Latvia, the Eurozone’s newest country, managed to weather the economic storm better than any other EU nation…
While it was big news halfway across the world, in the US, the announcement of Latvia’s acceptance into the 18-member Eurozone on January 1st was sandwiched somewhere between Justin Bieber’s New Year’s eve selfie and Grandma Molly’s 75th consecutive polar bear plunge on New Year’s day.
I’m exaggerating of course, but in reality, few people know a lot about this tiny Baltic state.
Here’s a little crash course…
Latvia is a former Soviet republic with a population of 2 million, which makes it one of the least populated countries in the European Union (EU).
After being a part of the USSR for nearly half a century, its independence was restored in 1991, the same year the Union was dissolved and succeeded by the modern-day Russian Federation.
Over the last 13 years, Latvia has taken great strides in establishing itself as a legitimate economy in Europe by becoming a member of the World Trade Organization (WTO), the North Atlantic Treaty Organization (NATO) and the EU.
Its primary industries are food manufacturing and processing, wood processing, metal processing, textiles, pharmaceuticals, machinery, and electronics.
Though not particularly rich in natural resources, it produces its fare share of limestone, gypsum, and clay for construction needs.
During the 2000’s, Latvia’s economy flourished as it had one of the highest GDP growth rates in all of Europe. Much of the expansion was attributed to a significant domestic consumer base.
In fact, it was the only European nation to experience double-digit growth each year from 2005 to 2007.
But like much of the developed world, it all came crashing down in 2008.
Latvia’s heavy reliance on domestic consumption turned out to be its own downfall. For the next three years, Latvia plunged into a deep recession as it dealt with a series of successive problems, including high inflation, a shrinking GDP, and high unemployment.
In May 2008, Latvia’s inflation rate reached an all-time high of 17.7%.
For fiscal 2009, its economy shrank by nearly 18% – the biggest drop on the continent.
By 2010, its unemployment rate had soared to a dizzying 22.5% – the highest in the EU — even ahead of Spain’s 19.7%.
But just as the country was hitting rock bottom, its government began to implement sweeping austerity measures.
After slashing spending and wages across the board and raising taxes, Latvia underwent one of the swiftest economic turnarounds in recent history.
Latvia’s Real GDP Growth:
Though not everybody agrees that austerity programs can work for every nation (e.g. Portugal, Italy or Greece), the Latvians have certainly made a solid case for it.
Within two years of seeing its economy put on life support, Latvia’s GDP was back in positive territory and has remained in growth mode ever since.
The European Commission predicts that Latvia will continue to have the highest GDP growth rate in Europe for at least the next two years.
And according to the World Bank Group’s latest rankings in the Ease of Doing Business Index, Latvia is ranked 24th out of 189 nations, putting it ahead of other strong euro-nations such as the Netherlands (#28), Switzerland (#29) and Austria (#30).
So for investors, what can the country offer?
I’ve already mentioned the various industries that Latvia is known for.
But now with its adoption of the euro currency, Latvia will have the means to promote opportunities in the transport and financial sectors as well.
Latvia possesses four separate Special Economic Zones (three ports and one inland). All are well connected and have developed infrastructure capable of moving goods and resources by rail, road and pipeline.
Again, while the country may not possess much by way of natural resources, the Baltic sea is a vital trade route for neighbors like Russia, which can leverage Latvia’s SEZs.
And even though it’s officially the fourth smallest economy in the euro zone after Malta, Estonia and Cyprus, Latvia expects the euro to lower its borrowing costs and encourage foreign investments by eliminating currency risk.
Concerns over higher consumer prices and inflation has weighed on the minds of some Latvians who were against the euro adoption, but others see it as the cost of progressing their country to become a more important economic player where the pros outweigh the cons.
As a testament to that progress, both Standard & Poor’s and Fitch have recently raised Latvia’s credit rating with its entry into the eurozone.
2014 is already shaping up to be an extraordinary year of growth for Latvia.
And if investors didn’t know anything about the country before, they’ll certainly want to learn more about it now.