Republic of Latvia with a modest small population base at 2.3 million successfully obtained European Union (EU) membership in May 2004, WTO in February 1999. In April 2005, Latvia joined ERM II mechanism on its way for euro entry later this decade. At present, Latvia is the midst of an economic boom with an economy overheating, high economic growth rates. Potential downside risk for Latvia is its credit/debt driven economic growth potentially leading to a real estate bubble to burst?
Economic Statistics
GDP as measured by purchasing power parity stands at $29.4 billion USD (2005) with corresponding GDP/Capita at $12,800 USD. GDP market price stands at $15 billion USD (2005). GDP growth figures include year 2004 at 8.5 percent, year 2005 at 9.8 percent, year 2006 estimated at 6.8 percent. Inflation for 2004 at 6.25 percent, 2005 at 6.7 percent, 2006 projected at 5.1 percent. Current account deficit came in at 11 percent of GDP (2005), year 2004 shortfall at 12 percent of GDP. Fiscal deficit at 1.1 percent of GDP (2004). Foreign exchange reserves are measured at $2.42 billion USD as of January 31, 2006. External debt came in at $13.2 billion USD although net debt is okay at 30 percent of GDP.
CURRENCY: ISO Symbol ‘LVL’, Latvian lat, lats, lati (plural). At time of review on February 7, 2006, the lat was valued at 0.5806 LVL to the US-dollar (USD) and/or at 0.696 LVL to the Euroland euro (EUR). The lati was pegged to the euro in January 2005 according to ERM II agreements in April 2005. ERM II mechanism provides for a least a two year wait time period to allow countries to keep their currencies stable while meeting euro membership targets (Maastricht treaty) on interest rates, inflation, debt and fiscal deficits. A fluctuation band of typically 15 percent is set initially, gradually narrowing as convergence nears.
CURRENCY HISTORY: the lat re-entered circulation in 1993 when the lat replaced the Soviet ruble at 200 rubles to 1 lat. In 1940, the Soviet ruble became the new currency with its military annexation of Latvia and remained in circulation until 1993. Previously in 1922, the original lat was introduced replacing the then Latvian ruble at a rate of 50 rubles to 1. Historical exchange quotes include year 2005 at 0.56 LVL to the USD, 2004 at 0.5402, 2003 at 0.5715, 2002 at 0.6182 and year 2001 at 0.6279. In 1999, the lat was pegged to the IMF’s special drawing rights (SDR) at 0.7997. Other exchange quotes include January 1998 at 0.595 LVL to the USD, 1997 at 0.581, 1996 at 0.551, 1995 at 0.528, 1994 at 0.56 and 1993 at 0.675.
CURRENCY FORECAST: exchange pressure include concerns with the large current account deficit over the last 10 years and fiscal deficit, inflation must be lowered. The country’s high current account deficit may reflect in a potential currency overvaluation for the lati if this shortfall is not corrected, Latvia has no oil & gas production. Latvia keeping its primary industry of exporting Russian oil abroad at its sea ports still vibrant. The Latvian authorities have a target admission date for euro adoption set sometime in 2008.
UPDATED: February 7, 2006
