Friday, June 27, 2008

Latvian real estate predictions

Throughout the bust of Latvian housing bubble, some real estate agencies have been making predictions of the type: "The prices will keep falling for 2-3 more months, for a total of another 3-5%, and then stabilize". Balsts agency may have been the one who made those more than anyone else.

Now, they've made a new prediction. They now expect another half-year of price declines, for a total of up to 10%, and then a price stabilization. As the bust of the housing bubble goes on, there is less and less of expectations that it will stop soon.

Real estate bust in Estonia

For a while, I have been looking for numbers on Estonian real estate market, to see the similarities and the differences from Latvia. But the numbers have been hard to find. In Latvia, virtually every major real estate agency releases monthly estimates of the average apartment price in Riga.

For Estonia, either I'm bad at finding such estimates or they are not made public. But, yesterday, I came across an Estonian article in which an investor calculated the averages himself. The result: advertised prices have declined 23% in last 14 months. This is quite similar to Latvian numbers that I reported on this blog.

The big question is how many Eastern European countries will get affected. I talked with a Slovak colleague last week. And what I heard about the market in Bratislava sounded remarkably like Riga before the bubble burst. But, again, it has been difficult to find statistics that are directly comparable to Latvian ones...

Saturday, June 14, 2008

Ireland rejects Lisbon treaty

A referendum in Ireland has rejected the Lisbon treaty that reforms the European Union. I'm glad that they did.

The proponents of the Lisbon treaty will claim that it's unfair for Irish, less than 1% of EU's population, to prevent the treaty from coming into force. But, as pointed out by Dave Kopel,
The very fact that only 1% of the EU's population was allowed to vote on a treaty [...] was itself an illustration of the enormous "democratic deficit" of the EU in general, and the Lisbon Treaty in particular.
There could be more countries rejecting the Lisbon treaty in referendums, if there were any other countries holding referendums on it. What can one think about the EU leadership which had one treaty ("EU constitution") rejected in referendums and then decided to avoid that by simply not holding referendums on the next one? They fully deserved what they got in Ireland this week.

The pro-Lisbon side will also complain that the existing EU treaties don't allow to expand the union to more than 27 countries. Technically, it's accurate. But it's easy to write a 1-to-2 page document amending the clause that limits EU to 27 countries and a few more related clauses. What EU leadership did is, they tried to package 398 pages of other stuff and slip it past the voters, using "we can't expand EU to more than 27 countries" as an excuse. Again, they deserved what they got.

Friday, June 13, 2008


Latvian women's basketball team qualifies for 2008 Summer Olympics, with an 84:26 win over Angola in the last qualifier. They will the first Latvian team in any of the olympic team sports (basketball, football, voleyball, etc.) to play in Summer Olympics, since Latvia regained independence in 1991. (Our mens ice hockey team has been in Winter Olympics twice, in 2002 and 2006.)

Wednesday, June 11, 2008

Major austerity measures coming in a few months?

Yesterday, Latvian government announced plans to cut more than 100 mln lats (140 mln euros) of spending from this year's budget. The cuts will be mainly to purchases by state organizations and to public administration expenses. A detailed plan is being developed and a vote on spending cuts is expected to be later in the summer.

It's a big amount in cuts. The basic Latvian state budget (excluding social security and municipal budgets) is around 3.5 bln lats (5 bln euros) and, by the time when the changes are passed, most of that will already be spent.

I'm not sure if I agree with this plan. There is no shortfall in Latvian tax revenues yet. State Revenue Service monthly data for first 4 months of 2008 show revenue in two months below the plan and in two months above the plan. On the whole, the tax revenues for first 4 months are a negligible amount of 1.5 mln lats (2 mln euros) below the plan. This hardly justifies such a drastic action...

Also, the Latvian economy is slowing down rapidly and cutting the government spending at this moment can make it even worse. (In their announcement, the government promised to do the cuts in a way that affects the economy least, but how much of that is actually possible?) Our government was very slow with the measures to keep the economy from overheating and it looks like they might be equally slow with stimulating it, when it slows down.

UPDATE (6/12): A more detailed report claims that the government needs to cut expenses by 263 mlns lats (375 mlns euros) if they want to maintain the plan budget surplus of 1% GDP, as planned, and by 108 mlns if they want to have no surplus but no deficit. If that's the case, the cuts are somewhat justified but I still don't see the evidence of 263 mln revenue shortfall...

