LATVIAN BUSINESSES SEE STRUCTURAL PROBLEMS, INVEST ANYWAY

UNCLAS RIGA 000715 SIPDIS E.O. 12958: N/A TAGS: ECON EINV EIND ETRD ELAB LG SUBJECT: LATVIAN BUSINESSES SEE STRUCTURAL PROBLEMS, INVEST ANYWAY ¶1. Summary: Businesses in Latvia recognize the recession they are in, but remain surprisingly confident. In recent meetings, business owners and managers noted sharp increases in job seekers and continued low productivity of labor, though the clear signs of reduced consumption were not as uniform as might be expected. Most business leaders were clearly resigned to the generally negative economic climate, but few seemed inclined to significantly scale back business or delay investment to deal with the crisis. End summary. ¶2. A few common themes emerged from recent meetings with business leaders following appearance of the clearest signs yet that Latvia's economy is in recession and its financial system not as insulated from the global crisis as previously hoped. While not universal, there were several common opinions expressed in meetings with companies large and small, in industries ranging from real estate to manufacturing and banking to transportation, in both Riga and Tukums, a small city about 40 kilometers from the capital. ¶3. The clearest shift in the economy from the perspective of business owners is in the labor market. Employers noted that it was not long ago that they had to scramble to find minimally qualified employees for many positions. They now report a deluge of applications for any potential job opening. Owners also noted that applicants no longer had the extravagant wage and benefit demands of a few months ago and they felt wages were beginning to stabilize. Several business owners lamented the low productivity of Latvian workers, and the lack of improvement over the boom years. In particular, companies relying on workers in rural areas noted this problem - including forestry, one of Latvia's primary exporters. All cited greater education as the key to resolving this issue. ¶4. Consumption, including significant imports, had been driving much of Latvia's recent growth. The businesses we talked to broadly described uneven declines in consumer spending. One producer of high-end baked products noted swiftly dropping sales at the lower-end retailers that carried their products, while sales in higher-end stores had seen less of a drop-off. A developer maintaining several shopping centers in Riga noted that sales are down across the board and that leases were being re-adjusted to keep many retailers afloat. Nevertheless, others in real estate noted continued demand for retail space. ¶5. Perhaps most strikingly, few of the businesses we talked with seemed deeply concerned. Several companies we visited had expansion plans afoot that they had decided to carry through with. Even those in the banking industry seemed calm and certain the market would pick up again in due course. The popular view among analysts that the recession would last for 6 months to a year was cited by several business managers. ¶6. Comment: Latvia's business owners are realistically assessing the current situation but surprisingly upbeat about their own prospects. Hopes for a soft landing or a shallow recession have been let go. U.S. firms will certainly find opportunities for business in Latvia more limited, although the bullish views of some businesses indicate that opportunities may still exist. It is promising to see that fear and uncertainty haven't unduly halted planned investments. That said, observations about continued low productivity and falling consumption indicate that the recession could be more severe than some of these employers are hoping. LARSON