On 26 November a team
from the International Monetary Fund completed a mission to Latvia
As a result of present
and past efforts, euro adoption in 2014 appears within reach. On the basis of fiscal outturns so
far this year and the 2013 budget approved by parliament, the general
government deficit and debt for 2012–13 would be well below their respective
Maastricht reference values. Inflation and interest rates have declined to low
levels, although the reference values for these criteria are yet to be
determined by the European institutions. The Latvian authorities’ policy record
to date—including the difficult adjustment effort over the past few
years—provides assurances for continued stability-oriented policies. Latvia’s
accession to the euro area would remove residual currency risk and, by
addressing vulnerabilities stemming from foreign-currency exposures, enhance
the stability of the already highly euroized financial system.
[...]
The rather rapid
increase of non-resident deposits (NRDs) in the banking system warrants
vigilance.
While the expansion of NRDs is associated with an accumulation of foreign
assets, the increasing size of the sector represents a source of vulnerability
to international reserves and—via sovereign backing for the deposit guarantee
scheme—a significant contingent fiscal liability. The supervision of
NRD-specialized banks should be sufficiently intensive and frequent given their
relatively higher risks. Appropriately, minimum capital requirements on
NRD-specialized banks are already higher than for others. Going forward, NRDs
should be required to be backed by more liquid assets than other deposits, in
the context of Basel III implementation.
Reserve cover remains
low in relation to short-term external debt. This is due mainly to
the expansion of non-resident deposits in the banking system, although these
are accompanied by an accumulation of foreign assets. External shocks such as
re-intensification of the euro area crisis, or greater deleveraging by Nordic
parent banks could potentially put pressure on foreign reserves. In this
context we welcome the authorities’ plans to lock-in current favourable yields
by issuing debt and thereby pre-funding debt service due in 2013.
[*The publishing of this
excerpt in this column is not to be interpreted as
implying agreement with the IMF team’s assertion that “Latvia
Source: Republic of Latvia:
2012 Article IV and Second Post-Program Monitoring Discussions: Concluding
Statement of the IMF Mission (2012-11-26)
Mark Pleas
[contact]
