Although Latvias construction industry made significant strides in emerging from sharp contractions through 2011, BMIs calculations show that the sector will not quite escape further shrinkage for the year. However, the upturn in construction activity through 2011 will nonetheless narrow the decline to just 6.98%, taking the sectors value down again to LVL550mn (US$1.12bn).

Figures from Latvias Central Statistical Bureau corroborate an increase in the countrys construction industry in 2011. The body estimates that construction volume climbed by 6.1% in the first nine months of the year at constant prices, led by a 8.9% year-on-year (y-o-y) growth in the construction of buildings and 4% y-o-y growth in civil engineering. Construction volume for Q311 reached 19.6% y-o-y, again with strong growth in buildings and civil engineering at 25.3% and 16% respectively.

The damage done by the global financial crisis years and concomitant recession will leave medium- to long-term marks, at least in terms of value. While BMI does not expect to see the industrys value surpassing the US$2bn mark again over the next 10 years, we also expect its contribution to Latvias GDP to remain within the 4% mark over the period against a high of 9.16% of GDP in 2008. Moreover, the reversal of residential and non-residential constructions dominance in the overall industry will remain through the 10-year period, with infrastructure cementing its larger share of the construction market. Where once infrastructure had a 39% share of the construction market in 2007, BMI expects this to reach 73% in 2011, at the expense of residential and non-residential building.

At a growth rate of 10.4%, the transport sector grew to LVL250mn (US$460mn) in 2010 (although strongly offset by a sharp 27.46% contraction in the energy sector). BMI estimates that the industry has declined by 6.09% in 2011, and is due to emerge again with between muted and entirely flat growth rates y-o-y for the next 10 years. However, the sector will maintain its dominance of the larger infrastructure market, holding at least a 60% share over the 10-year period (against the energy sector).

Unlike the transport sector, Latvias energy infrastructure market shrank sharply by 27.46% in 2010, taking its value down to LVL163mn (US$310mn) for the year. It is estimated that the sector contracted yet again in 2011, by 5.65%, although held the same industry value as the previous year. Unlike the transport space and the countrys larger construction industry, BMI expects to see further contractions throughout our 10-year forecast, albeit with interruptions of negligible growth.

While we remain broadly positive towards Latvias fiscal situation, we expect that the ambitious 2.5% of GDP fiscal deficit target in 2012 that the government has set for itself is likely to be missed. We forecast the deficit to fall to 3.4% of GDP in 2012 from 5.6% in 2011. Meanwhile, by the end of the 10-year period in 2021, we expect Latvias construction industry to grow by 1.7% to LVL900mn (US$1.6bn).