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Emerging Markets

Latvia PM ‘hopeful’ on relaxed loan conditions

Latvian Prime Minister Valdis Dombrovskis acknowledged yesterday he is hopeful of securing revised terms on a E7.5-billion IMF bail-out package to arrest the Baltic state’s downward economic spiral.

Dombrovskis told Emerging Markets he had received “certain encouraging signals that we could reach an agreement” from international lenders including the IMF, the World Bank and the European Union on allowing Latvia to loosen its budget deficit for 2009 to 7% of GDP from 5%.

In a broad hint that an announcement could come soon, he added that the IMF’s board could vote on the loan package following a report from a fund mission to Latvia next week.

“What we need to do is go through the formal procedures. A review mission is coming which will make recommendations and take them to the IMF board for a decision,” he said in an interview in Riga.

The deficit cap was a condition of the IMF loan brokered last December, but was based on a predicted GDP contraction of 5%, subsequently revised to 12.9%.

But analysts say meeting even a 7% deficit target will be a struggle, as the economy could contract by 16.5% this year, according to figures released Wednesday by the central bank.

The IMF disbursed the second tranche of its loan programme to Ukraine this month having revised the accepted budget deficit from zero to 4% of GDP.

Dombrovskis said that Latvia has also asked for more flexibility on the IMF loan’s spending terms. “We are not asking for any additional money, but we feel we can reallocate the existing E7.5 billion euro package to move part of the money which had been forseen for banking sector stabilisation to cover the budget deficit,” he said.

The successful rescue of Parex Bank, in which the EBRD recently took a stake, helped stem widely anticipated banking turmoil, he said. “But we expect to stick to the programme targets for 2010 and 2011,” he added.

Data released this week showed growth plummeted 18% year-on-year in the first quarter, with expectations high that worse may follow. Dombrovskis said the economy “could be at the lowest point” in the second quarter.

“We expect a gradual recovery afterwards even though we don’t expect economic growth the resume before the second half of 2010.”

He said he feared the economy could enter a “negative spiral”, an exit from which is “something we need to discuss with international lenders”.

“If we prepare a budget with certain cuts and then we discover the economy is even slower – partly as a result of the budget cuts – we reduce our expenditure, it slows down the economy, reduces our revenue and what do we do next? Reduce expenditure again,” said Dombrovskis.

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