Analytics, Baltic, Economics, EU – Baltic States

The easy times of cheap money and big spending is just a fading memory as Latvia, and neighbours Lithuania and Estonia, face an economic bust every bit as deep as their "Tiger" boom was spectacular, writes AFP/LETA.

Latvia's economy grew 10.2% in 2007, one of the highest rates in the world, but is expected to contract by as much as 12% this year after rampant inflation and the global economic crisis tipped the country of 2.3 million people into recession last year.

Mairis, 41, is among those Latvians who have had to reset their sights.

"Everything was going so well, then all of a sudden we couldn't get any credit. That's why I'm a taxi driver," said the former sales manager for US vacuum cleaner group Kirby.

"I've just done a 48-hour stint, day and night, and I haven't earned a thing for myself," he sighed.

Latvia and its two ex-Soviet neighbours, all now members of the EU, are tightening their belts, sparking sometimes violent street protests as people face wage cuts of anywhere up to 30%.

In Lithuania, the boom was only slightly less spectacular than Latvia's, with growth in the country of 3.4 million people hitting a record 8.9% in 2007.

In 2008, the economy grew 3.1%. Lithuania, not yet officially in recession, is expecting a contraction of 4.8% in 2009.

"To avoid firing people, we're going to appeal for solidarity and ask all our employees to take pay cuts. The managers are leading the way with cuts of 15-20%," said Tadas Goberis, 31, Lithuania sales director for US IT giant Hewlett-Packard.

Lithuanian Deputy Economy Minister Rimantas Zylius said "what we had was cheap money with high demand on the world market" but now firms need to get used to tougher times.

The Lithuanian government has approved an economic stimulus plan worth 5.0 billion litas (1.47 billion euros, 1.87 billion dollars).

"What we aim with this stimulus plan is to help our businesses adapt, to ease down to a significantly lower level of activity," Zylius said.

Estonia, which grew 10.4% in 2006 and 6.3% in 2007, has been in recession since last year, with the economy shrinking 3.6% in 2008 and expected to contract by up to 8.9% this year.

"We have to keep flying at a low altitude and preserve stability," Finance Minister Ivari Padar told AFP.

Unlike Latvia and Lithuania, Estonia used its boom to set aside funds for leaner times, he noted. "As a result we have the equivalent of 7.5% of GDP (Gross Domestic Product) available."

Latvia, which during its boom allowed budget deficits to build up, has had to rein in spending as part of a 7.5-billion-euro bailout deal with the International Monetary Fund, the EU and other lenders.

Lawmakers in December approved spending cuts and tax hikes to bridge a 2009 budget gap of some 1.0 billion lats (1.43 billion euros, 1.84 billion dollars).

Incoming premier Valdis Dombrovskis has warned Latvia needs to cut an extra 700 million lats from the budget or face bankruptcy.

Under the IMF deal, Latvia has to keep its deficit below 5.0% of GDP but Dombrovskis said Friday a rapid fire 217-million-lat round of cuts would only narrow the deficit to 8.0% of GDP. Without them, it would be 9.7%.

"Latvia was by far the most overheated of the three countries in all sorts of ways," said Morten Hansen of the Stockholm School of Economics branch in Riga. "The biggest credit boom, biggest property boom and subsequently biggest current account deficit, biggest wage inflation, biggest price inflation, biggest indebtedness. "In past years, wages grew way too fast, much faster than productivity ... so wage cuts are a way of undoing the excess ... It's a way of increasing their competitiveness. Basically the alternative to wage cuts here is to get fired," he said.