Crisis Monitoring Report No1 10 April 2020MONITORING REPORT NO.1. 15.03.- 09.04.2020.
DEVELOPMENTS 1.1. Political situation Thanks to timely government action, COVID-19 is spreading moderately in Latvia without overburdening the health care system. Overall, the political situation in the country remains stable. The government has shown decisive action to contain the pandemic and provide support to the economy. However, there is a risk that, as the crisis persists, it will become increasingly difficult to maintain political balance. The forthcoming elections to the Riga City Council will have a great impact on political stability - currently scheduled for August 29. 1.2. Economic situation: external and internal risks The OECD predicts that recovery from the pandemic will take many years. The IMF, for its part, predicts that the global economic recession will be comparable in scale to the Great Depression of the 20th century. In the 1930s, it is much deeper than the 2008 crisis, but a recovery is already possible in 2021. There are also assumptions that the recession in Europe will be even deeper than in 2008, and Germany and France, the EU's largest economies, will soon be hit hard. US gross domestic product (GDP) is projected to fall by 6.2% this year, but in the eurozone it will be around 9%. Consequently, a U-shaped recovery scenario is more plausible than a "V" scenario. However, if governments do not implement comprehensive economic rescue programs, there is also a risk that the "L" scenario will materialize, ie that there will be a lasting decline in economic activity. In the European Union, the rapid spread of a pandemic has led to a series of spontaneous and uncoordinated decisions by Member States, such as closing borders and banning the export of medicines and raw materials to other Member States. The Latvian government has also banned the export of any medicines intended for the Latvian market to third countries, but also the export of certain medicines to EEC countries. Such a wave of protectionism and disregard for the principles of free trade could further lead to rising prices and shortages of goods. The European Commission has relaxed state aid and government financial stability rules. EU Member States have been able to agree on more than € 500 billion in aid to the affected Member States. Through the European Stability Mechanism, € 240 billion will be available directly to fight Covid-19. Funding is also provided to support businesses. Member State governments will also receive significant EU support to cover the costs of unemployment and downtime. Economic sentiment indicators for Latvia's main trading partners are pessimistic after a slight increase at the beginning of the year. Given that Latvia is a small and open economy, the decline in GDP in Latvia will largely depend on what happens in the economies of other countries. Major banks and non-bank financial service providers have decided to grant customers credit holidays, deferring loan principal payments for 6-12 months. Such a step will ease the situation of borrowers for a certain period of time, but it will be necessary to assess how it will affect both the total loan terms and the financial indicators of commercial banks. 1.3. Economic situation: Macroeconomic indicators The slowdown in economic activity has not yet been reflected in the real economy. Despite the increase in industrial production observed in February, the figures for March will already be quite bad, for April - even worse, but the depth of trouble will be fully revealed in May and June. The Bank of Latvia has concluded that one month of downtime costs the economy about 2-3 percentage points of GDP, thus, if the emergency situation persists, the fall in GDP this year could be larger than forecast and unemployment above 7.3%. Trends in economic indicators point to the onset of the COVID-19 crisis. Confidence in the construction sector has been systematically low and has fallen most sharply since the beginning of the COVID-19 crisis, but the decline has affected all sectors, including manufacturing and services. Confidence in the manufacturing and consumption sectors has also continued to decline since the beginning of the year. For example, according to the CSDD data, the number of cars registered for the first time in March has decreased by 30% compared to the previous year. This shows that big purchases are currently being postponed. Exporting industries are reported to suffer from congestion, downtime of suppliers and customers. Demand for data transmission equipment and medical devices and equipment is expected to increase. In turn, industries such as construction affect the availability of workers and problems with the supply of imported construction materials. Freight volumes continue to decline in both the rail and port segments, but this decline has been observed for a long time and is not yet related to COVID-19. Unemployment has started to rise in all regions, the overall unemployment rate was 6.8% in March. Although it has not yet significantly exceeded the figures for the previous period, operational information suggests that the situation is evolving very rapidly. The State Employment Agencies report that while the number of registered unemployed had risen by 3,679 by 31 March (from 58,247 to 61,926), the increase had risen by 3,669 in the first week of April alone, bringing the total number of unemployed to 65,196. 