The document discusses the volatile economic future, projecting challenges over the next two decades, particularly in Latvia which is perceived as a high-risk investment environment in the EU. It highlights the global economic crisis of 2007-2008, which significantly reduced asset values, and emphasizes the need for Latvia to adapt through prudent financial measures. Recommendations include living modestly, reducing borrowing, increasing exports, and implementing swift reforms in the financial and pension systems.

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

2. 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

3. 1. Situation in Latvia.
3

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

5. Latvia’s CDS (credit default swap)
5

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

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

8. 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

9. 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

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

11. 2. Global situation.
11

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

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

14. Lowest Interest Rates in History
Source: The Economist 14

15. 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

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

17. 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

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

19. 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

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

21. No! A real meteorite!
21

22. 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

23. 3. Which way for Latvia?
23

24. 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

25. 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

26. Three Laws in Real Estate:
„Location, Location, Location.‟
Distance (km)
to Riga from:
 London: 1,662
 Berlin: 846
 Moscow: 835
 Stockholm 437
 Helsinki: 360
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27. „Swedish Occupation I‟
Estonia and Latvia (1629 – 1700)
“Positive times, during which this period also
acquired fame as golden times.”
Wikipedia
27

28. „Swedish Occupation II‟
(1998 - ...)
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29. Conclusion and
Recommendations
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30. 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.
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31. 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.
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32. 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

33. 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.
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34. “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
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