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Recent manufacturing trends in Latvia – are there reasons to worry?

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  1. 1. Swedbank Analysis May 19, 2011Recent manufacturing trends in Latvia –are there reasons to worry? • After a swift rebound in manufacturing in the first half of 2010, output growth has stalled, and there was even a decline in late 2010. The developments in manufacturing sectors in the other parts of the Baltic Sea region were more favourable. Are there reasons to worry? • Partly, the manufacturing slowdown is explained by a slowdown in the re- source- and capacity- limited wood industry. Another factor is the existing production capacity constraints in other sectors – investments in production facilities have been feeble so far. With investment growth picking up as delev- eraging becomes less acute and the continuing favourable external environ- ment, manufacturing and export expansion will continue. However, growth rates will decelerate. • Despite many improvements in the investment and business environment, there are still many opportunities for economic policy that can and should be taken to accelerate investments and manufacturing expansion, thereby sup- porting export-driven economic growth.Is the fallback in manufacturing temporary?After rapid recovery in the first half of 2010, manufacturing output growth Stagnating confidencelost momentum later in the year, and, around the turn of the year, output and a fallback in manu-even declined for three consecutive months. Moreover, industrial confi- facturing output.dence has been stagnating since May 2010. There was an increase inLatvian manufacturing in February and March and output returned to theaverage level of the second half of last year; however, it could not com-pensate for the whole fall of the three previous months. The pre-crisisvolumes have not been reached so far. Economic Research Department. Swedbank AB (publ). www.swedbank.lv Lija Strašuna +371 6 744 5875, Mārtiņš Kazāks +371 6 744 5859, Dainis Stikuts +371 6 744 5844 Legally responsible publisher: Cecilia Hermansson, Group Chief Economist, +46 8 5859 7720
  2. 2. Manufacturing output, sa 120 50 100 25 Annual growth (rs) 80 0 Index, 2005=100 Confidence, pts (rs) 60 -25 40 -50 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: CSBL, EurostatDuring the same time, manufacturing output and confidence develop-ments in the other parts of the Baltic Sea region were much more en-couraging. 1 Manufacturing output, 2007=100 (sa, 3M average) Manufacturing 120 Denmark 110 Euro area 100 Estonia Latvia 90 Lithuania 80 Poland Sweden 70 United Kingdom 60 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: Eurostat Manufacturing confidence, pts (sa, 3M average) 30 20 Denmark 10 Euro area 0 Estonia Latvia -10 Lithuania -20 Poland -30 Sweden -40 United Kingdom -50 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: EurostatDeceleration in the growth of manufacturing volumes in Latvia was ex- More favourable manu-pected (see our July 2010 monthly newsletter 2 ). However, the fact that facturing developmentsLatvian developments of confidence and output are falling behind those in neighbouring coun-of our main trading partners and competitors is disappointing. As manu- tries.facturing is one of the largest exporting sectors, such a tendency puts atrisk further export volume growth. Is the fallback temporary, what are the1 Manufacturing output developments do not necessarily follow confidence developmentsclosely. For instance, in Poland output was growing faster than confidence, while in theUK it was the other way around.2 Swedbank Montlhy Newsletter (2010), Latvian Economy, „Manufacturing in Latvia –are the current growth rates sustainable?”, July 20102 Swedbank Analysis • May 19, 2011
  3. 3. reasons behind it, and what might and should be done to accelerategrowth?What is behind the slowdown in confidence?Confidence in manufacturing has been stagnating due to production ex- Industrial confidence notpectations and an assessment of order-book levels. There seems to have improving…been a minor increase in production expectations in a couple of recentmonths, but, as the assessment of order-book levels has not improved,this small increase is hardly noticeable in the total confidence indicator(see above). It should be noted that production expectations are positive,implying growth in output, but manufacturers do not expect growth to ac-celerate.Employment expectations also became positive, suggesting that thereare more companies planning to hire new employees than those planningto fire existing ones. Selling-price expectations