A macro flash regarding that the President of Latvia Valdis Zatlers on May 28th announced his decision to propose a dissolution of the Parliament.

1. Flash comment
Economic commentary by Economic Research Department May 31, 2011
Latvia: President Valdis Zatlers calls for a dismissal of the Parliament
Real GDP,
% growth
-25
-20
-15
-10
-5
0
5
10
15
1Q 07 1Q 08 1Q 09 1Q 10 1Q 11
Quarterly (s.a.)
Annual (nsa) Source: CSBL
On Saturday night May 28th the President of Latvia Valdis Zatlers
announced his decision to propose a dissolution of the Parliament
stating that the last Thursday's vote to block a corruption probe in
the Parliament "sounded like a siren warning of a serious conflict
between the legislative power and judiciary" and that the oligarchs'
grip on the legislature must be broken by giving people a chance to
express their will. The non-executive head of state can not dismiss
the Parliament but can call for a referendum to vote on the issue,
which he did. The referendum is to take place by the end of July. If
the referendum is to dissolve the Parliament, the next Parliament is
to be elected by late September. This gives enough time for the
new Parliament to discuss and pass the 2012 budget in due time.
Good upside risks to growth
The current political situation is not a result of an economic crisis
per se. On the contrary, after the sharp contraction totalling to 25%
of GDP in 2008-2009, the economy has grown for six consecutive
quarters (the early estimate for GDP growth in 1Q 2011 is 3.4%
yoy). At the core of the recent development is a home grown socio-
political issue related to a long-standing problem of state capture
and political corruption, which has risks of stalling the progress of
structural reforms. These risks have been openly and repeatedly
discussed internally and externally. The decision by the President
Zatlers can change the political environment, pulling Latvia out of
the current trajectory of a muddling through scenario and put it on a
path of broader and significantly quicker growth. To our view,
downside risks are significantly lower than upside risks from the
President’s decision.
Negative effects, if any, to be short-lived
and small
We do not expect major socio-political turbulence and/or significant
negative adverse response by international markets. If any, it will
be short-lived and small. The timing is good – economy recovers,
State Treasury has ample reserves to cover budget deficits well
into 2012, there are no large debt rollover volumes any time soon,
a recent favourable evaluation by IMF Board of the Latvian
economic situation permitting access to the next tranche of the
bailout programme.
Namely, over the last year economic growth has become wider
extending from exports (higher value ever, growth rates in excess
of 40% yoy) to household consumption and business investments.
The early estimate for 1Q 2011, however, shows that the speed of
recovery has slowed significantly from an average quarter-on-
quarter growth of 0.9% in 2010 to only 0.2%. The key reason is tax
rise to consolidate the government budget and global commodity
price increases that have boosted inflation (CPI inflation at 4.5%
yoy in April) thus harming domestic demand. Our GDP growth
forecast under the muddling through scenario is ca 4% for 2011

2. Flash comment
Economic commentary by Economic Research Department May 31, 2011
and 2012; with a stronger positive boost to structural reforms we
should expect significantly stronger growth in 2012.
By the end of April the State Treasury had ca LVL 900m (ca 6.5%
of GDP) on its accounts. Tax revenues in January- April have been
8.5% above the plan (i.e. ca LVL 90m). The government aims to
end the year with a budget deficit below 5% of GDP, which is on
track to reduce the deficit significantly below 3% as required by the
Maastricht criteria to introduce the euro in 2014.
Mārtiņš Kazāks, PhD
Chief Economist in Latvia
+ 371 6 744 5859
martins.kazaks@swedbank.lv
Swedbank Economic Research Department
SE-105 34 Stockholm, Sweden
ek.sekr@swedbank.com
www.swedbank.com
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Cecilia Hermansson, +46 8 5859 7720
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