recent economic developments in latvia
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Recent economic developments in Latvia
July, 2013
Real GDP growth in 2012 and Q1 2013 (% y-o-y)
2 Source: Eurostat.; *data is not available for Q1 2013 yet
-8
-6
-4
-2
0
2
4
6
Lat
via
Lith
uani
a E
ston
ia
Slov
akia
Po
land
M
alta
Ir
elan
d B
ulga
ria
Aus
tria
G
erm
any
Rom
ania
Sw
eden
L
uxem
bour
g U
nite
d K
ingd
om
Fran
ce
Bel
gium
D
enm
ark
Finl
and
Net
herl
ands
C
zech
Rep
ublic
Sp
ain
Hun
gary
Sl
oven
ia
Ital
y C
ypru
s Po
rtug
al
Gre
ece
2012 Q1 2013
Latvia is the fastest growing EU country
Economic momentum is well sustained despite slow-down in Europe, growth is expected to remain robust
3
Real GDP growth (%)
Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast
-6.2
-4.0
3.1 2.8 3.6
5.7 6.6
5.7 6.9
5.0 5.2 5.1
3.6
5.6 4.1
-8
-6
-4
-2
0
2
4
6
8
Q1 2010
Q2 Q3 Q4 Q1 2011
Q2 Q3 Q4 Q1 2012
Q2 Q3 Q4 Q1 2013
2012 2013 F
Favorable competitive position shapes export trends: Latvia ranges among the export leaders in Europe
98 95 93 82
78
57 55 51 50 50 46 43 43 43 43 40 36 36 33 33 32 31 27 26 22
9
-2
-20
0
20
40
60
80
100
120
Lat
via
Lith
uani
a E
ston
ia
Gre
ece
Bul
gari
a Sl
ovak
ia
Rom
ania
C
ypru
s C
zech
Rep
ublic
M
alta
Po
land
U
nite
d K
ingd
om
Swed
en
Port
ugal
N
ethe
rlan
ds
Spai
n G
erm
any
Hun
gary
It
aly
Slov
enia
A
ustr
ia
Bel
gium
Fr
ance
Fi
nlan
d D
enm
ark
Irel
and
Lux
embo
urg
Merchandise export revenue growth (2012 over 2009, %)
Source: Eurostat 4
Growth has been supported by regained competitiveness: wage-productivity gap remains closed
70
90
110
130
150
2000
Q1
Q3
2001
Q1
Q3
2002
Q1
Q3
2003
Q1
Q3
2004
Q1
Q3
2005
Q1
Q3
2006
Q1
Q3
2007
Q1
Q3
2008
Q1
Q3
2009
Q1
Q3
2010
Q1
Q3
2011
Q1
Q3
2012
Q1
Q3
2013
Q1
Labour productivity Real wage 5
Wage and productivity (2005 Q1 = 100, seasonally adjusted)
Source: Central Statistical Bureau, Bank of Latvia staff calculations
Latvia’s market share in world exports continues to grow
80
100
120
140
160
180
200
220
240
260
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
Czech Republic
Estonia
Hungary
Latvia
Lithuania
Poland
Slovak Republic
Merchandise export shares in world import (2002=100)
Source: WTO 6
7
Domestic demand has also recovered: regained competitiveness and corporate profitability have pushed up productive investment
Gross fixed capital formation (1Q 2010 = 100)
Source: Central Statistical Bureau of Latvia
+64%
100
110
120
130
140
150
160
170
2010 Q1
Q2 Q3 Q4 2011 Q1
Q2 Q3 Q4 2012 Q1
Q2 Q3 Q4 2013 Q1
Structure of investments has been shifting towards tradable sector
28.2 31.2
10.1 16.9
0
10
20
30
40
50
60
70
80
90
100
2008 2012
Industry Transport and storage Public administration Trade Others
Source: Central Statistical Bureau of Latvia 8
Non-financial investments by branches (% of total)
Unemployment rate has been going down alongside with growing employment opportunities
9.9
12.8
8
10
12
14
16
18
20
22
2010
I II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
20
11 I II
II
I IV
V
V
I V
II
VII
I IX
X
X
I X
II
2012
I II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
20
13 I II
II
I IV
V
Registered unemployment rate Job seekers rate
Unemployment rate (% of economically active population)
Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations 9
Strong competitive position and a shift from non-tradable to tradable sector is expected to keep current account in equilibrium
Source: Bank of Latvia; F – Bank of Latvia forecast
