Latvia is one of the fastest growing economies in Europe. It was hit by the crisis, like many other economies, but it has also worked hard on a number of economic reforms and now there are projections for growth. Could give me an overview of the key factors that have contributed to Latvia’s economic recovery?
Not going too deep into the past, it is still worth to mention, what caused the crisis in Latvia. There were quite a number of internal and external factors, among them the flow of money on the international level and a fragile economic structure.
The government of Latvia took a number of actions that helped us to overcome the financial and economic crisis and return to positive growth. First, we had a disciplined attitude towards fiscal policy and the budget; the government took the position that we can only spend the money that we earn. We cannot go on forever relying on loans and increasing the debt; it is a road to nowhere. At that time public debt was relatively low; lower than what the Maastricht Treaty required, but our decision was not to increase the spending.
Disciplined fiscal policy implied that during 2009 and the first half of 2010 the government of Latvia made severe budget cuts; real austerity measures were implemented. We were experiencing cuts of wages, reforms in the public sector. We had inherited a massive public sector from Soviet times, but over a period of twenty years the demographics had changed, and we needed to adapt the system to the new reality. It was very painful and still is, but we had no other choice. The decisions were not based on ideological grounds, it was done because all other alternatives were much worse than the path than the government took at the beginning of 2009.
The very cause of the financial crisis in Latvia was the loss of the second largest commercial bank in Latvia, and the fact that the government was forced to take it over. The bank collapsed due to its inability to refinance itself. There was a lack of confidence in the international financial markets, after the crash of Lehman Brothers the flow of money was disrupted, and there was no trust in the financial system of Latvia. So the government had to step in. You can compare the situation with what is happening in Spain now. So the second task of the government was to ensure the stability of the banking sector of Latvia, which was done successfully.
And the third set of government actions was streamlined to raise the competitiveness of Latvia’s economy. Administrative burdens were eliminated, the business environment made more attractive, and European Union funds used to support Latvia’s economy.
Are there plans to raise more money with further privatisations, or issuing bonds? Are there any plans by the government to raise new capital?
Definitely, the international financial markets have regained confidence in us; we are able to refinance ourselves because markets trust Latvia. They know now that we can cope with our problems, manage our economy and put it in order. The rating agencies value the achievements made in Latvia, and this is a sign that the policies implemented by the government were the right ones. Recently, for example, the government of Latvia issued 7-year bonds worth 1.25 billion US dollars at the historically lowest interest rate of 2.75%. This helps us to refinance our international debts.
With regards to the state capital in companies, on two occasions the government was unwilling to take over a private company. For example, in the case of the commercial bank that I mentioned before – had the government not intervened, the bank would had collapsed, which would had been a disaster for Latvian financial sector.
The other occasion has been the insolvency of the bank “Krajbanka”, caused by the collapse of its mother bank “Snoras”, a Lithuanian bank connected to the Russian businessman Antonov. Indirectly they were stakeholders on the national airline, and as a result of the mismanagement of the bank, the government became the major stakeholder of the national airline with 95% ownership. Now the government of Latvia is looking for a strategic investor in the airline. The government has no intention in retaining the ownership of the company. It is complicated for the government to run an airline.
The government has been able to solve the problems of the financial sector, but it is the real economy and the industrial sector the ones that drive the growth and contribute to the efforts made by the government. What are the key sectors that are driving the economic growth?
What has helped us to pull the country out of the crisis has been a restructuring of the economy. Before the crisis, the contribution of industry to the GDP was between 10 and 11%; the rest were services, internal consumption and real state. Now the situation has changed. The contribution of industry to the GDP is around 13–14%. These data show how, when overcoming the crisis, Latvian companies have increased production and their exports. You cannot have economic stability based entirely on the service sector.
Is it in your plans to invest in innovation and technology?
Yes, but going back to your previous question, one of the key sectors that helped us recover from the crisis was the forest industry with an increase of exports.
Are they added value products?
Of course, there are, but not all of them. This is one of the areas we are working at, especially in the wood processing industry. Right now we are the fifth European exporter of processed wood for heating systems, and considering the size of the country, it is impressive, even if 50% of the territory of the country is covered with forests. The forest industry is one of our key industries.
Latvia also exports machinery.
We import iron and metals, process them in Latvia and export them, as well as machinery and technologies to the EU market. We have long-standing manufacturing traditions in Latvia. Even though we have lost some of our manufacturing sector when adjusting to the open markets in 1990ies, metal processing and automotive industry is still a significant sector for Latvia.
Latvia is a small country, our population is less that the population of Berlin, and our companies are medium sized. But the total annual export of goods amounts to €7–€8 billion; it is impressive.
Besides wood and automotive industries, also transport and logistics is an important sector for Latvia’s economy. We have impressive harbours, good railway connections, and the railway tracks still have the old Russian gauge. That means that trains do not have to wait at the border while wheels are changed. Goods can come from Kazakhstan straight to a harbour of Latvia and be loaded onto a ship. For example, we are helping to supply American troops in Afghanistan; from Riga harbour supplies go to Afghanistan via the railroads through Uzbekistan or Turkmenistan.
You’re talking about the diversity of the different sectors, but in 2010 your first export market was the UK, followed by Germany. What kinds of markets are you looking towards exporting at the moment?
In 2011, Lithuania and Estonia were at the top of our export partners’ list, both neighbouring countries of Latvia. They were followed by Russia, Germany, and then Sweden. More than 8% of our exports go to Germany.
Are you looking at any new markets?
