Latvian tragedy

Saturday's Diena has a poignant article (in Latvian). Short summary in English:

A 21-year old Latvian suffering from chronic liver disease (primary sclerosing cholangitis) was waiting for a liver transplant. That would be the first liver transplant performed in Latvia.

The operation was planned for December 2008. Then postponed to March 2009. Then, due to the economic crisis and the healthcare budget cuts, postponed again. The patient was suggested to seek a treatment abroad. Which would cost 80000 Euros which the patient did not have.

Three weeks later, he committed suicide by jumping from a 6th floor window.

The budget cuts are taking their toll. Sometimes, it's a very heavy toll.

Here is the Google translation of the story to English. With some mistakes and untranslated words, but readable.

Humour during crisis

The coalition that governed Latvia until a few weeks ago has been an object of endless parodies and ridicule. Reuters has a good story about that called Nothing Special as Latvia penguins lampoon leaders.

Now, the most-ridiculed government in post-1990 Latvia is gone. (Well, partly gone... and partly part of the new government.) Will Dombrovskis do better?

Latvia has current account surplus in Jan 2009

According to Bank of Latvia, Latvia recorded a half-million lat (700,000 euro, 0.04% of GDP) current account surplus in January 2009. This was the first Latvian current account surplus since mid-1990s.

Here are the monthly current account numbers for the last half-year:

The change is quite stunning: from a deficit of almost 10% GDP in November 2008 to a slight surplus two months later. A change of this speed likely indicates a severe credit crunch: the flow of foreign money into Latvia has stopped or even reversed. (Since Latvia is receiving a sizable loan from IMF/EU, 0.04% surplus means that IMF/EU loan is balanced out by money outflows.)

Signs of crisis in everyday life

A Latvian college whose funding has been cut by 30-something % cuts off the hot water in the student dormitories:

Translation of the sign:

"Attention! From now on, hot water will be supplied only on Wednesdays from 15:00 to 23:00. Administration of [name of the institution]"

There are multiple reports of this happening in different places. And there are many more reports of heating turned off/down in classrooms and students sitting in classes in coats.

Correcting Cristoph Rosenberg

IMF's response to an article in The Economist:

"Latvia's International Monetary Fund (IMF) supported program does not entail large cuts to social spending," Christoph Rosenberg, mission chief for the IMF in Latvia, said in a letter to The Economist.

Although it is true that the fiscal consolidation planned by the Latvian government is indeed large, at around 7% of GDP, social spending, as well as capital spending co-financed by the European Union, is explicitly protected," the IMF representative said in the letter.

What Rosenberg says is half-true, half-false.

True part: social spending was indeed protected from cuts in the December 2008 version of the budget.

False part: the agreement between Latvia and IMF requests that Latvia keeps to 5% of GDP deficit even if the Latvian economy deteriorates further. The revenues of the Latvian budget have been falling rapidly and this means that our government may have to cut 700 mln lats (4-5% of GDP) more from the budget. The unofficial gossip is that there is a 20% cut in social security benefits coming, unless Latvia manages to convince IMF and EU to fund a bigger budget deficit.

Back to blogging

I let my blog fell dormant half a year ago, as I got increasingly busy with my job in Latvia.
Meanwhile, Latvian economy started deteriorating at an increasing speed, to the point that we are watched by the rest of the world as one of the forefronts of the financial crisis.

My work life is still very busy (response of a distant friend when I complained about that: "Consider yourself lucky that you HAVE a job!"). But I am starting to blog again, to describe what is happening in Latvia now.

English language writing about Latvia either focuses on the macroeconomic numbers or on the squabbles of Latvian politicians who keep fighting one another even as the country descends into crisis. What is missing in English language is a human perspective of the crisis, how it is affecting people in their everyday life.

Previously, I've written about numbers and about politicians a lot. I'll keep doing that but I'll also try to give the everyday perspective of the crisis.

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.