Edward Hugh points to the disastrous effects that devaluations in Great Britain, Ukraine, Russia, Belarus, Sweden (the list keeps growing) will have on Latvian exports. Incidentally, I raised the same point in my previous blog.
Also, the government’s stabilization plan is based on the projection that GDP will fall by 5% in 2009. A few days ago the European Commission released its interim forecast, in which Latvian GDP is projected to contract by 6.9% in 2009. It should not be forgottned that 7.5 billion euros is a loan, which needs to be repaid. Assuming the interest rate of 3.5 percent per annum (that’s what the IMF will charge for its part), the interest payments alone will amount to about 185 million LVL per annum. For comparison, the total cost of this Palace of Light project is projected at about 140 million LVL. The question is, if the GDP will fall by more than (projected) 5%, what will the government do to repay the loan?
What does above has to do with these devaluations and their (nasty) effects on Latvian exports? Well, there is this accounting identity which says that GDP=C+I+G+(X-M). X stands for exports.