MNI INTERVIEW: Latvia To Monitor FX Debt Chances, Focus On EUR

Europe's economic recovery from the Covid-19 pandemic will be both slow and unevenly distributed, a senior Latvian Treasury official told MNI, though the hit to local growth rates has been less than first feared, with less government borrowing and a smooth transition expected from the ECB's Pandemic Emergency Purchase Programme.

"Some countries have been less affected by Covid-19 than others," Deputy Treasurer Janis Pone said in an interview, "but it is clear that in the medium term everyone will remain affected and the recovery will not be very rapid."

Initial estimates of the pandemic's impact on Latvia's economy were "much larger" than transpired, he added, while the growth rate is "less negative than it was initially forecasted in spring, and also actual budget execution is much better than estimated."

Pone expects the European Central Bank to adopt a "smooth" exit strategy from its EUR1.35 trillion PEPP, "only when macro fundamentals are strong enough to do so," and to do so in a manner that does not "destabilise the situation from what is now, and somehow make negative effects to financial markets in whole."

MONITORING FX OPPORTUNITIES

Latvia's 2021 borrowing in international and domestic markets and from international financial institutions is currently estimated at EUR2 billion, Pone said - down an expected EUR870 million from 2020 - while stressing that uncertainty regarding the size of a second wave of infections makes borrowing estimates less predictable.

Some 76% of this year's domestic issuance, and 100% of Latvia's international issuance is now complete, he added, after the Treasury made a series of deals in March and April this year to ensure prefunding, and conducted more frequent auctions to sell larger volumes than previously.

Noting issuance plans by other sovereigns for long- and ultra-long tenors, Pone said that any decision on whether or to adjust Latvia's existing maturity portfolio will depend on the absence of additional financial risk. The choice of maturities issued next year will depend primarily on the redemption profile and the market situation, he said.

The Treasury will closely monitor the currency markets for foreign currency borrowing opportunities, but expects to concentrate on the EUR market primarily, he said.