S&P: wage cuts have helped Latvia regain competitiveness
04.02.2010, 11:42Latvia has regained its competitiveness as the government cut wages as part of austerity measures to reduce its budget deficit and wages were adjusting sharply lower both in the public and private sectors, says S&P analyst Frank Gill.
In response to questions from Bloomberg, Gill said: “There are some indications of the beginning of a recovery of exports, and the early days of a reorientation of the tradables sector towards external demand.”
Public sector pay packages are down about 45% on the year and private sector salaries have fallen between 5 and 30% over the last 18 months, depending on the sector, according to Gill.
“Wage levels are once again very competitive versus Poland for example,” he said. “The current policy stance, while indisputably pro-cyclical, is laying the foundations to stabilize public finances. Stimulus to the economy will have to come from outside. This continues to mean that Latvia remains more vulnerable than your average economy to the external environment.”
While the economy may grow in real terms this year, the recovery will be “largely statistical,” driven by re-stocking, according to Gill. Nominal GDP will probably still decline this year, he said. The decline in output boosted the unemployment rate to 22.8 percent in December, the EU’s highest, according to Eurostat data.
“What is missing is job creation,” Gill said. “Only job creation will but a floor under the economy. Until then, without question, wage deflation and rising unemployment will weigh heavily on public finances.”
S&P rates Latvia BB, two levels below investment grade, with a negative outlook, meaning that it is more likely to be cut than raised or left unchanged. The grade may worsen if the government’s resolve to continue deficit cuts weakens before elections in October, Gill said. Further evidence of a “long-term commitment” to reaching euro-adoption goals would “help anchor the rating,” he said.
“There are grounds for optimism here, given the scale of adjustment that has already occurred, and the successful passage of an ambitious 2010 budget,” Gill said. “Latvia has taken measures that would be very difficult to implement in many Western European countries.”
Fitch Ratings rates the country BB+, its highest junk rating, with a negative outlook. Moody’s Investors Service, rates the country Baa3, its lowest investment grade, with a negative outlook.