By Patrick Lannin
RIGA, Feb 12 (Reuters) - Latvia's economic downturn will be deeper than the fall of 5 percent forecast by the government this year and could be 10 percent, the Baltic state's finance minister said on Thursday.
But Atis Slakteris still expected a return to growth in 2011 as planned under Latvia's 7.5 billion euro ($9.69 billion) rescue agreed last year, which was led by the International Monetary Fund (IMF) and European Union (EU).
Asked whether GDP could fall 10 percent this year, Slakteris said in an interview: "I would like it to be better, but there is probably little foundation to hope it will be better this year."
But he added: "The faster the fall this year, the faster the hope it (GDP) will return to positive growth figures."
He said the international environment had worsened and that a preliminary estimate from the statistics office of a gross domestic product fall of 10.5 percent in the final quarter of last year had been a surprise.
He was not ready to give a precise forecast and said experts would probably have new forecasts ready next week as the government prepares to amend the 2009 budget.
The new budget is due to be ready by end-March.
"...but there is still a hope of course to return to positive gross domestic product growth in 2011," he said, noting that a lot depended on the international environment and the prospect for exports.
Under the economic programme drawn up to win the 7.5 billion euro loan, Latvia planned a drop in GDP this year of 5 percent and a budget deficit of 5 percent of GDP. He said the goal was to keep to the 5 percent of GDP deficit goal.
Under the IMF plan, Latvia chose to retain its peg to the euro rather than devalue, as some economists say it should have done to restore its competitiveness.
This mean a domestic adjustment is coming via spending and wage cuts. Some economists have compared Latvia's situation to that of Argentina, which tried to keep its currency peg in the face of crisis, but eventually underwent a massive devaluation in 2002 and financial meltdown.
Slakteris reiterated that choosing devaluation would have been more harmful due to the large amount of foreign currency loans people have. There was also a regional aspect as Lithuania and Estonia also have fixed currencies.
"It is not possible for Latvia to go its own way. That means currency stability can be to a large extent linked to other European Union countries with which we are neighbours," he said. (Editing by Stephen Nisbet)