have risen, owing toglobal commodity price growth in the second half of 2010. Manufacturing confidence, pts (sa) 50 Assessment of stocks of finished products 25 Assessment of order-book levels 0 Production expectations for the months ahead -25 Selling price expectations for the months ahead -50 Employment expectations for the months ahead -75 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Source: DG ECFINHowever, the situation differs across industries. For instance, productionexpectations can be used as a leading indicator to forecast productionvolumes, although volatility of this confidence indicator should be takeninto consideration. Production expectationsfor the months ahead, Production expectations for the months ahead, pts (sa, 3M average) 50 Food products 25 Wood products Machinery & equipm. 0 Computer, electronic prod. -25 Metal products Total manufacturing -50 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: DG ECFINThe expected slowdown in the wood industry was quite evident last year,and, although there has been a rebound early this year, it is likely to be …but some industries areone-off, as production expectations have decreased again in April (see performing better thanbelow for more detailed analysis). Wood industry constitutes nearly one- others.fourth of total manufacturing output thus significantly influencing total fig-ures. Production expectations in food manufacturing have been quitestable for a year now. At the same time, production expectations in metal-Swedbank Analysis • May 19, 2011 3
  4. 4. and machinery-related sectors 3 continue to increase (mostly owing to ex-port expectations).Is demand growing?During the last two years, manufacturing has grown, owing to a recovery Share of exported pro-in export markets: the share of exported production in manufacturing duction has risen…turnover increased from 51% in 2008 to 64% in the first quarter of 2011. Manufacturing turnover (sa), 2005=100 180 160 Locally sold production 140 Exported production 120 100 80 Jan.05 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: CSBLThe recovery in domestic demand has started, thereby supporting pro-duction for local use; however, this is much slower and expected to re-main so in the near future.The external environment is also expected to remain favourable in the … and external environ-coming years, especially so as our main trading partners are forecast to ment remains favourable.grow faster than Europe on average. Moreover, growing global prices,although raising imported input costs, are helping Latvian exporters to in-crease their turnover thus easing deleveraging pressures. Economic growth of main trading partners, % Exports to this 2010 2011f 2012f country, % of total exports (2010) Lithuania 1.3 4.2 4.7 16.3 Estonia 3.1 4.5 4.5 13.2 Germany 3.6 2.4 1.9 8.7 Russia 4.0 4.6 4.5 10.7 Sweden 5.3 4.0 2.6 6.3 Poland 3.8 3.9* 4.2* 5.0 Denmark 2.1 1.9* 1.8* 3.9 United Kingdom 1.4 1.5 2.0 3.6 Euro area 1.7 1.5 1.5 21.5** * Eurostat forecasts ** Without Estonia Source: CSBL, Eurostat, Swedbank forecasts (April 2011)3 Basic metals, metal products, computers and electronic products, electrical equipment,other machinery and equipment, and transport (including motor vehicles and their acces-sories).4 Swedbank Analysis • May 19, 2011
  5. 5. What are the factors limiting production?Capacity constraints are becoming more and more important for manu- Equipment and labourfacturers, implying slowing growth rates of production volumes. Amongthe factors limiting production, demand and financing are becoming less constraints increasing.binding, while the role of equipment and labour constraints are increas-ing. Factors limiting production in manufacturing, % (sa) 60 50 Demand 40 Labour Equipment 30 Other 20 Financial 10 0 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Source: EurostatThe situation certainly differs across industries – while average capacity Capacity utilisation inutilisation in manufacturing is moving towards pre-crisis levels, in some some industries exceededsectors (such as wood, wearing apparel, and basic metals) it has already pre-crisis levels.reached or even exceeded the 2005-2007 average levels. This impliesthe necessity of investments. Capacity utilization, % average 2005-2007 90 Metals 75 Food products Wood products 60 Electrical equipm. Metal products 45 Wearing apparel Total manufacturing 30 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 1Q 12 Source: DG ECFINAt the same time, the manufacturing sector was the one seeing the Manufacturing has seenlargest gains in competitveness. Assuming that in 2005, i.e., before the the largest gains in com-boom, the situation was about balanced, the gap between productivity petitiveness.and wage levels was eliminated in late 2009. Moreover, productivity perfull-time equivalent employed grew more rapidly than real wages last twoyears. Unit labour costs also continued to decline throughout 2010. Thissuggests that Latvian producers have restored their competitevenesssufficiently to be able to benefit from the rise in external demand.Swedbank Analysis • May 19, 2011 5
