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