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| Latvian wages to drop 10 pct q-o-q from Q2 - analysts |
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| Monday,June 01,2009 Posted: 13:57 BJT(0557 GMT) | | From:Baltic News Service Article type:Original |
RIGA, May 30, BNS - From the second quarter of this year wages in Latvia are expected to drop by at least 10 percent quarter-on-quarter, and there will also be a year-on-year decline, said banking analysts.
Latvia's Swedbank senior economist Lija Strasuna told BNS that in the first quarter of 2009 average gross wage in Latvia declined by 6.2 percent, which is a lower drop than expected by banking analysts. However, there was still a year-on-year growth in wages.
"There was a 15.7 percent drop of wages in public sector, which is in accordance with the International Monetary Fund (IMF) support agreement. The largest drop was reported in education sector -- by 19.5 percent, while wages to administrative and service employees declined by 5.7 percent, in state administration by 14.3 percent," said Strasuna.
She said that in the public sector gross wages dropped by only 0.6 percent quarter-on-quarter and the annual rise was 5.1 percent, which means that so far companies have attempted to cut their expenses by firing employees, not cutting wages. The unemployment rise slowed down in April, showing that drop of wages in the private sector is still expected as companies will be forced to cut their expenses.
"It should be underscored that drop of net wages was even slower because non-taxable minimum rose in 209, and the individual income tax rate declined. Our forecast of average drop of net wage in 2009 is 15 percent," said the analyst.
"As it is known, in many private companies wages are traditionally paid partly illegally on basis of informal agreements, not providing any legal liabilities to employers. Therefore, it is easier to cut these expenses. The sector with the deepest decline of activity -- construction, catering -- are traditionally sectors with illegal wages being most popular," said Strasuna.
SEB Banka macroeconomic expert Dainis Gaspuitis told BNS that wages in the private sector rose year-on-year, and it is no surprise and can be explained by several factors. "First, the rise of minimum wage early this year, as it is no secret that many employees receive the minimum wage. Second, optimization of the number of employees, which is mainly done on the account of lower-paid workforce, which leaves an impact on statistics. Third, layoff benefits paid for several months are included in the statistics on wages," he said.
He said that the most topical changes to be assessed are wages compared the previous period, showing a 6.2 percent drop. "It is good signal to investors, creditors and ourselves, showing that we are regaining competitiveness. There are less changes in the private sector," said Gaspuitis.
He said that the decline of revenues to the state budget show that the state is not able to cover the current wage level and it has to be reduced. Therefore attention should be paid to changes in the budget and wage reform in the public sector. The decline shows that the first results have been achieved. In public sector wages declined by 15.7 percent from the fourth quarter of last year as opposed to a 0.6 percent drop in private sector, but the wage level in public sector -- 512 lats (EUR 728) still exceed the level of the private sector -- 444 lats.
"It is important to underscore that wage reduction should not be performed mechanically, but it should be used to balance wages among public sector employees," said the expert.
Gaspuitis said that despite the decline in wages, the trend will even grow in the coming quarters. The decline will be at least 10 percent quarter-on-quarter from the second quarter of this year and there will be also a decline year-on-year. In the second half of the year the reduction is expected to reach 15 percent and 10 percent respectively.
Latvijas Krajbanka (Latvian Savings Bank) investment department chief analyst Olga Ertuganova told BNS that the changes in wages in the first quarter of this year show several new trends in Latvia's economy.
"As compared to the end of 2008, wages have declined by 6.2 percent on average. However, the decline is mainly explained by reduction of wage fund and mass layoffs in the public sector -- wage has declined by 15.7 percent in the sector. Meanwhile, the statistics of the private sector seems not to meet reality -- according to official data, wages have dropped by just 0.6 percent. Wages in construction -- one of the first sector showing the beginning of the economic downturn, reported just a 1 percent drop year-on-year. It shows a large share of illegal wages in the private sector," said Ertuganova.
She said that the recent deflation threat has become a popular topic, while the society might not understand why it is bad that the prices are dropping.
"Unfortunately, the deflation process in the country is mainly characterized by a drop of goods and service prices, and reduction of income. If people have to pay for loans, their liabilities grow in fact. Thus, in case of deflation, cheaper prices does not mean growing purchasing power. However, talks about deflation are too early in Latvia as the price drop is characteristic just for some categories of goods," said Ertuganova.
During the first quarter of 2009, the average monthly gross (pretax) wage in Latvia rose by 3.5 percent against the same period in 2008 to 469 lats, the central statistics office said. In comparison with the previous quarter -- the last three months of 2008 -- the average gross monthly pay declined 6.2 percent.
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