  6. 6. Competitiveness indicators in manufacturing, 2005=100 (sa) 160 200 Unit labour costs (rs) 140 170 Real gross wage 120 140 Productivity per FTE* 100 110 *FTE - employment in full-time equivalents 80 80 Source: CSBL, 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Swedbank estimationsWhy have investments been slow to respond sofar?In our July 2010 monthly newsletter, we already pointed out the necessity Feeble investment activ-of investments in production facilities to sustain manufacturing growth ity so far.rates. However, even though the trough in nonfinancial investmentsseems to have been reached in the second quarter of 2010, investmentactivity so far has been quite feeble. The picture with respect to foreigndirect investment (FDI) is a bit more encouraging. Nonfinancial Non-financial investments in manufacturing, investments in manufacturing, LVL m 140 25 Other fixed assets 120 20 100 Machinery & equipment 80 15 Buildings 60 10 Long-term intang. 40 assets 5 20 % of total investments (rs) 0 0 1Q 08 1Q 09 1Q 10 Source: CSBL FDI inflows in manufacturing 50 25 40 20 30 15 LVL m 20 10 % from value 10 5 added (rs) 0 0 -10 -5 -20 -10 1Q 04 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: Bank of Latvia, CSBL6 Swedbank Analysis • May 19, 2011
  7. 7. Companies’ cash flows have improved and profit margins have risen, es- Better cash flows andpecially in manufacturing, where they are on average higher than in the profitability of busi-economy and have already reached the 2006-2007 levels. 4 However, thesituation differs a lot across industries. For instance, evidence suggests nesses, but deleveragingthat last year was exceptionally good for wood manufacturers (although still ongoing.currently profit margins are decreasing due to rising input prices), whilefor many companies in metal- and machinery-related sectors profitabilityis still way below pre-crisis levels. At the same time, manufacturers, hav-ing raised turnovers, are now taking the time to shape up their balancesheets (many of them are still in the loan restructuring process) beforeassuming new liabilities. Credit stock in manufacturing 100 1500 80 1200 % of value 60 900 added LVLm (rs) 40 600 20 300 0 0 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: FCMC, CSBLAs a result, companies’ retained earnings so far seem to have increaseddeposits more than investments. This can also be justified by the uncer-tainty regarding global developments and pre/post-election fiscal policy. Itshould be taken into account that developments in investments and de-posits late last year were also influenced by seasonal factors. Deposits of resident non-financial institutions, bn LVL 1.8 up by LVL 255m 1.5 or 36% yoy in 4Q 2010 1.2 0.9 Other 0.6 Overnight 0.3 0.0 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: Bank of LatviaWill investment activity increase?Investments in manufacturing are expected to pick up. Companies need Investments in produc-to increase their capacity to continue raising production volumes. This tion facilities to pick up.implies investments in production facilities. Investments to reduce labourand energy intensity are anticipated – for instance, increasing energy tar-iffs are compelling companies to invest in energy effectiveness. In 2010,issued building permits for production buildings and warehouses rose4 Bank of Latvia (2011), http://www.makroekonomika.lv/dazu-nozaru-pelnitspeja-atgriezas-straujas-izaugsmes-gadu-limeni (in Latvian).Swedbank Analysis • May 19, 2011 7
  8. 8. significantly, while, for all other types of buildings (residential and non-residential), permits seem to have bottomed out after an extensive drop. Number of issued building permits 120 100 Office buildings 80 Wholesale and retail 60 trade buildings 40 Production buildings and warehouses 20 0 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 1Q 11 Source: CSB LInvestments in new product development and diversification (including Moving up the value-education and training of employees) are also essential. Taking into ac-count the current relatively unsophisticated product mix of Lativan manu- added chain is crucial.facturers, 5 there is still a substantial potential for manufacturing sector tomove up