"With a shrinking labor force, policies to raise investment and total factor productivity are key for income convergence going forward. Despite some improvements, progress has been insufficient, and the Baltic Sea index shows Latvia falling behind its peers."
In order to prevent further slippage, deep and determined reforms are required, but according to Swedbank despite some progress the political cycle means these are not as bold as necessary.
"The general election of October 2018, however, is turning against [PM Kučinskis'] reform agenda. We do not foresee economic policy taking a U-turn post election, but initiatives that are not yet enacted stand a slim chance in a pre-election year. With a new parliament and government in office only in late 2018, it will be too late to include major reforms in the 2019 budget. In 2019, the business cycle will have become cooler, making financing reforms more difficult," warns Swedbank.
According to Swedbank’s Baltic Sea index, which measures an economy’s structural and institutional strength, Latvia’s score has worsened. The gap with principal competitors – Estonia and Lithuania – has widened. Now, the standing is on par with Poland and above only that of Russia.
With a palpable sense of frustration, Swedbank's summary concludes:
"So, politicians, hurry up! IMF estimates suggest that better property rights and an upgraded legal system could improve Latvia’s potential growth rate by 1 percentage point a year for four years. Certainly worth to give it a push!"
You can read the full report HERE.