UPDATE (6/16): After 5 months, the overall state budget shows a surplus of 273 mln lats. It's true that there are more purchases made at the end of year (slowness of Latvian government institutions) but I still don't see how one would get from a surplus of 273 mln to a deficit of 108 mln in the remaining 7 months.


Tuesday, June 10, 2008

Society for not-so-different politics

"Society for Different Politics" is one of the new Latvian political parties, lead by People's Party's defectors Aigars Štokenbergs and Artis Pabriks and a group of high-level managers, mainly from finance sector.

They have been one of the driving forces behind the pensions referendum, which would increase the old-age pensions dramatically. Now, they've released the rest of their economic platform. They would like to:
  • cut the personal income tax from 25% to 20%, effective 3 months from when they get into the government.
  • cut the corporate income tax for smaller companies from 15% to 10%.
The first proposal alone would cost 200 mln lats (280 mln euros) per year which is 1.2% of Latvia's GDP. That comes in addition to their pension increase proposal which would cost 0.8-1% of Latvia's GDP.

They claim that they will pay for that by firing 22% of Latvia's civil servants, also in their first 3 months in government. Trimming down Latvia's bloated bureaucracy would be good for the country but doing that on such a large scale in such a short time would be both dangerous and legally impossible (there is a lot of protections for civil servants in Latvian labour law).

So, "different politics" is degenerating into promising everything. Tax cuts, benefit increases, all at the same time, with no realistic proposal of how to pay for that. If there is anything "different" here, it's that the unrealistic promises of previous parties were a bit more modest than "Society for Different Politics".

I think that the ex-bankers at the leadership of the "Society" are perfectly aware that the numbers don't add up. (And Štokenbergs himself was one of the few people to predict inflation at 13-14% last year, so, I trust his numbers skills as well.) What they will actually do, if they get to power... I don't know.

Monday, June 09, 2008

Revised Baltic GDP data for the 1st quarter of 2008

All three Baltic countries have now updated their Q1 2008 GDP numbers. Here they are, all in one place. First, year-on-year numbers:
  • Estonia: +0.1% (revised downwards from +0.4%);
  • Latvia: +3.3% (revised downwards from +3.6%);
  • Lithuania: +6.9% (revised up from +6.4%).
Since the Baltic economies are at a turning point, quarter-on-quarter numbers may be more meaningful. Here is Q1 2008 compared to Q4 2007, seasonally adjusted:
  • Estonia: -0.5% (revised up from -1.9%??? what sort of adjustment is that???);
  • Latvia: -1.9% (since our statistics office does not do seasonally adjusted GDP, this is my own rough adjustment);
  • Lithuania: +0.2% (revised up from -0.2%).
To summarize, both Latvia and Estonia are in an economic contraction, due to an aftermath of the credit/housing bubble. Lithuania is also sliding in the same direction, but slower. (Since the boom was smaller/later in Lithuania, the bust may also be smaller.)

And I am still wondering how Statistics Estonia turned their initial -1.9% quarter-on-quarter number into -0.5%. It just doesn't make sense...

Friday, June 06, 2008

Diena in trouble?

Diena is one of the two largest Latvian language newspapers. Recently, many Diena subscribers have been getting letters offering free half-year subscriptions. Find a friend who does not subscribe to Diena and that friend gets the newspaper for half a year, free of charge.

To myself, this reminds of North America, where newspaper sales have been falling for the last 20 years, with people abandoning the newspapers for other sources of news. The emergence of the Internet as a news source is accelerating this trend. North American newspapers have gone to offering themselves nearly free of charge and relying on advertising for revenues. But this strategy has not helped.

Are we seeing a repeat of this story in Latvia? The number of people subscribing to newspapers in Latvia is falling rapidly. (In particular, Diena's subscriptions have fallen by 14.7% compared to last year.) Offering free half-year subscriptions is way more generous that any promotional action ever done by any Latvian newspaper. Unlike the other Latvian newspapers, Diena is owned by a Swedish media multinational who can afford generous promotional actions to keep the newspaper alive.

In other news, Diena's editor-in-chief, Sarmite Ēlerte, resigned today, after being with the newspaper for more than 18 years (16 years as the editor-in-chief). When resigning, Ēlerte claimed that she wants to have a break after presiding over several major changes in the newspaper recently.

My opinion is that too much of Diena reporting recently has felt like LETA/AP news stories that are available free of charge on news websites. To survive in the Internet age, newspapers need to distinguish themselves from the free content that is available online.

