Crisis Monitoring Report No1  10 April 2020

MONITORING 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.

 

Activity

Predicted impact on economy (mlj. eur)

Predicted impact on budget (mlj. eur)

Suport to residents

 

 

Idling payment (2 month)

147,9

-147,9

Sick leave if diagnosed with COVID-19 or in quarantine

34,5

-34,5

Support to municipalities

2,2

-2,2

Ammendments to unemployed (self-employed and microcompanies)

1,4

-1,4

Support to companies

 

 

Tax holidays

291

-291

ALTUM working capital loans

200

-50,8

ALTUM credit and portfolio guarantees

715

-50

Support to industries

218,1

-182

total

1610,1

-759,7

No IKP

5,2%

-2,5%

 

  1. OPINION OF THE COUNCIL

     

    The Council broadly supports the government's operational action to mitigate the effects of COVID-19 and considers that investment in strengthening the health care system, measures to support entrepreneurship and social support for citizens are in line with international good practice in this crisis situation;

     

    The Council is concerned that support measures could have a medium- and long-term impact on the government balance, and therefore reiterates its call on government support instruments to be designed as short-term measures to stimulate the economy and maintain economic potential;

     

    While respecting the government's responsibility in choosing the priority areas for funding, the Council draws attention, however, to the need to provide greater support for those areas that directly ensure the control of infection and the successful recovery of patients;

     

    Given the high level of uncertainty in the economic and fiscal development scenarios, it is not yet possible to make accurate estimates of the 2020 government budget balance and government debt at the end of the year. Preliminary, based on current data, the general government deficit could reach 5.5% of GDP by the end of 2020 and government debt at 44% of GDP;

     

    The Council notes that a discussion on medium-term budgetary objectives is needed as soon as the macroeconomic impact of the crisis becomes more precise. Keeping the planned level of expenditure unchanged in 2021 and 2022, the deficit could reach more than 4% in those years. Therefore, the Council draws attention to the need to plan deficit reduction measures in a timely manner in the post-crisis period, already assessing priority and vulnerable sectors and envisaging consolidation measures as part of the exit strategy.

     

    Annex for FDP monitoring no. 1

     

    Review of government decisions related to COVID-19 containment and economic support

     

    3/19/2020 the government decided:

    To approve a draft law on measures to prevent and manage the state threat and its consequences in connection with the spread of COVID-19 with the aim of establishing measures for the prevention and management of the state threat and its consequences, special support mechanisms, as well as crisis expenditure directly related to COVID-19 control. financing. To finance emergency measures from the budget in case of contingencies;

    To support employers in paying incapacity for work sheets, to cover the compensations of employees during the period of downtime and to defer the payment of overdue taxes for a period of up to three years;

    Instruct ALTUM COVID-19 to provide credit guarantees (EUR 715 million), crisis solutions loans (EUR 200 million) and reduced interest rates to companies affected by the crisis.

    3/24/2020 the government decided:

    To increase the reserve capital of ALTUM by 100,000,000 euros;

    To increase the share capital of SJSC Latvijas oro satiksme by 6,000,000 euros;

    Increase the contingency budget by EUR 300 000 000.

    3/26/2020 the government decided:

    Increase the remuneration of a doctor for three months who work in high-risk and high-load conditions. Planned impact on the budget - 8,000,000 euros;

    To approve the criteria for receiving downtime allowance and tax holidays for up to three years for companies in each sector (40 in total). The planned impact on the budget is 130,200,000 euros.

    31.03.2020. the government decided:

    Approve support measures for self-employed persons and micro-enterprise taxpayers affected by the emergency. The planned impact on the budget is 35,309,400 euros.

    To co-finance expenditures made in EU funds projects from EU funds in case the implementation of activities has been affected by the spread of COVID-19;

    To cover half of the crisis benefits paid to local governments from the budget in case of unforeseen circumstances. Estimated impact on the budget - EUR 2 160 000;

    To allocate the state budget funds of the Ministry of Education and Science in the amount of 365,208 euros for the creation and distribution of audiovisual content intended for distance learning.

    04/02/2020 the government decided:

    To exempt entrepreneurs from rent during an emergency situation if the premises for the economic activity of the enterprise are leased from a public person or its capital company;

    To establish a State Central Reserve Procurement Group in the Ministry of Defense for centralized procurement of personal protective equipment and disinfectants for the needs of all state institutions, creating reserves in the amount of at least three months;

    Expand the circle of entrepreneurs who will be able to apply for downtime allowance and tax holidays, ie companies registered after 1 March 2019 and with a higher amount of tax debt will also be able to receive support. Planned impact on the budget - 2,303,000 euros;

    Postpone the repayment of study and student loans and credit-like scholarships for 6 months. Impact on the state budget in the revenue section - a reduction of 48,729 euros.

    07.04.2020. the government decided:

    Extend the emergency until 12 May;

    To make amendments to the 2020 state budget by increasing the amount of state budget loans by 150,000,000 euros. The decision has no fiscal implications;

    Amend the criteria for downtime allowance for self-employed persons. Planned impact on the budget - 35 309 400 euros;

    To provide support for the operation of commercial media - 2,040,928 euros.

    04/09/2020 the government decided:

    Establish more flexible conditions for obtaining the status of unemployed for employees of micro-enterprises and self-employed persons. Planned impact on the state special budget - 1,368,400 euros;

    Continue to pay parental benefit from 12 March 2020 until the end of the state of emergency. Planned impact on the state budget - 6,323,033 euros;

    To provide additional financing to local governments for the provision of support to the population - 1,432,800 euros;

    Postpone the Riga City Council elections to August 29;

    To invest in the share capital of state hospitals - 14,108,837 euros;

    Grant downtime allowance to micro-enterprise taxpayers, small business board members and old-age and retirement pension recipients. Planned impact on the state budget - 2908280 euros;

    Provide funding for business incubators. Planned impact on the state budget in 2020 - 5,594,486 euros; In 2021 - 5,118,487 euros; In 2022 - 6,118,486 euros; In 2023 - 4,339,113 euros;

    To renew grant support for conformity assessment (certification) of production facilities and products, increasing the available funding by EUR 200,000.