Abstract
The global economic crisis has hit Latvia hard and an IMF loan looks to be on
the cards to bail the
country out of its precarious financial situation.
Due to recent economic growth stemming from consumer
credit-fuelled
growth, the country is now suffering a wide current account deficit and a
large external debt
pile. The drying up of consumer demand and consumer
credit is threatening the country’s economic
growth, which
contracted by 4.2% year-on-year (y-o-y) in Q308.
The impact on the
country’s construction sector has also been noticeable, as the total
value of new orders
in the industry, including residential,
non-residential and civil engineering structures, fell in Q308
(EUR394.8mn) compared with Q307 (EUR479.8mn). For the first nine months of
2008 the total value of
new orders reached EUR1.52bn, down from EUR1.66bn
for the same period of 2007.
The impact on construction in the country is
reflected in our revised forecasts for real growth in the
industry, which
we now expect to contract by 1.8% y-o-y over 2009. By 2010, growth will be
positive
again and continue to rise until the end of our forecast period
in 2013, reaching 2.7% y-o-y. However,
growth in the industry will remain
limited compared with the previous highs experienced in the country in
the
first half of the decade.
Public sector investment in the transport and
utilities sector was strong in 2008 and is set to continue into
2009, with
various expansion plans already announced. In the transport sector, Transport
Minister Ainars
Slesers stated that he expected road construction to
triple y-o-y in 2009. The investment is mainly being
targeted at the
construction and upgrade of highways, which are currently of secondary
importance to
Latvia’s more efficient and extensive rail network.
The rail network is also expected to receive a boost in
the form of the
Rail Baltica project. In November 2008, it was reported that construction of
the first stage
is due to begin in 2010 and be completed by 2013. The
project will further integrate the Baltic states’
transport network
and enable a more efficient and thus cheaper route to transport freight.
The power sector has also seen a great deal of investment interest, fuelled by
a focus on plugging the
expected supply gap which will follow the
shut-down of Lithuania’s Ignalina Nuclear Power Plant, due in
2009.
Like many of Lithuania’s neighbours, Latvia relies on power from the
plant. Indeed, Latvia relies
on imports for much of its power supply, and
therefore the issue is presenting a serious threat to the
country. The
Baltic countries and Poland have agreed upon the construction of a new nuclear
power plant
in Lithuania to replace Ignalina, which will be jointly
constructed and the power shared. However, this
project is currently only
in its environmental impact assessment phase and therefore short-term
solutions
are necessary. Latvia’s approach to the problem is both
the construction of thermal power plants, which
are due to come online in
2015, and an investment plan of EUR596mn between 2008-2010 by
Latvenergo
to upgrade and expand existing plants. However, BMI believes that Latvia may
face power
shortages following the shutdown of Ignalina.
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