"Although the Latvian economy is now more balanced and competitive than before the crisis, growth is likely to be permanently slower, going forward. Our Baltic Sea index shows some progress in institutional quality, but it is still below the region average, with the innovation climate and financial markets microstructure needing the most improvement. Yet, the current reform agenda is quite pale and lacks ambition," Swedbank said in its quarterly Baltic Sea Report.
"Investments have been rather weak recently, partly owing to the weak external environment and cautiousness of companies due to geopolitical uncertainty. In 2012-2013, gross fixed capital formation was about 24% of GDP, compared with 29% in 2004 and 36% in 2007," the Latvian section of the report, authored by leading economist Mārtiņš Kazāks outlined.
Another fundamental factor hampering growth going forward is the shrinking and aging population. This is starting to have a more visible effect in the labour market, as the falling labour supply is hindering employment growth.
The bank, which is the largest financial institution in the country, also suggested that the appetite has disappeared for sweeping reforms such as those instituted in response to the global economic crisis, with the new government of Laimdota Straujuma content to sit on its hands.
"Alas, the previous government did not show much willingness to undertake major reforms, and its rhetoric was more suggestive of
stability than of stark, pro-growth reforms. In addition, the upcoming EU presidency in the first half of 2015 will take much of the politicians’ attention and administrative capacity. We thus believe that bolder reforms can, at the earliest, appear in the 2016 budget," Swedbank said.
"One of the legislative changes announced for the 2015 budget is a rise in the minimum wage from EUR 320 to 360. It seems that a lowering of the personal income tax rate by 1 percentage point
(to 23%) as of next year also remains in place."
We believe it would be more appropriate to raise tax-exempt income, to support lower-income earners and reduce income inequality
The innovation climate was described as "a major disappointment" with Swedbank claiming it had actually worsened during the last two years.
It predicts GDP growth of 2.4% this year and 2.6% next year.