We are alive! Now what? by Kārlis Cērbulis

We are alive! Now what? Source: The Economist K. Cerbulis (karlis@nchriga.lv) March 2010 1

My only prediction: The global economy in the next 20 years will be more challenging/ volatile than the previous 20 years. Can we still be successful? 2

1. Situation in Latvia. 3

Investors consider Latvia as one of the riskiest in the European Union... (though worries may be subsiding) 4

Latvia’s CDS (credit default swap) 5

CDS: Latvia / Greece / Iceland Convergence! Latvia Iceland Greece 6

Latvia‟s GDP (% change y-o-y) Source: Central Statistical Bureau, SEB 7

Bank Loans & Inflation 25 000 16% 14% 20 000 Inflation 12% Bank loans Bank loans, mill. Ls + 533% ! 10% 15 000 Inflation 8% 6% 10 000 4% 2% 5 000 0% - -2% 2003 2004 2005 2006 2007 2008 2009 Source: Associtaion of Latvian Commercial Banks, Central Statistical Bureau 8

Bank Loans & Apartment Prices 25 000 100 000 119 Series 2-room apartment (55 m2) 90 000 20 000 80 000 Apartment price Bank loans, mill. Ls +269% 70 000 price, EUR 15 000 60 000 - 73% 50 000 10 000 Bank loans 40 000 30 000 5 000 20 000 10 000 - 0 2003 2004 2005 2006 2007 2008 2009 Source: Associtaion of Latvian Commercial Banks, Ober-Haus 9

Wages and Productivity, 2000 = 100 We became uncompetitive! Nominal Wages Productivity Source: Bank of Latvia 10

2. Global situation. 11

In 2007 the global domestic product totaled 55 trillion USD.... ... in 18 months of crisis global asset values decreased by ~ 50 trillion USD. 12

The world economy today lives in a „Virtual reality‟ 13

Lowest Interest Rates in History Source: The Economist 14

Total Debt (% of GDP) 2009 estimate 450% 400% 350% 300% 250% 200% 150% 100% 50% 0% Latvia Estonia Lithuania Germany Finland Spain UK USA Source: World Bank, Eurostat 15

Total United States Credit as % of GDP Baltic States regain independence Source: www.growthology.org 16

Budget Deficit (% of GDP) 0% -2% -4% -6% 2009 -8% 2010* *estimate -10% -12% -14% Latvia Lituania Estonia Germany UK USA Source: World Bank, Eurostat 17

USA Federal Budget Balance (% of GDP) Source: Nordea Economic Outlook January 2010 18

New Bubbles? • Bank assets in China + 28% in one year. • Apartment prices in Bejing and Shanghai +50%. • Price of land in China + 106% Shanghai + 200%, Guangzhu 400% Sounds familiar? 19

We are experiencing a “non-linear” event, such as: a meteorite striking the Earth... 20

No! A real meteorite! 21

Like the one that killed off the dinosaurs... “Prediction is very difficult, especially of the future.” Niels Bohr The world will be very different than before the crisis. 22

3. Which way for Latvia? 23

Latvia Reacts Quickly Current Account (% of GDP) 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009* 10% 5% 0% -5% -10% -15% -20% -25% Source: Bank of Latvia * Provisional data 24

Retail Trade (growth % YOY) 60% 40% 20% 0% -20% Retail turnover -40% -60% Registration of -80% new vehicles -100% Source: Latvian Association of Authorized Car Dealers, Central Statistical Bureau 25

Three Laws in Real Estate: „Location, Location, Location.‟ Distance (km) to Riga from:  London: 1,662  Berlin: 846  Moscow: 835  Stockholm 437  Helsinki: 360 26

„Swedish Occupation I‟ Estonia and Latvia (1629 – 1700) “Positive times, during which this period also acquired fame as golden times.” Wikipedia 27

„Swedish Occupation II‟ (1998 - ...) 28

Conclusion and Recommendations 29

History of “Big” Crisis • The „Great Depression‟ lasted 11 years (it ended only with the beginning of World War II) . • 1970‟s USA crisis lasted 9 years. • Japan‟s „deflation spiral‟ lasts more than 20 years. The crisis is here to stay for a while! It will change and shift form. 30

Expect Economic Volatility the next 10+ years • How to survive changing times: – Live modestly – Borrow less (as a country, as individuals) – Export more than import. Live like a „frugal family‟ would. 31

Would New Lending Solve Everything? Nej tack!” (“No, thank you!” in Swedish) Only fast credit write-offs provide a solution. (“When gross external debt exceeds 90% of GDP, annual growth rates are cut in half.” ) Reinhart & Rogoff 32

Set Clear Targets: • Budget without deficit ASAP. “Be more Estonian than the Estonians!” • Fast, effective bancruptcy procedure for individuals and companies. • Encourage lending to companies, hinder consumer borrowing. • Rapid reform of pension system. 33

“It is not the strongest of species that survives, nor the most intelligent that survives. It is the one that is the most adaptable to change.” Ch. Darwin 34

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We are alive! Now what? by Kārlis Cērbulis

by Roberts Zīle on Mar 28, 2010

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We are alive! Now what? by Kārlis Cērbulis — Presentation Transcript