Gloomy economic news worry tamed Baltic tigers (News Feature)

May 16, 2008, 2:08 GMT

Riga - In an old Latvian adage, a king decides between life and death for his subjects with the placement of a comma. Today, the Baltic nation's policymakers face some tough choices in trying to avoid recession.

There has been little good economic news in the Baltics recently - rising inflation, wide current-account deficits and fears of job losses.

After several years of record-breaking economic growth boosted by membership in the European Union, and fuelled by domestic demand and abundance of credit from mostly Scandinavian banks, the closely linked economies of Estonia, Latvia and Lithuania are cooling.

Experts expect growth to slow in eastern European countries from the Baltics to Bulgaria under the impact of tighter credit, central bank moves to fight surging inflation and the ripple effect of a weaker global economy.

Now, there's fear that the economic slowdown may force the Baltic Tigers to hide in the jungle.

Although signs of slowing growth appeared last year, the slowdown worsened this week when Estonia estimated its economy grew at near zero in the first quarter of 2008 - far below experts' forecasts. Economists also expect Latvia and Lithuania to slow down considerably.

Signs of a slowdown are persistent. One of Latvia's major lenders, GE Money Bank, recently speeded up procedures for re-selling impounded vehicles because its parking lot was filling up so quickly.

A number of newly-registered passenger vehicles in Latvia - an indicator for robust economic growth over the last three years - dropped 32 per cent in March 2008 from a year earlier, the European Automobile Manufacturers Association said.

Maris Saukans, a board member of the RBSSKALS, a Latvian construction company, told media Thursday that it had run out of jobs for five to 10 per cent of its workers.

Given the lower demand for the construction projects, they should have laid off 5 to 10 per cent of their employees by now. However, he added the company has no plans to lay off anyone yet.

Economic outlook forecasts from Danske Bank and GE Money Bank warn that plummeting consumer spending may even lead to contraction of the economy this year after three years of double-digit growth which made Latvia a leader in the EU in that economic indicator.

All of this is not good news for Aleksandrs Truhanovs, a Latvian construction worker. Dropping real estate prices make it tough for developers to earn a return on their investments, hire new workers, and keep the existing ones. And the future looks bleak.

'The mood is very pessimistic,' the 25-year-old Truhanovs told Deutsche Presse-Agentur dpa this week. 'No one knows what lies ahead and people are jittery.'

That shattered consumer confidence helps slow economic growth as well.

'If everyone thinks it'll be bad, trust me, it'll be bad,' Ilmars Rimsevics, governor of the Bank of Latvia, told reporters Thursday.

But he said Latvia would avoid a steep economic slowdown such as that in Estonia.

'It would not be right to take to fortune telling at this time. I hope very much that Latvia's situation would be a bit more balanced and that we would not experience such a steep fall in GDP growth,' Rimsevics said.

Latvia's centre-right government is also jittery.

The record-high inflation and slowing economic growth is eating up chunks of the Baltic nation's budget, translating it into a cut in government expenses and staff. Prime Minister Ivars Godmanis said this month he would consider cutting the budget to maintain a 1-per- cent surplus.

'A clear trend has emerged that the increase in budget revenues are likely to fall short of the target amid weakening economic growth. To meet the set targets in this situation, the government must start cutting spending,' Rimsevics said.