the value-added chain. Producing “smarter” goods would dimin-ish dependency on price movements and the cheap (so far!) labour force,but would generate higher turnovers. There is also the possibility of pro-viding additional services to customers in relation to the produced goods,thereby strengthening client loyalty. Share of high-tech exports, % of total 20 16 Latvia 12 EU27 8 Estonia Lithuania 4 0 2002 2003 2004 2005 2006 2007 2008 Source: CSBLCurrently, Latvia lags behind Lithuania and Estonia in export sophistica- More research and de-tion, as well as in innovations and research and development. The link velopment is needed.between research institutes and business is quite weak, resulting in a lownumber of patents. Research projects (and received grants) satisfy aca-demic interests and very rarely follow business requests. At the sametime, most manufacturing companies are too small to create their own re-search centres. In order to develop new, more sophisticated products,investments in research and development are necessary.5 See Beņkovskis, K., R. Rimgailaite (2010), „The quality and variety of exports fromnew EU member states: evidence from very disaggregated data”. Working Paper 2/2010,Bank of Latvia. Also Vītola, K, G. Dāvidsons (2008), “Structural transformation of ex-ports in a product space model”, Working Paper 4/2008, Bank of Latvia.8 Swedbank Analysis • May 19, 2011
  9. 9. Share of enterprises with innovation activities in manufacturing, 2006* Share of with innovation in 80 60 40 28 20 15 0 UK AU CZ PO DE BE IE DK EE SE ES LV NL EU27 PL FI FR GR HU IT LT LV (08) NO BG RO * Eurostat data available for 2006 only, CSBL provides data about LV also for 2008 Source: Eurostat, CSBL R&D expenditure of business enterprises, 2009 (% of GDP) 2.5 2.0 1.5 1.0 0.5 0.14 0.0 FR (08) IT (08) SE EU 27 FI SI HU HR TR RU CZ MT LT US (08) IS (08) EA (08) PT (08) ES (08) DE (08) BG (08) NO CY (08) RO DK IE UK EE SK LV PL Source: EurostatFinancing of investments is becoming more available. This can be seen Financing availabilityin confidence survey data (see above), close-to-zero or even negativereal interest rates 6 (however, the forecast rise in EURIBOR will raise improves gradually.these). Banks are becoming more active in new lending, and the first pri-ority is exporting companies. With higher Latvian sovereign credit ratings,foreign investors are also expected to become more active. EUR interest rates, % 15 Weighted average for new loans (nominal) 10 5 Weighted average for new loans (CPI deflated) 0 Nonfin. corporates, -5 existing stock (PPI deflated) -10 Nonfin. corporates, existing stock (nominal) -15 Jan.06 Jan.07 Jan.08 Jan.09 Jan.10 Jan.11 Source: CSBL, Bank of Latvia6 Regarding interest rates for new loans, separate data are not available for households andbusinesses, just a weighted average – that is why they are deflated with the consumerprice index (CPI). Interest rate data for existing credit stock are available for nonfinancialinstitutions, but not for different industries – the producer price index (PPI) is used fordeflating, as it might better reflect the cost situation for businesses than CPI. Deflated bythe CPI, interest rates for existing stock of nonfinancial corporations still nearly ap-proached zero in early 2011.Swedbank Analysis • May 19, 2011 9
  10. 10. Will a change in industry structure supportgrowth?In the second half of last year, the output growth of wood manufacturingslowed noticeably. As it is the second-largest industry, the growth of othersectors did not manage to compensate for this slowdown, which was alsoreflected in total manufacturing figures (see above). In the first quarter ofthis year there was a sudden pickup in wood manufacturing; however, itis seen to be more a one-off effect rather than a return of the previoussteep trend. Manufacturing output, 3M average, sa (sa, 3M average) Manufacturing output, 2007=100 150 Food prod. 125 Metal prod. Machinery & equipm. 100 Wood 75 Computer, electronics Clothing 50 Nonmetallic minerals 25 Jan.07 J an.08 Jan.09 Jan.10 Jan.11 Source: CSBLThe slowdown in wood manufacturing growth was expected. The limiting Growth of wood manu-factor in this industry is not only equipment, but also resource constraints, facturing has slowed…as logging volumes are not expected to grow. The state logging companyLatvijas Meži, which provided about 70% of timber resources the last twoyears, plans to reduce its logging volumes by about one-third during2011-2014. With prices rising, private forest owners are becoming moreactive and might compensate for a decline in supply from the public sec-tor; however, it is difficult to forecast these volumes. If Russia