On December 5th, 2016, Dr. Arnis Sauka presented the FICIL Sentiment Index on the investment climate in Latvia. The aim of this report is to foster more evidence-based policy decisions to further promote a favourable investment climate in Latvia. Notwithstanding the attempts of policymakers to arrange the business environment and make it more favourable, no substantial improvements have been seen during the last 12 months and the attractiveness of Latvia in the eyes of investors is still not improving.
The largest foreign investors in Latvia are most concerned about the unpredictable taxation policy, lack of qualified labour, and purposeful national development strategy – these are findings of the study about the development of the investment climate in Latvia in 2016, ‘FICIL Sentiment Index 2015-2016’, jointly developed by the Foreign Investors' Council in Latvia (FICIL) and the Stockholm School of Economics in Riga (SSE Riga).
The author of the study, Associate Professor of SSE Riga Arnis Sauka notes that: “Overall, the latest FICIL Sentiment Index covers three substantial issues: (1) Do the investors see any improvement with respect to the investment environment in Latvia compared to the situation in 2015; (2) What, in the investors’ opinion, has been done and should be done to improve the investment environment in Latvia, including the assessment of various policy initiatives; and (3) What are the main tasks to accomplish in the short-term to improve the investment environment in Latvia”. Sauka emphasises that the results of the study demonstrate that in addition to those discussed above, investors are repeatedly noting several other pressing issues, which, if not resolved in the long run, adversely affect business development and the national economy of Latvia in general. These include the shadow economy, corruption, disordered social security and healthcare systems, negative demographic growth and protracted regional reform. Moreover, in the investors’ opinion, political initiatives implemented during recent years have not substantially improved the situation. Thus, for example, acknowledging that resolution of individual issues, like improving demographic indicators and a better approach to labour, is a long-term challenge where one cannot expect an immediate result, the investors would like, however, to see more initiatives aimed at addressing these issues as soon as possible.
The study has revealed also another disappointing trend – only half of the largest foreign investors in the country are planning to continue investing in business in Latvia and to increase the amount of investment. Unfortunately, we often encounter the following opinion: “The reasons to invest in Latvia are becoming fewer year by year – new taxes are introduced without any explanation and the only opportunity to seek justice is by going to court. Currently, there is a lack of strong incentives to invest in Latvia that would be worth investing in business in Latvia, especially compared to the welcoming investment environment in the neighbouring countries, Lithuania and Estonia”, acknowledged an investor representing the financial and banking sector in the study. A negative decision regarding increasing investment has several other reasons as well; however, a positive sign is that notwithstanding different challenges, a large portion of surveyed investors is either planning on increasing the volume of investment or are seriously considering such option.
“Like last year, a large portion of investors this year also are looking at what is happening in Latvia with concern and are refraining from making a significant decision in favour of investing in business. Uncertainty about what the new taxation system will bring, contradictory amendments of laws, inability to arrange the national healthcare system and find the way out from demographic crisis – these are only a few reasons due to which some investors have assumed an expectant position. Most likely, these are the reasons for new foreign investors not coming to Latvia as well. If purposeful and effective action that could improve the competitiveness of Latvia will not be taken in near future, not only new companies will not be formed in Latvia, but there is a risk that the existing ones will be moved to other countries as well”, warns Marta Jaksona, Executive Director of FICIL.
Notwithstanding foreign investors’ critical assessment of what the policymakers have accomplished in 2016, positive changes have been noted also. The majority of participants in the study have noted that communication with the government and the support provided by it to the investors has improved substantially during this period. Likewise, the competitiveness of Latvia in the area of infrastructure has increased, and investors have evaluated the energy and defence sectors with greater recognition than last year.
For the Latvian business environment to improve and the amount of investment to grow, foreign investors are urging the government and policymakers of Latvia to find the solution without delay or at least take targeted steps in labour availability and demographic problem areas, to improve the taxation and judicial system, as well as to eliminate the most substantial deficiencies in the process of action policy planning and implementation. Investors have also included in the list of urgent works such tasks as fighting the shadow economy, malicious use of insolvency proceedings, tax evasion, and corruption, which have been undermining the competitiveness of Latvia for a long time.
The study was carried out in 2016 by interviewing the 32 largest foreign investors in Latvia.
FICIL Sentiment Index presentation: FICIL Sentiment Index 2016.pdf