Cablegate: Latvia Passes Budget but Economic Trouble Remains

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OO RUEHIK
DE RUEHRA #0573 3361558
ZNR UUUUU ZZH
O 021558Z DEC 09
FM AMEMBASSY RIGA
TO RUEHC/SECSTATE WASHDC IMMEDIATE 6165
RUEATRS/DEPT OF TREASURY WASHDC IMMEDIATE
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE PRIORITY

UNCLAS RIGA 000573

SENSITIVE BUT UNCLASSIFIED
SIPDIS

E.O. 12958:N/A
TAGS: ECON EFIN PGOV PREL SW LG
SUBJECT: LATVIA PASSES BUDGET BUT ECONOMIC TROUBLE REMAINS

REF: A. RIGA 569, B. RIGA 542

1. (SBU) Summary:Qtvia's parliament approved the 2010 budget on
December 1, clearing a significant hurdle to Latvia's economic
recovery. The budget has been welcomed by the IMF and EC, which
will begin negotiations on the second review of the Stand-by
Agreement on December 2. The budget vote was met by a couple of
minor peaceful protests by students and trade unionists. Despite the
budget passage, the general economic picture remains weak and will
continue to deteriorate through at least the first half of 2010.
End summary.

Budget Passes
-------------

2. (SBU) Latvia's parliament (Saeima) approved the 2010 budget in a
party-line, late-night vote of 64-30, with 2 abstentions, on
December 1. The final budget was different from the budget that
passed in the first reading on November 5, but lacked any real
surprises. The major changes were all hashed out over the course of
the past few weeks in intense behind-the-scenes deliberations
between the IMF/EC and the Cabinet of Ministers, which pulled the
budget into compliance with Latvia's international financial
assistance package obligations. The IMF and EC issued coordinated
statements welcoming the agreed budget on November 27. The
negotiated changes include the introduction of a small progressive
real estate tax, an increase in the personal income tax rate to 26%,
and excise taxes on natural gas, cigarettes and alcohol.

3. (SBU) The budget includes LVL 500 million (USD 1.068 billion) in
fiscal adjustment, including LVL 244.5 million (USD 522 million) in
expenditure cuts and LVL 255.5 million (USD 545 million) in
projected tax and non-tax revenue increases. These measures
represent roughly 4% of GDP. The 2009 budget deficit is still
anticipated to hit 10% of GDP, but the Latvian government believes
the just passed 2010 budget will result in a deficit of only 7.6% of
GDP in 2010, which is well below their EC memorandum target of 8.5%.
Whether this projection is accurate or not will obviously depend on
how the expenditure cuts are implemented and whether or not the
anticipated revenues materialize. And despite this significant
achievement, Latvia will need to enact a further LVL 500 million
(USD 1.068 billion) budget adjustment in the 2011 budget, which will
be negotiated in the midst of the October 2010 Saeima elections.

Minor Protests Accompany Budget Debate
--------------------------------------

4. (SBU) The Latvian Student Association and the Confederation of
Trade Unions held back-to-back demonstrations on December 1 to
protest various components of the budget. These protests followed a
small gathering of motorcycle enthusiasts on November 30 who
complained about an increase in the annual motor vehicle fee. These
protests were all conducted peacefully and in compliance with
government authorities.

Economic conditions still weak
------------------------------

5. (SBU) In the short-term, the budget passage should remove
international observers' unease about any impending debt default or
devaluation and could ease pressure on Latvia's sovereign credit
rating. However, the fact remains that the Latvian economy is still
contracting, with joblessness rising steadily. Unemployment
officially reached almost 15% in November and Eurostat lists the
unemployment rate at nearly 20% as of September; the worst in
Europe. Some regions (e.g., Rezekne in the east) are experiencing
Depression-era official unemployment levels of 25-30%. And the
fiscal consolidation, while necessary, will exacerbate the economic
downturn. The Governor of the Central Bank has optimistically
forecast a return to growth in the second half of 2010 and there is
widespread hope that wage and price deflation are helping to restore
the country's competitiveness. However, the IMF still believes
there will be a 4% drop in economic output in 2010.

6. (SBU) Comment: The resolution of Parex Bank and the
implementation of continuing structural reforms are now the keys to
economic recovery and the restoration of international financial
credibility. Political maneuvering in advance of the 2010 Saeima
elections will undoubtedly complicate the 2011 budget discussions.
Most Latvian politicians are hoping for an early resumption of
economic growth to mitigate the necessity of additional tough fiscal
consolidation in an election year. Once the new budget figures have
been consolidated by the Saeima Budget Committee and the Ministry of
Finance, Post will issue a comparative analytical report of the 2010
budget against the 2009 and 2008 budgets. End Comment.
GARBER

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