In March 2012, for example, the Prime Minister of Latvia visited Qatar and the United Arab Emirates. The Prime Minister took a number of businesspeople with him. The purpose of this visit was to bring the business circles together and explore possibilities for entrepreneurs to come over to Latvia and make investments and trade. I think that is one of the directions we will go. These countries (and we are interested also in Kuwait, for example) have accumulated wealth and are looking for opportunities to invest. We have not had any exposure to Arab countries in previous decades or during Soviet times; they seemed to be very far away.
Another region of interest is Central Asia. These countries have been more traditional partners; Latvian businessmen have visited them and have been looking for business opportunities there. These countries, as well, are keenly looking in our direction and seeking for cooperation possibilities. We enjoy both rail and air connections. And there is a great deal of cooperation potential there.
Latvia has been very open to investment, and creating a suitable environment for new investors entering the market. What progress made until today to create an attractive investment climate?
The government has worked hard to simplify and streamline the procedures for investors who want to come to Latvia and open a new company there. In Latvia you can technically register a company in just one day. We also have a very good banking sector that is very efficient and a very good IT and internet connectivity speed. We are one of the countries with the fastest internet in Europe. There are particular institutions that provide support for investors entering Latvia. The Latvian Development & Investment Agency (LIAA) is intended to be a “one stop point” for new investors. A representative office of LIAA is seated also in the Embassy of Latvia in Berlin, from where it assists businesspeople from Latvia and Germany. The German Chamber of Industry & Trade has also representation in all three Baltic countries to help German businesspeople establish themselves in Latvia.
In 2011 the government introduced tax rebates for large scale investment projects, with the aim of facilitating foreign investment: investors can claim a tax rebate of 25% of total initial long-term investment in the amount of up to 35 million lats (LVL), or tax rebate of 15% of the part of the total initial long-term investment exceeding 35 million lats. And the government is continuing to examine our tax system: in May 2012 the decision was passed to lower the personal income tax rate. It will be made in several steps so that until 2016 the income tax rate will be decreased, quite significantly, from 25% to 20%.
What about the lifestyle in Latvia?
It is a lovely place to be. We have a very mild climate and the Baltic Sea is beautiful in summer.
In terms of hiring personnel, we have plenty of opportunities for that, and the government is ready to assist acquiring an appropriate labour force through the LIAA. There are state agencies that directly deal with our domestic labour force, which actually have a very good database on the available labour force.
On a daily basis you are dealing with both the federal and local German government. I’d like to know your view about bilateral relations on a political level?
From the very beginning of 1990s, Germany was one of the first countries to recognise Latvia’s independence. There are no elements in our bilateral political relations which would make them complicated. Such political impediments do not exist. That is a big advantage that makes my task here in Berlin much easier and simple. I would tend to say, judging from our government’s position and the German’s government’s position in European economic policy; I would say we are like-minded. Not because of some political, ideological, or historical stance, but it is simply a pragmatic approach. Chancellor Merkel has pointed out that people should not take for granted that Germany is strong today. You cannot be lax, and I think that is a very positive attitude. We are like-minded. Latvia supports the German initiatives on smart growth and spending in the European Union.
On the business level there are about 1,000 joint German-Latvian ventures established in Latvia, the majority of them small and medium-sized enterprises. The largest German investments in Latvia have been made in energy. E.ON Ruhrgas International owns around 47% of the Latvian gas company “Latvijas gaze”, the other half belongs to Gazprom. This is a good example of how we ensure the predictability and stability of gas supplies to Latvia. Another big German investor is ERGO International Insurance Company, which has opened a subsidiary in Latvia. There are also some major investments in Latvia’s industrial sector: a German enterprise owns 80% of a Latvian fibreglass company, products of which are exported to 32 countries worldwide and used in building sector.
Latvians like stability and predictability in daily life and in economy as much as Germans do. There has to be a basis for our future cooperation. It is an on-going process of discovery, innovation, and increased efficiency.
In which regions in Germany do you see the most potential for collaboration?
Certainly Lower Saxony and Schleswig-Holstein could be good examples, also North Rhine-Westphalia. We are producing some spare parts for BMW in our metal industry as subcontractors. In terms of geography, our natural partners are mostly northern Germany’s federal counties.
There is one area of cooperation, which is almost impossible to reach, but which I personally would like to experience, is more German investment in Latvia’s financial sector. It would stimulate an even greater flow of German investment into Latvian market, especially industry. Right now our market is dominated by Scandinavian banks. When I speak to the German bankers about this they admit that they were too slow in the early 1990s because they had to cover Eastern Germany, which took a while. At that point the Scandinavians were already there. Now Swedes consider Latvia their domestic market. So German banks and companies would need to fight for their place in Latvia, they would need to invest in advance and then wait patiently to see returns. The potential is there, but the Germans are not ready yet to pick up this fight.
Imagine that I am Angela Merkel; what would you like to see from Germany?
Investment in production, the industrial sector, like the wood and automotive industries, the metal industry, and transport and logistics.
Latvia’s trade with Germany is growing. In the last year we have achieved the highest export levels in our history at €650 million. When the German economy is growing it is a very positive sign for us as Germany is our fourth largest export partner.
What is your brand? What would be your message about Latvia? If you could give a title to the report, what would it be? What do you want the Germans to know about Latvia?
That we are on a path of sustainable growth and we do care about being more efficient and productive. I cannot name just one brand because we have several, like wood processing, transport and logistics, machinery and metal industry, IT, and pharmacy. I think we have an advantage in being so diverse. Focusing on one area makes us more vulnerable, more exposed to external risks.
Diversification and new industries are the trend.
We really pay great attention to diversification. One of our challenges, for example, is the growing costs of energy. Government of Latvia currently works at a new energy strategy; in close cooperation with the other countries in the region we want to integrate our energy market into the European market, develop renewable energies and ensure greater energy efficiency in Latvia.
So come and see Latvia! The Embassy of Latvia in Berlin will be glad to assist you.