enters theWTO in 2012, as planned, current export duties on its timber will be low-ered, which might also improve somewhat the availability of resources forLatvian manufacturers. However, imported volumes are still likely to bevery small. In order for the wood industry to grow further, product devel-opment and diversification are necessary, facilitating a shift to higher-value-added products.Metal and machinery sectors (including equipment and transport) have … but the baton is beingpicked up the baton from wood producers, as expected. These industries picked up by metal- andaltogether constitute about one-fourth of total manufacturing turnover; machinery-related sec-however, it should be taken into account that many of them are quite tors.small and some of them (like transport) are dependent on large ordersfrom a few customers. The developments in these sectors are muchmore volatile than in, e.g., the relatively homogeneous wood sector, but,on the other hand, the greater diversification of metal- and machinery-related industries makes them less vulnerable to external shocks (espe-cially as the strongest companies survived the crisis). These sectors areanticipated to raise their share in the manufacturing structure in the com-ing years and increasingly to support growth. They have encounteredfewer problems with capacity constraints so far, although some of thecompanies have begun to experience a shortage of qualified labour.10 Swedbank Analysis • May 19, 2011
  11. 11. Latvian manufacturing structure, % 100 Other 10 12 11 10 10 8 8 9 9 9 9 9 10 Machinery, equipm., transport 80 14 12 11 13 13 14 14 16 14 16 18 14 13 Basic metals, metal products 60 Rubber, plastics, minerals 19 20 23 23 26 Chemicals, pharmaceuticals 23 40 19 17 17 26 25 23 26 Paper, poligraphy Wood, furniture 20 34 33 31 30 29 28 28 28 31 27 26 26 26 Textiles, clothing Food, beverages 0 1Q 08 1Q 09 1Q 10 1Q 11 Source: CSBLThe largest sector, the food industry, stagnated last year due to its large Food manufacturingexposure to domestic demand, even though its share of exported produc- growth will remain frag-tion rose somewhat. We expect domestic demand to recover slowly in the ile.coming years, thus adding to food manufacturing growth; however, risingglobal food prices and, consequently, food product inflation in the Latvianmarket will undermine consumption growth. Exports, % of total manufacturing turnover 90 Food products 80 Wood products 70 Metal products 60 Chemicals 50 Electrical equipm. 40 Nonmetallic minerals 30 Total manufacturing 20 10 1Q 08 1Q 09 1Q 10 1Q 11 Source: CSBLAn opportunity to support manufacturing growth by raising the value Growth via wideningadded of its production is through the strengthening of clusters, i.e., anintegration of several upstream and downstream subsectors. For in- clusters is possible.stance, renewable/ bioenergy and wood industries and energy sectors atlarge could be incorporated, while links with other regions inside Latviaand also across the Baltic Sea Region could be estab-lished/strengthened.Overall, we expect manufacturing growth to continue because of both ex- Total manufacturingternal demand developments and gradual recovery in domestic demand, growth is forecast toInvestments in production facilities will rise. The output growth rates will nearly halve this year.decline, however; we expect manufacturing growth to nearly halve thisyear compared with the 2010 rebound (15.3%), as global growth slowsand while investments are made.How is export and GDP growth affected?A structural change in the economy is slowly taking place – the shares of Economy is becomingmanufacturing and exports in GDP are rising. Owing to the recovery in more balanced.manufacturing, goods exports (which account for over 70% of total ex-ports) have already exceeded pre-crisis levels in value terms. The econ-omy is becoming more balanced; however, this is an early stage of therestructuring process, which might take years to complete.Swedbank Analysis • May 19, 2011 11
