Headline Expenditure Projections
- Pharmaceuticals: EUR325mn (USD429mn) in 2013 to EUR341mn (USD447mn) in 2014; +5.0% in local currency terms and +4.2% in US dollar terms.
- Healthcare: EUR1.45bn (USD1.92bn) in 2013 to EUR1.53bn (USD2.00bn) in 2014; +5.1% in local currency terms and +4.3% in US dollar terms.
Risk/Reward Ratings: Latvia is ranked 12th out of the 20 countries surveyed in the Central and Eastern Europe (CEE) region in Q314. Latvia's ranking has improved two places compared with our assessment in the previous quarter. Latvia's overall score improved by 1.2 points from 48.8 in the previous quarter to 50.0 in Q314. Lativa's score remains below the regional average of 51.6, indicating the country's challenging business environment, particularly in terms of potential industry rewards. Consequently, direct multinational operations are limited and domestic companies such as Grindeks have looked abroad for growth opportunities.
Key Trends And Developments
- Grindeks reported a 1% year-on-year increase in net profit to EUR13.8mn (USD19mn) in 2013. The company's turnover amounted to EUR118.5mn (USD163.1mn). In 2013, the company's gross profit margin was 60%, while its net profit margin was 11.6%. The company's products manufactured in 2013 were exported to 59 countries globally for a total of EUR112.4mn (USD154.8mn), up by 1.1% y-o-y.
- OlainFarm's sales to Ukraine and Russia will not be significantly affected by the ongoing standoff between the two countries according to Olainfarm's Chairman Valerijs Maligins in March 2014. The company's sales to Ukraine rose 4% year-on-year in January 2014, with Russia, Latvia, Ukraine, Belarus, the UK and the Netherlands the company's main markets for sales during the same month. However, if the EU and its allies fail to resolve the dispute in Ukraine, the Olainfarm's sales could be negatively impacted in both Ukraine and Russia.
BMI Economic View: Latvia's sovereign risk profile remains one of the strongest in Emerging Europe, with a below average public debt load, small fiscal deficits and a strong commitment to conservative fiscal frameworks from the government. The one potential trend that could emerge over the coming quarters will be a slight easing of fiscal consolidation measures, in line with Prime Minister Straujuma's recent comments that she will initiate programmes to use EU funds, including money to reduce inequality in society. This tallies with our expectations for less aggressive fiscal consolidation efforts, although we do not believe this will weaken Latvia's sovereign credit profile.
BMI Political View: Unity party member Laimdota Straujuma was appointed the next prime minister of Latvia in February 2014. The new government is expected to retain a broadly similar composition to the previous coalition, and we do not expect to see any major shifts in policy ahead of the parliamentary election in October 2014. Straujuma's appointment follows the resignation of Prime Minister Valdis Dombrovskis in November 2013 after the collapse of a supermarket roof in Riga was blamed on poor government oversight of construction projects. A total of six new ministers entered the cabinet as part of the new government, as five former ministers left their posts, including Economy Minister Daniels Pavluts (Reform Party) and Defence Minister Artis Pabriks (Unity) and Dombrovskis.
Latvia's macroeconomic environment continues to improve at the same time as smooth transitions to a new currency and new Prime Minister. Market growth forecasts are strong although the country will continue to present a modest opportunity to larger multinational companies on account of its relatively small market size. Meanwhile, tensions between Ukraine and Russia may provide challenges for local manufacturers looking towards exports to Russia to boost revenue.