I've also been somewhat unhappy with positions taken by Diena, for essentially the same reasons that LETA's blogger Maris Zanders in his post. (It's a very eloquant post - he says what I think but better than I would say it myself.) But I don't think that their troubles with the number of subscribers is due to that.

Monday, June 02, 2008

May real estate numbers

Arco Real Estate agency reports that the average apartment price in Riga was 1276 Euros/m2 at the end of May. This is:
- 2.6% less than at the end of April 2008;
- 9.2% less than at the end of 2007.
- 21.2% less than at the end of June 2007.
Arco did not release month-by-month numbers for the first half of 2007. But the other real estate agencies (like Latio, whose numbers are now paid-subscription-only) observed a slight drop in May and June 2007, as well. Based on that, we get 23-24% decline compared to peak prices (March-April 2007).

The fall in Latvian real estate prices has been more than anyone, including myself, expected. And it keeps going on...

For me, it's good because I'm still looking for an apartment and there's much more reasonably priced options now. What a difference one year can make...

UPDATE (6/6): Estimates by other real estate companies range from 18% decline year-on-year (Oberhaus) to 27.2% decline (Latio). My impression is that the higher estimates are the more accurate ones.

Sunday, June 01, 2008

Latvian pensions referendum, part 2

Brief summary. Latvian retirees are the biggest group of people who have been left out during the recent economic boom. While Latvian salaries have been growing at (an unsustainable rate of) 30%/year, the government has limited the increases in retirement benefits to the inflation rate or slightly above it. Combine that with the fact that the recent inflation has been particularly high for many basic food items... and a lot of older people are having trouble making ends meet without assistance from their children.

Current state, in numbers. Under the current system, retirees are guaranteed a minimum pension in the amount from 49.5 lats/month (70 euros) to 76.5 lats/month (109 euros). The smaller amount, 49.5 lats/month, is for people who contributed to Latvian social security system for less than 20 years (or not at all, like Janis Kleinbergs). The bigger amount, 76.5 lats/month, is for people who have contributed for 40 years and more.

The actual pensions depend on person's income before retirement and are usually more than the minimum (but still less than one would need to live on). At the end of 2007, the average pension was 124 lats/month (177 euros).

The referendum proposition. The referendum proposition would increase the minimum to 135 lats/month (192 euros) for people who have worked less than 20 years and to 202.5 lats/month (288 euros) for people who have worked more than 40 years. Thus, minimum pensions would almost triple.

I would calculate the average pension under the new law, but there's no statistics on the web about the distribution of Latvian retirees by the number of years worked. A rough estimate puts the average guaranteed minimum at 175-180 lats/month (250-260 euros).

There's 5-10% of retirees who get more under the current law. For the rest, the new minimums will be more than their current pensions. So, the average pension will be 180-185 lats, just slightly more than the average guaranteed minimum.

That makes it an increase of pensions by 45-50%, by January 2009 when the new law comes into effect. It's a huge increase and that's how the people writing the law intended.

Inflation effect. When the referendum proposition was written, Latvian inflation had not taken off yet. Now, the inflation is running at 17.6%/year. This means that this year's inflation adjustments will increase the pensions by slightly more than 20%. (The number comes out to more than inflation because the formula for pension increase also includes the salary growth which is at 28%/year now.)

So, when the law comes into effect at the beginning of 2009, the increase in average pension will be 20-25% instead of 45-50%.

Cost.This would cost 140-170 mln lats (200-250 mln euros) per year. That's 0.8-1% of Latvia's this years GDP and is substantially more than any of instances of "wasteful spending" (e.g. National Library or "the most expensive bridge in Europe") that the opposition has critisized the government for.

Given that a lot of retirees have a real difficulty making ends meet, I'm inclined to support a substantial increase in pensions. But it's an expensive thing.

Government's counter-proposal.Trying to fix the situation/to disperse the public anger, the government has come up with its own scheme for increasing pensions, by introducing a pension supplement of 1 lat/month (1.4 euros) times the number of years the person has contributed to the social security system.

If this gets adopted, both the average increase in pensions and the cost will be roughly the same as under the referendum proposition.

Summary. The meager Latvian pensions will see an increase of about 20%-25%, under either government or referendum proposals. The differences between the two are now primarily in the details of how the increase is distributed.

Even though the differences between government's proposal and the referendum propositions are much smaller than they used to be, I expect both sides to run a heated debate, along the lines of "Government will starve the senior citizens" and "Referendum will destroy the budget and the pension system"...