Eastern Europe Property

[tag]Latvia[/tag]’s economy probably recorded its fifth consecutive quarter of double-digit growth between April and June as consumer spending rose, a survey of economists shows.

Gross domestic product may have risen an annual 11.5 percent, the second-fastest pace in the 25-nation European Union behind Estonia, after 13.1 percent growth the previous quarter, according to the median estimate of six economists surveyed by Bloomberg. The statistics office will release the data at 1 p.m. in Riga.

EU membership in 2004 stimulated growth as trade barriers fell and foreign investment rose. Latvia’s growth rate of 10.2 percent in 2005 was the EU’s highest, pushing up inflation and forcing the country to put off plans to adopt the euro in January 2008. The inflation rate has been above 6 percent for 27 consecutive months, raising concerns the economy is overheating.

“The economy is growing a little bit too fast,” said Zigurds Vaikulis head of market research at Parex Asset Management. “There are signs” of overheating.

Consumers have taken advantage of low interest rates to buy real estate, doubling housing prices over the last two years. Many of Latvia’s biggest lenders are subsidiaries of foreign banks, like SEB AB, Scandinavia’s third-biggest bank by assets, and Swedbank AB, the sixth-largest Nordic bank.

Foreign-owned banks have poured money into the market and replaced reserves that have been moved to the central bank.

Few Resources

Foreign direct investment grew from 170 million lati ($311 million) in 2003 to 350 million lati in 2004, and in the first half of 2006 to 450 million lati, said Andris Vilks, chief economist at SEB Unibanka.

For all of 2006 foreign investment could read 650 million lati, made up of mostly medium size and small businesses, he said.

The central bank has raised the reserve requirement, and increasing the refinancing interest rate by half a percentage point to 4.5 percent in July, to cool the housing market. Since the lati is pegged to the euro, the bank has few resources to fight inflation.

Economic growth has also been helped by many service companies deciding to legalize their businesses, Vilks said.

More companies began declaring income and paying taxes when the corporate tax rate fell to 15 percent in January of 2006, Vilks said. Three years ago, the corporate tax rate was 25 percent.

“If we see a further legalization of the grey economy, then there could be some surprises,” Vilks said.

Inflation Woes

The three [tag]Baltic States[/tag] of [tag]Estonia[/tag], [tag]Lithuania[/tag], and Latvia have the fastest-growing economies in the EU though are among its poorest members. Latvia ranks last in the EU by per capita GDP according to Eurostat, the EU’s statistical arm. Per capita GDP climbed to 47 percent of the EU average last year, up from 43 percent in 2004.

The three states have been forced to alter their euro adoption dates. Lithuania and Estonia had planned to switch currencies by 2007.

Fitch ratings said on Sept. 4 it has pushed back its estimate for the Baltics’ euro target dates, to 2010, with Estonia possibly joining in 2009.

Latvia’s annual inflation rate rose to 6.9 percent in July. Estonia’s consumer prices grew by 5 percent on the year in August, and Lithuania’s was 4.4 percent.

To contact the reporter on this story: Aaron Eglitis in Riga at aeglitis@bloomberg.net