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Latvia's internal devaluation in a cross-country perspective

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Presentation by Ettore Dorrucci (ECB) at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic …

Presentation by Ettore Dorrucci (ECB) at Country workshop: "EU Balance-of-Payments assistance for Latvia: Foundations of Success" organized by the European Commission, Directorate General for Economic and Financial Affairs, and the Bank of Latvia.
Brussels, March 1, 2012

Published in Economy & Finance , Business
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  • 1. Joint Commission - Bank of Latvia Seminar“EU balance-of-payments assistance for Latvia: Foundations of success” Roundtable “Lessons from Latvia, and the way forward” Latvia’s internal devaluationin a cross-country perspective by Ettore Dorrucci, European Central Bank 1st March 2012 1 March 2012
  • 2. Comparison with other program countries(1) Real GDP growthReal GDP growth(quarterly frequency; year-on-year growth rates; t stands for the quarter in which the program started in therespective country) LV RO GR IE PT 15 10 5 0 -5 -10 -15 -20 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12Source: Eurostat.Latest observation: LV, GR 2011Q4; RO, IE, PT 2011Q3. Note: t stands for the quarter in which the program started in therespective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. Data sa or wda and sa, GR: nsa. 1 March 2012 2
  • 3. Comparison with other program countries(2) Real GDP levelReal GDP levels(quarterly frequency; index, t =100; t stands for the quarter in which the program started in the respectivecountry) LV RO GR IE PT 110 105 100 95 90 85 80 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10 t+12Source: Eurostat.Latest observation: LV, GR 2011Q4; RO, IE, PT 2011Q3. Note: t stands for the quarter in which the program started in therespective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. Data sa or wda and sa, GR – internalECB seasonal adjustment. 3 1 March 2012
  • 4. Comparison with other program countries(3) CompetitivenessReal effective exchange rate (deflated with total economy ULC)(quarterly frequency; index, t =100; t stands for the quarter in which the program started in the respectivecountry) LV RO GR IE PT 130 120 110 100 90 80 70 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10Source: Eurostat.Latest observation: 2011Q3. Note: Calculated vis-à-vis 20 trading partners. t stands for the quarter in which the programstarted in the respective country: LV 2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. 1 March 2012 4
  • 5. Comparison with other program countries(4) General government debtGeneral government debt (as % of GDP)(annual frequency; t stands for the year in which the program started in the respective country) LV RO GR IE PT 200 2013, before PSI agreement 150 100 50 0 t-2 t-1 t t+1 t+2 t+3 t+4 t+5Source: European Commission Autumn 2011 forecast.Latest observation: 2013. Note: Data after 2010 are forecasts. t stands for the year in which the program started in the forecastsrespective country: LV 2008, RO 2009, GR 2010, IE 2010, PT 2011. 1 March 2012 5
  • 6. Comparison with other program countries(5) PricesHICP(monthly frequency; year-on-year growth rates; t stands for the month in which the program started in therespective country) LV RO GR IE PT 20 15 10 5 0 -5 -10 t-24 t-20 t-16 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32 t+36Source: Eurostat.Latest observation: Jan2012. Note: t stands for the month in which the program started in the respective country: LVDec2008, RO May2009, GR May2010, IE Dec2010, PT May2011. 1 March 2012 6