  12. 12. Considering that Latvia’s export base is smaller than those of Estonia andLithuania, Latvian manufacturing and exports need to grow faster to at-tain the GDP growth rates of those countries. So far, this has not beenthe case, which is one of the reasons why the economic recoveries in theneighbouring countries have been more rapid. Manufacturing and exports in Baltics (current prices) 20 1500 16 1200 LV goods exports, LVL m (rs) 12 900 LV manufacturing, % of total GDP EE manufacturing, 8 600 % of total GDP LT manufacturing, 4 300 % of total GDP 0 0 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBL, EurostatThe smaller manufacturing base in Latvia also makes it more difficult for Larger-scale, greenfieldthe existing companies to expand and enjoy economies of scale. The investments are neces-business side has already done a lot to improve the competitiveness andeffectiveness of production, and to find new markets. However, it will be sary to accelerate manu-very difficult to raise overall manufacturing volumes significantly and fast facturing growth.without attracting new players to the market. A positive example can befound in Estonia, where the reopening of the Ericson plant last autumn 7immediately boosted the manufacturing and exports of electronic prod-ucts. Share of exports in GDP (current prices), % 90 80 70 Estonia 60 50 Latvia 40 30 Lithuania 20 10 0 1Q 05 1Q 06 1Q 07 1Q 08 1Q 09 1Q 10 Source: CSBLHow to accelerate growth?To conclude, the very recent slowdown in manufacturing is explained bytwo main factors. First, the slowdown of resource and production capacityconstrained wood industry, which was the first and the strongest driverstarting to pull the Latvian economy out of the recession. Further sustain-able growth in this industry is by and large possible only by moving up thevalue added chain. Second, existing capacity constraints are hinderingother manufacturing sectors, and investments in production facilities havebeen feeble so far. The success of these industries will depend on mak-ing investments to expand production capacity, develop new products,and find new markets.7 Ericson bought a plant form Elcoteq in 2009, renovated it to diversify production, andincreased produced volumes substantially in 2010.12 Swedbank Analysis • May 19, 2011
  13. 13. The slowdown in manufacturing per se is thus not a reason to worry.However, the issue that should be considered is that growth is moresluggish than in Latvia’s closest neighbours: Estonia and Lithuania canenjoy faster GDP growth owing to larger manufacturing sectors. Whatcan be done to accelerate manufacturing and export growth in Latvia? Noneed to reinvent the bicycle. Our policy suggestions have not changedmuch since last year – while there have been improvements in the in-vestment and entrepreneurial environments, many things still can andshould be done.(i) The creation of six competence centres (financed with EU funds) to Improve quality of edu-gain synergy from the involvement of the academic, local government,and business sides in developing new, innovative products is a welcome cation. 8initiative. Strengthening cooperation among these sides and supportingresearch and development are important conditions for Latvian manufac-turers’ increasing the value added of their products. Not less importantand urgent, while still nonexistent, are reforms of higher and vocationaleducation to increase its quality and availability, promote innovations, andbring it closer to businesses.(ii) The plans to accelerate the appropriation of EU funds this year are Make acquisition of EUalso encouraging. However, plans sometimes stay only on paper or be- funds more efficient.come reality only with delays. For instance, a transfer of large amounts ofnon-used EU funds late last year to accounts of municipalities (as pre-payments) technically improved the statistics, but have either not turnedinto tangible business projects and investments so far or have done sowith unacceptable delays. The acquisition of EU funds can and should bemade more efficient and focused.(iii) While financing availability has been improving (e.g., sovereign credit Improve availability ofratings have risen due to the stabilising economic and fiscal situation, andbanks have become more active in lending), little policy action has been financing.undertaken to strengthen the financial sector via diversification of finan-cial markets (e.g., access to equity capital). Although there are severalrisk capital funds (incl. those using EU funds), they have been quite inac-tive so far in providing financing.(iv) Unfortunately, the window of opportunity to restructure the tax burden Ease labour tax burden.after elections last autumn was not used. Now, the room for manoeuvreis much smaller, taking into account the planned euro adoption in 2014and existing trade-off between reducing inflation and lowering the gov-ernment budget deficit. The tax burden on labour was not reduced, whilethe overall tax burden increased. An easing of the labour tax burden isnecessary to lower the labour costs of businesses and lessen incentivesfor tax evasion, which would help to support investments and promote jobcreation.Businesses need a clear outlook for future changes – at least for a few Medium-term outlook foryears – regarding fiscal policy in general, and tax changes in particular, to fiscal policy is needed.be able to make their investment decisions. Implementation of some ofthe above-mentioned suggestions is a vital condition for Latvian exportsto grow faster than those of competitors. Lija Strašuna8 These started operating in April 2011. During the five-year period, financing of EUR 53million will be available. The competence centres include chemistry and pharmacy, ITand communications, wood manufacturing, manufacturing of electronic and opticalequipment, and transport engineering, as well as one for the environment, bioenergy, andbiotechnology.Swedbank Analysis • May 19, 2011 13
