LATVIAN GDP FALLS 19.6 Percent in Q2

UNCLAS RIGA 000417 SIPDIS E.O. 12958: N/A TAGS: ECON EFIN ETRD PGOV LG SUBJECT: LATVIAN GDP FALLS 19.6 Percent in Q2 ¶1. According to a flash estimate released by the Latvian Central Statistics Bureau on August 10, in the second quarter of 2009 Latvia's GDP contracted by 19.6 percent, down 1.6 percentage points from a quarter earlier when the economy declined by 18 percent. This steep decline is consistent with the International Monetary Fund's (IMF) 2009 economic outlook. ¶2. The figure comes as no surprise, given the sharp collapse in internal demand combined with languishing external demand. Economic activity in the retail, service and construction sectors remained weak and industrial output continued to fall compared to last year. Credit markets remain constrained as a consequence of the bursting of the real estate bubble and the efforts of banks to limit loan exposures, thereby inhibiting a return to growth. ¶3. As a consequence of the nearly 20 percent contraction, Standard and Poor's downgraded Latvia's already junk status sovereign credit rating from BB+ to BB. S&P pointed to the ongoing political and economic challenges facing Latvia, including the pressure on public finances and declining wages, in explaining its decision. On August 5 and 6, Latvia sold 38.9 million Lats (USD 79.4 million) worth of short-term (one and three month) debt, but failed to attract bids on its six month debt offering despite offering a 12 percent yield. ¶4. COMMENT: While some signs are emerging that the economy might be stabilizing, including sporadic reports that real estate prices are stabilizing and the pace of contraction of industrial output has slowed, experts agree that Latvia's economy is facing a protracted period of stagnation or possibly even stagflation. Consumer prices, which fell 0.6 percent in July from the previous month, are widely expected to continue to fall through 2011. The road ahead for Latvia will be very tough, especially since more fiscal tightening, required by Latvia's Stand-by Agreement commitments to the IMF and EC, will further reduce domestic demand. END COMMENT