  • 7. Factors underpinning a successful internal devaluation strategy: The case of LATVIA strategy Exogenous factors Endogenous factors “Countries’ initial conditions” “Right policy Very country-specific Possibly in common does deliver” with other countries Magnitude of crisis shock and Small open economy Appropriate IMF/EU pre-crisis imbalances conditionality, W B support Perceived lack of alternatives Low stock of public debt at the Frontloading of measures to hard peg beginning of the crisis (“Big Bang” approach) Magnitude of FX loans Prospects of euro adoption Proper communication strategy Collective memory of past Degree of market liberalisation Overall government credibility crises that were successfully overcome Electoral rules, form of Distribution of costs government Degree of party fragmentation Government’s cohesion and political (in-)stabilityPartly drawing on “Fiscal austerity, structural reforms and re-election: Explaining the “Possible Trinity in the case ofLatvia”, by Marion Salines and Kristaps Bērzinš, mimeo. 1 March 2012 7
  • 8. The importance of productivity-enhancingstructural reforms: EU country ranking (1) Chart: Development of country rank in the EU now and 5 years ago The World Bank Institute: Average of Worldwide Governance Indicators (2011) Transparency International (Corruption Perception Index 2011) World Economic Forum (The Global Competitiveness Index 2011-2012 rankings) The World Bank and the International Finance Corporation (Ease of Doing Business 2012) 30 AVERAGE OF RANKS (2011) AVERAGE OF RANKS (2006) 25 20 15 10 5 0 FI DK S DE UK NL E IE AT BE LU FR EE PT CY ES MT LT SI PL CZ LV HU SK IT BG RO GR Source: own calculations on data from The World Bank Institute (Worldwide Governance Indicators 2011, 2006), World Economic Forum (The Global Competitiveness Index 2011-2012 and 2007-2006 rankings), Transparency International (Corruption Perception Index 2011, 2006) and the World Bank and the International Finance Corporation (Ease of Doing Business 2012, 2007). Note: Malta is not covered in Doing Business report. Early period for Luxembourg refers to 2008 report, for Cyprus to 2009 report. 1 March 2012 8
  • 9. The importance of productivity-enhancingstructural reforms: EU country ranking (2) Chart: Development of country rank in the EU now and 5 years ago AVERAGE OF RANKS (2006) AVERAGE OF RANKS (2011) Range of ranks (2011) 30 25 20 15 10 5 0 FI DK S DE UK NL E IE AT BE LU FR EE PT CY ES MT LT SI PL CZ LV HU SK IT BG RO GR Source: own calculations on data from The World Bank Institute (Worldwide Governance Indicators 2011, 2006), World Economic Forum (The Global Competitiveness Index 2011-2012 and 2007-2006 rankings), Transparency International (Corruption Perception Index 2011, 2006) and the World Bank and the International Finance Corporation (Ease of Doing Note: Malta is not covered in Doing Business report. Early period for Luxembourg refers to 2008 report, for Cyprus to 2009 report. 1 March 2012 9
  • 10. Background slides 1 March 2012 10
  • 11. Comparison with other program countriesGDP per capitaReal GDP per capita(annual frequency; index, t = 100; t stands for the year in which the program started in the respectivecountry) LV RO GR IE PT 110 105 100 95 90 85 80 t-2 t-1 t t+1 t+2 t+3 t+4 t+5Source: European Commission Autumn 2011 forecast.Latest observation: 2013. Note: Real GDP per capita in PPS. Data after 2010 are forecast. t stands for the year in which theprogram started in the respective country: LV 2008, RO 2009, GR 2010, IE 2010, PT 2011. 1 March 2012 11
  • 12. Comparison with other program countriesUnemploymentUnemployment rate (as % of labour force)(monthly frequency; t stands for the month in which the program started in the respective country) LV RO GR IE PT 25 20 15 10 5 0 t-24 t-20 t-16 t-12 t-8 t-4 t t+4 t+8 t+12 t+16 t+20 t+24 t+28 t+32Source: Eurostat.Latest observation: RO, IE, PT Dec2011;GR Oct2011; LV Sep 2011. Note: t stands for the month in which the programstarted in the respective country: LV Dec2008, RO May2009, GR May2010, IE Dec2010, PT May2011. 1 March 2012 12
  • 13. Comparison with other program countriesCurrent account balanceCurrent account as % of GDP(quarterly frequency; 4 quarter moving averages; t stands for the quarter in which the program started in therespective country) LV RO GR IE PT 20 10 0 -10 -20 -30 -40 t-8 t-6 t-4 t-2 t t+2 t+4 t+6 t+8 t+10Source: Eurostat.Latest observation: 2011Q3. Note: t stands for the quarter in which the program started in the respective country: LV2008Q4, RO 2009Q2, GR 2010Q2, IE 2010Q4, PT 2011Q2. 1 March 2012 13