  14. 14. AbbreviationsCPI – Consumer price indexCSBL – Central Statistical Bureau of LatviaDG ECFIN – European Commissions Directorate-General for Economicand Financial AffairsEU – European UnionFCMC – Financial and capital market commissionFDI – Foreign direct investmentFTE – Full-time equivalentIMF – International Monetary FundPPI – Producer price indexWTO – World Trade OrganizationEconomic Research DepartmentSwedenCecilia Hermansson +46 8 5859 7720 cecilia.hermansson@swedbank.seGroup Chief EconomistChief Economist, SwedenMagnus Alvesson +46 8 5859 3341 magnus.alvesson@swedbank.seSenior EconomistJörgen Kennemar +46 8 5859 7730 jorgen.kennemar@swedbank.seSenior EconomistAnna Ibegbulem +46 8 5859 7740 anna.ext.ibegbulem@swedbank.seAssistentEstoniaAnnika Paabut +372 888 5440 annika.paabut@swedbank.eeActing Chief EconomistElina Allikalt +372 888 1989 elina.allikalt@swedbank.eeSenior EconomistLatviaMārtiņš Kazāks +371 6 744 5859 martins.kazaks@swedbank.lvDeputy Group Chief EconomistChief Economist, LatviaDainis Stikuts +371 6 744 5844 dainis.stikuts@swedbank.lvSenior EconomistLija Strašuna +371 6 744 5875 lija.strasuna@swedbank.lvSenior EconomistLithuaniaNerijus Mačiulis +370 5 258 2237 nerijus.maciulis@swedbank.ltChief Economist, LithuaniaLina Vrubliauskienė +370 5 258 2275 lina.vrubliauskiene@swedbank.ltSenior Economist14 Swedbank Analysis • May 19, 2011
  15. 15. DisclaimerThis research report has been prepared by economists of Swedbank’s Economic ResearchDepartment. The Economic Research Department consists of research units in Estonia, Lat-via, Lithuania, and Sweden, is independent of other departments of Swedbank AB (publ)(“Swedbank”) and responsible for preparing reports on global and home market economicdevelopments. The activities of this research department differ from the activities of otherdepartments of Swedbank, and therefore the opinions expressed in the reports are inde-pendent from interests and opinions that might be expressed by other employees of Swed-bank.This report is based on information available to the public, which is deemed to be reliable,and reflects the economists’ personal and professional opinions of such information. It re-flects the economists’ best understanding of the information at the moment the research wasprepared and due to change of circumstances such understanding might change accord-ingly.This report has been prepared pursuant to the best skills of the economists and with respectto their best knowledge this report is correct and accurate, however neither Swedbank norany enterprise belonging to Swedbank or Swedbank directors, officers, or other employeesor affiliates shall be liable for any loss or damage, direct or indirect, based on any flaws orfaults within this report.Enterprises belonging to Swedbank might have holdings in the enterprises mentioned in thisreport and provide financial services (issue loans, among others) to them. Aforementionedcircumstances might influence the economic activities of such companies and the prices ofsecurities issued by them.The research presented to you is of an informative nature. This report should in no way beinterpreted as a promise or confirmation of Swedbank or any of its directors, officers, or em-ployees that the events described in the report shall take place or that the forecasts turn outto be accurate. This report is not a recommendation to invest into securities or in any otherway enter into any financial transactions based on the report. Swedbank and its directors,officers, or employees shall not be liable for any loss that you may suffer as a result of rely-ing on this report.We stress that forecasting the developments of the economic environment is somewhatspeculative in nature, and the real situation might turn out different from what this report pre-sumes.IF YOU DECIDE TO OPERATE ON THE BASIS OF THIS REPORT, THEN YOU ACTSOLELY ON YOUR OWN RISK AND ARE OBLIGED TO VERIFY AND ESTIMATE THEECONOMIC REASONABILITY AND THE RISKS OF SUCH ACTION INDEPENDENTLY.Swedbank Analysis • May 19, 2011 15