Details
Political risk and uncertainty are on the rise again in Latvia. The largest party in Latvia’s coalition, the People's Party, has taken a decision to leave the government. The First Party of Latvia/Latvia’s Way have said that they will not be a part of the government but have pledged their support.
What are the possible scenarios we might expect in the coming months? One of them is that the PP together with the opposition might be forced to go to an early election, which had been scheduled for October this year. However, we believe that this is unlikely, as it would necessitate a referendum being called. The second scenario is that the PM Dombrovskis government would remain ineffective, while the PP together with the opposition could push through some populist bills ahead of this year's general elections.This might disrupt confidence in the Latvian economy and bring renewed pressure to the financial market. Recently, the IMF praised Latvia for its progress in meeting the terms of its EUR7.5b financial bailout package but warned of significant risks ahead and urged the government not to move to a fiscal easing policy option.
We believe that the market reaction to this event might be relatively negative. The economic situation in Latvia has just started to stabilise and rising political tension and uncertainties will not support the recovering path of the Latvian economy.
Political risk and uncertainty are on the rise again in Latvia. The largest party in Latvia’s coalition, the People's Party, has taken a decision to leave the government. The First Party of Latvia/Latvia’s Way have said that they will not be a part of the government but have pledged their support.
Assessment and outlook
The largest coalition party, the People's Party (PP), has taken a decision to leave the government. However, the PP says that it will not ask PM Mr. Dombrovskis to resign. Thus, we expect to see a minority government in action.What are the possible scenarios we might expect in the coming months? One of them is that the PP together with the opposition might be forced to go to an early election, which had been scheduled for October this year. However, we believe that this is unlikely, as it would necessitate a referendum being called. The second scenario is that the PM Dombrovskis government would remain ineffective, while the PP together with the opposition could push through some populist bills ahead of this year's general elections.This might disrupt confidence in the Latvian economy and bring renewed pressure to the financial market. Recently, the IMF praised Latvia for its progress in meeting the terms of its EUR7.5b financial bailout package but warned of significant risks ahead and urged the government not to move to a fiscal easing policy option.
We believe that the market reaction to this event might be relatively negative. The economic situation in Latvia has just started to stabilise and rising political tension and uncertainties will not support the recovering path of the Latvian economy.
