Abstract
The medium-term outlook for the Latvian economy is bleak. The country is
approaching a technical
recession (defined as two quarters of negative
growth) with the economy contracting by 4.2% year-onyear
(y-o-y) in Q308,
according to a flash estimate from Statistics Latvia following a paltry
0.1%
expansion in Q208. While a GDP by expenditure breakdown is not
available for Q308, a marked
slowdown was seen across all components of
GDP in the previous quarter, implying that there is little to
be
optimistic about at the present time.
This report is being written at a
time when the global financial crisis, which arose as a result of the
evaporation of inter-bank liquidity, has moved into a new phase. Stock market
participants appear,
reasonably, to have taken the view that the policy
responses taken by governments, central banks and
multi-lateral
institutions will be sufficient to prevent a total collapse of the global
financial system.
Instead, stock market participants are focusing on the
impact of a near-global recession on the earnings of
non-financial
companies.
The number and size of stand-by facilities agreed by the IMF
since early October supports our view that,
of the emerging markets whose
commercial banking sectors are surveyed by BMI, the countries of
Central
and Eastern Europe are those whose economies are most at risk of suffering
adverse affects as a
result of the global financial crisis. This is partly
because the macroeconomic imbalances are relatively
severe and partly
because the Central and Eastern European countries are more directly affected
by the
brutal recession that is unfolding in wealthier member states of
the EU.
As yet, it has not been possible to collate hard numbers, for most
of the countries whose commercial
banking sectors are surveyed by BMI,
that clearly quantify the impact of the global financial crisis on the
banks. As we explain in the section that discusses changes that we are making
to the report, we again
include a lengthy essay which attempts to identify
the key issues. In essence, in the emerging markets –
and, indeed,
the developed countries – of the Asia-Pacific, commercial banks appear
well placed to deal
with the crisis. The same is, broadly, true of
commercial banks in the various countries of the Middle East
and North
Africa. Latin America, Chile, Brazil, Mexico and Colombia appear better placed
than
Argentina, Venezuela, Bolivia and Ecuador. South Africa’s
situation appears to have much in common
with that of Brazil. In contrast,
Nigeria faces some of the same challenges as those that confront
Venezuela. The positions of most countries in Central and Eastern Europe,
however, are alarming.
From Q209, we will include data that pertains to
late 2008 and extend forecasts out to 2013. We will also
incorporate much
greater discussion of the various protagonists in each country’s
commercial banking
sector and a number of new features. We believe that
the figures we compiled in mid-2008 provide
insights as to how the various
commercial banking sectors will fare in the current, extremely uncertain,
climate. We have, therefore, left them essentially unchanged.
The figures
on the tables above provide a snapshot of the banking sector in Latvia prior
to the onset of the
global financial crisis. To place the figures in
context, it may be useful to bear in mind certain aspects of
the 59
countries whose banking sectors are currently surveyed by BMI. Across this
sample, the median
growth in assets in local currency terms was 21.3% (in
Colombia), the median loan growth was 21.6% (in
India) and the median
growth in deposits was 17.9% (in Brazil).
On their own, the ratios of
loans to deposits, assets and GDP mean little. However, they can provide
useful hints when combined with other data. Across the 59 countries, the
median loan/deposit ratio is
92.3% (in Greece), the median loan/asset
ratio is 56.0% (in Poland) and the median loan/GDP ratio was
63.9% in
India.
As in previous reports, we include a SWOT analysis for Latvia. We
suggest that the two most important
strengths are the ability of Latvian
banks to respond quickly to change and the strengthening of economic
reforms which comes with EU membership. Against this, there are weaknesses
such the limited role of
foreign banks in the country, the small size of
Latvia’s population and economic base, the
abovementioned loan/asset
ratio and the serious threat of runaway inflation.
Since Q108, we have
calculated, on a consistent basis, a Commercial Bank Business Environment
Rating
(CBBER) for each of the 59 countries surveyed. The CBBER includes
an assessment of the limits of
potential returns. It does this by taking
into account the size, growth potential and bancassurance potential
of the
banking sector, as well as aspects of the economy in 2007. The CBBER also
depends on an
assessment of the risks to the realisation of potential
returns. This reflects BMI’s assessments of overall
country risk,
together with the regulatory and competitive environment.
Latvia’s
overall CBBER of 56.2 is towards the middle of the countries in the CEE region
that are
surveyed by BMI. This score is particularly held back by a
particularly weak 42.5 on the heavilyweighted
banking market structure
element of the limits to potential returns. This reflects the small scale
of the Latvian economy and of the domestic deposit base available to the
banking system.
|
Related Report
|
View Cart