26 employers' notifications on collective redundancies and on the planned redundancies of 3,908 employees were submitted. In March, compared to March 2019, the average consumer price level increased by 1.4%, according to the latest data of the Central Statistical Bureau. Prices for goods increased by 0.9% and for services - by 2.7%. The average price level of restaurant and hotel services increased by 3.6%, however, looking at the price dynamics by months, it can be seen that prices in the hotel and restaurant segment started to decrease in March, while in the leisure and culture segment prices continued to rise. Prices for transport services also fell. According to economists, this is the lowest inflation rate in Latvia in the last three years and one of the sharpest declines in the annual inflation rate in one month since 2009 - it shows the magnitude of the shock caused by the COVID-19 virus. 1.4. Budgetary situation The operative data of the State Revenue Service and the Treasury show that the slowdown in economic growth rates referred to the state basic budget balance from the beginning of the year, when the impact of COVID-19 on the Latvian economy was not felt. Unlike in 2019, the basic budget balance was already negative from January, deteriorating sharply in March. Although the tax collection plan was only 85% implemented in March, the shortfall was partially offset by significant foreign financial assistance.
Extensive state social insurance contributions in the first two months of the year ensured an improvement in the state special budget balance compared to the 2019 result. However, special budget expenditures in March this year increased by 26% compared to March 2019, but the special budget revenue plan was fulfilled by 96% in March this year, which significantly worsened the special budget balance at the end of March.
Taxes and SSIAI were well collected in the first two months of the year, exceeding the plan by 1-3%. The decline in the collection of basic budget taxes was marked in March, when the amount of collected taxes reached only 85% of the plan. A similar picture emerges with regard to the implementation of SSIAI collection plans. If the SSIAO collection plans were fulfilled in January, then in March the SSIAI was collected in the amount of 96% of the plan. In March, 672.7 million euros were collected in the total budget revenue, which is 92.8% of the planned. VAT and excise taxes were collected in the amount of 89% of the amounts of March of the previous year, but personal income tax - in the amount of 88%. However, overall, the plan for the first quarter was 100.6% implemented. In April, an even larger decline in tax and SSIAI collection is expected, and an even more significant diversion from annual collection plans. The decline in tax revenues increased significantly at the beginning of April, when only 83% of the previous year's level was collected in the period from 1 to 8 April. The results of a survey of 500 companies in various sectors, organized by the Latvian Investment and Development Agency, show that the biggest changes have taken place in the decline in turnover and exports. Only 23 companies have acknowledged that they have no change. The Central Statistical Bureau, on the other hand, reports that almost a third (29.3%) of Latvian households have no savings, while almost half (40.9%) of household savings would allow maintaining the current standard of living for no more than 3 months. 1.5. Fiscal impact of government support measures The Latvian government has responded promptly to the COVID-19 crisis and set up support mechanisms in line with the recommendations of international organizations aimed at maintaining liquidity in the financial sector, social protection of workers and the most vulnerable, business support, and health sector capacity building. The current planned distribution of funding for the support measures by groups of beneficiaries is shown in the attached graph. Most of the support - 51% is directed to business support. Only 3% is allocated to the health care system. The Ministry of Finance informs that the funding available for measures to mitigate the crisis caused by COVID-19 and economic support is 4 billion. The SRS, in turn, reports that by April 6, 5,500 employees in 1,048 companies have received downtime benefits, the total amount paid - 1,327,354 euros. 424 companies were denied support, but tax payment deadlines were extended for 949 companies. The attached table provides an estimate of the impact of the support measures on the economy and the general government balance in 2020.
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