Fitch: New Latvia Govt Will Stick with Fiscal, Growth Policies
OREANDA-NEWS. Latvia's new government is unlikely to alter fiscal or economic policy substantially and will pursue deficit and debt reduction and economic reform, Fitch Ratings says. Our expectation reflects the composition of the new administration and the recent track record of fiscal conservatism.
Latvia's parliament on Thursday approved the formation of a new government under Maris Kucinskis of the Union of Greens and Farmers party by 60 votes to 32. Kucinskis succeeds Laimdota Straujuma of the Unity party, who resigned as Prime Minister in early December following disputes within the governing coalition, including over immigration.
Kucinskis will head a coalition made up of the same three parties that constituted the previous government and a majority of ministers will remain in their posts. The time taken to appoint a new Prime Minister and the presence of the same parties in the coalition suggests disputes may resurface. But the Union of Greens and Farmers enjoys more support in opinion polls than Unity, putting the new prime minister in a stronger position than his predecessor.
The continuity in government and cabinet means that we do not expect significant changes in policy direction. But our view also reflects Latvia's consistent efforts to combine fiscal consolidation with policies to promote economic growth since it emerged from the 2008-2009 financial crisis.
The draft 2016 budget targets a general government headline deficit of 1.0% of GDP, with revenue measures worth 0.8% of GDP, which more than matches expenditure measures of 0.4%. Key measures aim to reduce income inequality and lay the foundations for progressive taxation. The government is also looking to boost tax revenues by making collection more efficient and tackling the grey economy, for example, by cutting labour taxes to encourage more formal labour market participation.
Economic and fiscal outturns since we affirmed Latvia's 'A-'/Stable sovereign rating on 6 November 2015 have been close to or slightly better than our forecasts. The Central Statistical Bureau's initial estimate for real GDP growth for 2015 of 2.6% is higher than our 2.3% forecast, despite a challenging external environment.
Rising exports to the other Baltic States and the Middle East helped increase the value of total exports by 1.2%, despite exports to Russia slumping by nearly a quarter as a result of the Russian recession and food import embargo.
Domestic demand was the key driver and we think it will remain so in 2016 as rising incomes boost household consumption. For 2016-2017, we forecast real GDP to grow in line with potential, at around 3%, on a par with the 'A' category median. Downside risks include more weakness in Russia as we forecast the Russian economy will contract a further 1% this year.
2015 saw strong fiscal performance in Latvia, with the latest figures from the Ministry of Finance predicting a fiscal deficit not exceeding 1.0% of GDP on a cash basis. Our baseline projections see gross general government debt declining from its 2014 peak of 40.6% of GDP to 30% in 2022, compared with the current 'A' category median of 51.4%.