BNP Paribas Sees Case Of Latvian Currency Devaluation

The analysts at BNP Paribas still see the case of Latvian currency devaluation. As they sum up in a note Friday:

We have modelled the impact of a 30% LVL devaluation vs. EUR on the economy. According to our calculations, Latvia would benefit from a weaker exchange rate.

Bold REER depreciation would immediately boost (net) exports. Over the medium term, we would also expect faster investment growth and fewer job losses.

Devaluation would not only improve external accounts but also the medium-term outlook for the fiscal accounts and banking sector.

Devaluation as a stand-alone measure is not sufficient to transform the Latvian
economy from being demand-driven to being supply oriented.

However, this process would be less difficult to manage with a weaker currency,
which would support external competitiveness for 5-10 years.

Click on charts to enlarge, courtesy of BNP Paribas.