Latvia Politics September 2018

Latvia

Latvia: Corruption dominates agenda as election looms; anti-establishment parties set to gain support

September 25, 2018

Latvians will head to the polls on 6 October against the backdrop of a series of corruption scandals this year that have rattled the halls of power and put the country under greater scrutiny by the EU. Most polls currently suggest the likeliest election outcome would be another coalition government led by the longstanding alliance between the Latvian Farmers’ Union and the Green Party intended to, once again, keep the pro-Russian and largest party in parliament, Harmony, out of government. Moreover, the likelihood of a broad coalition government should ensure center-right policy continuity and avert a more radical, reform- and Russia-oriented agenda. Since taking office, the governing coalition has initiated tax reforms and a health care overhaul, and intends to pursue a similarly right-of-center, pro-business platform if re-elected.

In an election campaign dominated by corruption allegations, economic policy has taken a backseat to the perceived tug-of-war between Western and pro-Russian politicking. That said, the current coalition government has generally favored a liberal business-oriented platform and conservative fiscal policy, and most new iterations of the existing coalition would be expected to commit to similar policies in years ahead. Previously, in an effort to tackle the massive shadow economy, long-term unemployment, a fast-aging population and income inequality, the current government laid out an expansionary policy agenda aimed at reallocating funds toward greater minimum-income support and improved access to education, health care and affordable housing. Meanwhile, following a corruption scandal at the beginning of the year that led to the arrest of the governor of the Central Bank and the collapse of Latvia’s third largest bank, the government took steps to dismantle the non-resident banking industry. These policy prescriptions, as well as the further overhaul of the economy’s offshore banking system, would likely underpin any center-right coalition political platform once in office.

In the unlikely scenario that Harmony wins a majority of seats and forms its own government or enters into some sort of coalition, the economic and political implications are uncertain. As it stands, amid the sudden rise of KPV LV, a populist and anti-establishment party which has not ruled out cooperation with Harmony, a new government led by the pro-Russian party is more likely now than ever. Harmony’s steadfast anti-Western stance would likely put the country at odds with key allies both in Europe and across the pond, while authorities’ commitment to maintaining prudent fiscal balances and public-debt levels would also come into question, possibly threatening the economy’s long-term stability. Martins Abolins, an economist at Citadele, agrees and argues that:.

“In the case a new government is again led by the Union of Greens and Farmers, I do not see any significant change in the country’s economic outlook. The most likely main risk is a government led by “Saskana” which could lead to more Russian-friendly policies. This could jeopardize Latvia’s position regarding EU sanctions against Russia and could also affect current efforts to improve the reputation of Latvia’s financial sector [...]. Otherwise, there is broad support in favor of prudent fiscal policy and following of EU fiscal rules.”

Anti-establishment and anti-Western parties have gained support in recent months as corruption scandals and ethnicity-centered arguments have increasingly polarized the electorate. That said, the likelihood of these forces securing enough seats to form a government remains slim. Another center-right coalition is thus likely, which would ensure the continuation of existing reforms and keep the economy’s long-term outlook on track. Any new government, however, should focus on structural reforms aimed at improving labor-market participation, lowering structural unemployment and increasing labor productivity. Labor market constraints and demographic headwinds are key downside risks to the long-term outlook. Lastly, a new government will need to prioritize bolstering fiscal buffers and enhancing regulations and lending standards to ensure financial-sector stability going forward.

The Central Bank forecasts growth of 3.9% in 2018 and 3.0% in 2019. FocusEconomics panelists expect GDP to increase 4.1% in 2018. Next year the economy is seen expanding 3.6%, which up 0.1 percentage points from last month’s forecast.


Author:, Economist

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Latvia GDP Q2 2018 2

Note: Year-on year changes of GDP in %.
Source: Central Statistics Bureau and FocusEconomics Consensus Forecast.


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