Intra-Coalition Stability Still At Risk

Though Latvian Prime Minister Valdis Dombrovskis suggested on October 23 that the worst of the country's recession was likely over, we caution that ongoing intra coalition ructions will continue to weigh on financial and political stability in the medium term. In particular, there remains a significant risk that parliament will fail to approve the government's proposed 2010 budget, which envisages LVL500mn in cuts next year, with opposing parties struggling to agree on the focus and magnitude of spending cuts. Even should the budget secure parliamentary approval, we believe that the government's deflationist strategy will prove disruptive to political stability, with opinion within the five-party coalition similarly likely to diverge going forward over the virtues of internal versus nominal devaluation.

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