Aug 10, 2009
IMF Donations
Latvia has received 7% of its trailing 12 months GDP in IMF aid package, totaling $2.35bn. This is one of the tiniest tranches offered to struggling Eastern European countries and Iceland in nominal terms. Nevertheless, compared to FX reserves, Latvia is the third largest European debtor. And the first largest which kept it peg unchanged. In total, $10.8bn tranche was planned.
Apart from other things, that could mean Latvia is the sort of country, receiving external financial aid, which is most vulnerable to hot money outflows, followed by Bosnia. Historically, these countries couldn’t manage to increase their reserves in line with GDP expansion as a result of speculative money transferring and excessive credit growth. They simply are not able to cover all external obligations with current FX rate, since the money didn’t pass through the central banks. To partly offset loose policy of Latvia and reduce investors’ concerns, FX reserves of the country will grow by 63% thanks to IMF donations.
Now the problem is postponed to 2011-2012 in the best case scenario. But it is questionable if they manage to borrow other LVL 233mn in open market. Let’s monitor further.
Latvia's debt outstanding
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