Latvia has intervened into the currency market to maintain the currency peg of 1 euro=0.7028 lat (+/- 1%). They've bought a total of 24 million euros in 3 weeks, to prevent the lat from rising against euro.

Economists are still discussing whether the imbalances in Latvian economy could lead to a devaluation of the lat in the future. But, despite those discussions, it's now the euros that are being changed into lats, rather than the other way around. And, in the streets of Riga, currency exchanges are selling euro banknotes for 69.8-69.9 santims, about half percent below the Bank of Latvia official rate.

Two months ago, I wrote that people are starting to disregard devaluation rumours as background noise. It's even more true now.

Pirates of the Sea

This is the Latvian song for 2008 Eurovision Song Contest:

I think it was one of better songs from a selection which could have been better. We had the most complicated multi-stage selection process ever this year and all that we got was a pretty mediocre group of songs for the national finals.

Preserving the Soviet heritage

LETA news agency reports that a group of Latvian enthusiasts is fixing up a former Soviet nuclear base in Zeltiņi (Alūksne county, NorthEast corner of Latvia). The base used to house nuclear missiles aimed at UK, Germany and Spain. It was abandoned during 1990s when the Soviet Union fall apart and Russian army withdraw together with all the nukes. Now, local history fans are turning it into a museum.

Here is the news video and here is a written report (both in Latvian). And here are some photos.

This is a part of a broader trend towards preserving the "Cold War heritage". In the Central Latvian town of Ligatne, tourists can visit "Bunkurs", a structure 9m (30ft) under the ground which would have served as the command center for the government of Soviet Latvia in case of the unclear war. Now, it's a highly popular tourism object and one can even book it for "Real Soviet-time party".

Loss of competitiveness?

Estonian exports in December declined 8% compared to December 2006, while imports declined 3.8%.

This sounds like the dreaded "loss of competitiveness" that economists have been warning about. With salaries rapidly rising in Baltics, so are the prices for Baltic goods and we may reach a point where the rest of the world would no longer buy them at higher prices. And then, the new higher standards of living that we've reached will be unsustainable.

If Estonian numbers represent a trend (rather than a one-time fluctuation which do happen in numbers from small countries like Baltics), Estonia may be there now. Latvia is still not at that stage but the events here repeat Estonia, with 1-2 year delay.

UPDATE: A commenter points out a longer version of the story from Bloomberg. It mentions one of companies that have moved the production from Estonia, due to rising costs: Nolato, a producer of components for mobile phones.

Also, the commenter asks why Rigibor (the interbank interest rate for latvian lats) has fallen so much. (The 3-month rate has fallen from almost 13% in October to 7% now.) I'm not sure but there are two possibilities. It's either some easing policy or the speculators have stopped sending the rates up by borrowing lats for devaluation bets, after realizing that Bank of Latvia will not budge.

Learning geography from my visitor counter

Yesterday, my blog was visited by a person from North Pole.

North Pole, Alaska. It's about 1700 miles south of the geographic North Pole.

Opinion poll numbers

New opinion poll from Latvijas Fakti about how people would vote if elections were now. For first time, they have included the two new parties that are forming now: one consisting of New Era defectors (lead by Sandra Kalniete) and the group that left Fatherland and Freedom a few days later (lead by Ģirts Valdis Kristovskis) and another lead by People's Party's defectors Aigars Štokenbergs and Artis Pabriks.

The numbers are:

Harmony Centre 9%
Farmers and Greens 6.7%
Kalniete - Kristovskis party 6.4%
People's Party 6%
PCTVL 5%
LPP/LC 4.6%
Štokenbergs - Pabriks party 3.7%
New Era Party 3.6%
Fatherland and Freedom 2.5%
-----------------------------
undecided or would not vote 46%

The conclusions:

1. Compared to the previous poll, the biggest loser is opposition's New Era. Kalniete and other former popular ex-New Era people are starting a new party and the former New Era voters are gone to them.
2. The coalition parties remain unpopular but not more than two months ago. The huge undecided/would not vote segment is still there. The new parties have convinced the former New Era voters but not much of the rest of the country.
   
3. The undecided voters will probably vote for someone. It's impossible to predict whom. But the next parliament will be quite different from the current one.

Even though the numbers will change a lot until the election, I translated them into seats in the parliament:

Coalition: 39
Farmers and Greens 15
People's Party 14
LPP/LC 10

Opposition - ethnically Russian: 31
Harmony Centre 20
PCTVL 11

Opposition - ethnically Latvian: 30
Kalniete - Kristovskis 14
New Era Party 8
Štokenbergs - Pabriks 8

For all of post-independence Latvia, the Russian parties have been left in the opposition. With those numbers, it's hard to think of a stable government without the Harmony Centre, the biggest and the more moderate of the two ethnically Russian parties that we have.

Troubling economy news

Rebir, a Latvian electrical equipment manucfacturer is laying off 1000 of its 1200 workers. Rebir is one of the few Soviet era factories which managed to survive throughout the 1990s transition to a free-market economy... only to close its doors now.

According to the news report, the insiders tell a story about younger people from Eastern Latvia leaving for higher wages in UK or Ireland, older workers retiring... and Rebir left with not enough qualified workers. The company tried to fix that by ordering some parts from China... only to discover that the parts and the resulting equipment is not of good enough quality and to see their buyers go away to another equipment supplier.

We don't have an economic crisis in Latvia yet. A few months ago, the unemployment rate was at 5%, the lowest level in more than 10 years and even now, it's only slightly above that level. But reports of this type are worrying. If that's typical of what's happening in Latvia now, we may have more difficult times ahead.

Developing...