Current account balance (% of GDP)
-22.6 -22.4
-13.1
8.6
2.9
-2.2 -1.7 -1.8
-25
-20
-15
-10
-5
0
5
10
15
2006 2007 2008 2009 2010 2011 2012 2013F
Goods and services Income Current transfers Current account 10
Inflation on a declining trend; past increase has been driven by the commodity prices
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
-5
-4
-3
-2
-1
0
1
2
3
4
5
6
I 2010
III V VII IX XI I 2011
III V VII IX XI I 2012
III V VII IX XI I 2013
III V
Food Energy Inflation (yoy) Inflation excluding food and energy (yoy)
2012: 2.3% Forecast: 2013: 0.7%
Impact of food and energy prices on total inflation (%-points) and the annual inflation rate (%)
Banking sector has returned to profitability, capital adequacy has strengthened to record-high levels
Profitability indicators
-70
-60
-50
-40
-30
-20
-10
0
10
20
30
-800
-600
-400
-200
0
200
400
Q1
2008
Q
2 Q
3 Q
4 Q
1 20
09
Q2
Q3
Q4
Q1
2010
Q
2 Q
3 Q
4 Q
1 20
11
Q2
Q3
Q4
Q1
2012
Q
2 Q
3 Q
4 Q
1 20
13
% Mln. of lats
Accrued profit ROE (right-hand scale)
0
2
4
6
8
10
12
14
16
18
20
Q1
2008
Q
2 Q
3 Q
4 Q
1 20
09
Q2
Q3
Q4
Q1
2010
Q
2 Q
3 Q
4 Q
1 20
11
Q2
Q3
Q4
Q1
2012
Q
2 Q
3 Q
4 Q
1 20
13
CAR Tier 1 ratio Minimum capital adequacy requirement
Capital adequacy ratio (%)
Source: FCMC and Bank of Latvia 12
Decline in credit stock reflects ongoing deleveraging; reappearance of a credit boom is unlikely for many years to come
Credit to private sector (y-o-y, %)
Source: Bank of Latvia 13
-20
0
20
40
60
80
100
2004
Q1
Q3
2005
Q1
Q3
2006
Q1
Q3
2007
Q1
Q3
2008
Q1
Q3
2009
Q1
Q3
2010
Q1
Q3
2011
Q1
Q3
2012
Q1
Q3
2013
Q1
Q3
2014
Q1
Q3
2015
Q1
Q3
Annual growth of household credit stock Annual growth of nonfinancial corporation credit stock Annual growth of resident credit stock (without government)
Forecast
Money market rates have remained stable at low levels for a lengthy period of time
0%
5%
10%
15%
20%
25%
30%
jan
08
apr 0
8
jūl 0
8
okt 0
8
jan
09
apr 0
9
jūl 0
9
okt 0
9
jan
10
apr 1
0
jūl 1
0
okt 1
0
jan
11
apr 1
1
jūl 1
1
okt 1
1
jan
12
apr 1
2
jūl 1
2
okt 1
2
jan
13
apr 1
3
jūl 1
3
RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M 14
Money market rates (%)
Source: Bank of Latvia
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
I 200
8 II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
I 2
009 II
II
I IV
V
V
I V
II
VII
I IX
X
X
I X
II
I 201
0 II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
I 2
011 II
II
I IV
V
V
I V
II
VII
I IX
X
X
I X
II
I 201
2 II
III
IV
V
VI
VII
V
III
IX
X
XI
XII
I 2
013 II
II
I IV
V
V
I
Net foreign assets Monetary base 15
The backing of the monetary base with foreign reserves is over 150%
Source: Bank of Latvia
Net foreign assets and Monetary base (mln lats)
16
Maastricht criterion* Reference value Latvia’s respective indicator
Inflation (April 2013) 2.7% 1.3%
Budget deficit (% of GDP, 2012) -3% -1.2%
Public debt (% of GDP, 2012) 60% 40.7%
Long-term interest rate (April 2013) 5.5% 3.8%
ERM II membership At least 2 years Since 2005
* Convergence Report 2013 on Latvia; EC, 5 June 2013
After fulfilling criteria, Latvia is set to become the 18. euro area country in 2014
Latvia’s credit ratings have been upgraded and have positive outlooks
Standard&Poor's Fitch Investment grade Moody's (rhs)
Latvia’s sovereign rating on long-term foreign currency debt
17
A1
A2
A3
Baa1
Baa2
Baa3
Ba1
Ba2
Ba3
A+
A
A-
BBB+
BBB
BBB-
BB+
BB
BB-
Source: Bloomberg
18
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