Economic Developments in LatviaLatvia
September 2012September, 2012
Macroeconomic Overview
2
Strong economic growth in Latvia is supported by so nd f ndamentalssound fundamentals
Real GDP growth in the 1st half of 2012 (% y o y)Real GDP growth in the 1st half of 2012 (% y-o-y)
4
6
2
4
-2
0
-6
-4
-8
LV LT SK PL EE SE DE AT
UK
* FI BG IE RO FR BE
LU
*M
TD
K NL
CZ
HU ES SI CY IT
PT*
GR
Source: Eurostat; * Q1 2012 data3
U L
Economic growth was led initially by exports,broadened to investment and private consumtionbroadened to investment and private consumtion
Real GDP growth (y-o-y %) and contribution to the growth (percentage points)Real GDP growth (y-o-y, %) and contribution to the growth (percentage points)
151821
3.1 2.8 3.65.7 6.6 5.7 6.9
5.069
12
-6.2-4.0
-6-303
-15-12
-96
-18Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Private consumption Public consumption GFCF Changes in inventories
Source: Central Statistical Bureau of Latvia
Private consumption Public consumption GFCF Changes in inventoriesExports Imports GDP, % yoy
4
GDP growth is broad based across sectorsg
Real GDP growth (y-o-y, %) and sector contribution to the growth (percentage
5.76.6
5.76.9
5.06
8
g (y y, ) g (p gpoints)
3.1 2.83.6
5 0
2
4
6
-4
-2
0
-6.2-4.0
-10
-8
-6
10Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2
Agriculture Industry Construction Trade Transportation and storage Private servicesTrade Transportation and storage Private services Public services Product taxes and subsidies GDP y/y, %
Source: Central Statistical Bureau of Latvia
Economic growth remains strong; GDP forecast for 2012 stands at 3 5 4 0%GDP forecast for 2012 stands at 3.5-4.0%
Real GDP growth (%)Real GDP growth (%)
6.6 6.98
3.1 2.8 3.6
5.76.6
5.75.0
4
63.5 – 4.0%
0
2
4
-2
-6.2
-4.0
-6
-4
-8Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 2012 F
Source: Central Statistical Bureau; F – Bank of Latvia forecast
Growth has been supported by regained competitiveness: wage-productivity gap has been p g p y g pclosed
Wage and productivity (2005 Q1 = 100 seasonally adjusted)150
Wage and productivity (2005 Q1 = 100, seasonally adjusted)
130
90
110
70
90
1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1 3 1
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
Labour productivity Real wagep y g
Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
2012 Q2: labour productivity forecast
Export growth remains robustExport growth remains robust
Export growth of goods and services (y-o-y; % in nominal terms )Export growth of goods and services (y-o-y; %, in nominal terms )
25
10
15
20
11.7%
0
5
10
15
-10
-5
-20
-15
2006 2007 2008 2009 2010 2011 2012 H1
Source: Central Statistical Bureau of Latvia
Current account stays close to balancey
Current account main positions (% of GDP)
8.610
15p ( )
2.95
-2.4 -3.1 -2.7
-5
0
-13.1-10
-20
-15
2008 2009 2010 2011 Q1 2012 Q2
Goods and Services Income Current Transfers Current Account
Source: Bank of Latvia
Inflation stays on a declining trend; annualaverage inflation forecast for this year: 2 4%average inflation forecast for this year: 2.4%
Impact of food and energy prices on total inflation (pp) and the y o y inflation rate (%)Impact of food and energy prices on total inflation (pp) and the y-o-y inflation rate (%)
5.05
7
1 73
5
1.7
1
-3
-1
-5I 2010 III V VII IX XI I 2011 III V VII IX XI I 2012 III V VII
Source: CSB, BoL calculations
Food Energy Inflation (y-o-y) Inflation excluding food and energy (y-o-y)
Unemployment rate continued to declinep y
Unemployment rate (% of economically active population)
25
Unemployment rate (% of economically active population)
Methodology change
2016.1%
gy g(population census) impact: Registered unemployment rate: + 1.6 pp as from April 2012
11.3
10
1511.3%
Unemployment rate: + 0.7 pp as from Q1 2011
5
0
2008
I II III
IV V VI
VII
VII
IIX X X
IX
II20
09 I II III
IV V VI
VII
VII
IIX X X
IX
II20
10 I II III
IV V VI
VII
VII
IIX X X
IX
II20
11 I II III
IV V VI
VII
VII
IIX X X
IX
II20
12 I II III
IV V VI
VII
VII
I
Registered unemployment rate Unemployment rate (Labour Force Survey)
Source: Central Statistical Bureau of Latvia; State Employment Agency11
Financial sector issues
12
The average level of deposits in 2012 is almost unchanged y-o-y - depositors’ confidence is
Domestic deposits (mln lats)
g y y prather stable
Domestic deposits (mln lats)
5800
5600
5200
5400
5000
5200
4800
008 II III
IV V VI
VII III
IX X XI
XII
009 II III
IV V VI
VII III
IX X XI
XII
010 II III
IV V VI
VII III
IX X XI
XII
011 II III
IV V VI
VII III
IX X XI
XII
012 II III
IV V VI
VII
I 20 V V X
I 20 V V X
I 20 V V X
I 20 V V X
I 20 V
Source: Bank of Latvia
* In October 2010, decline of deposits reflects large one-off effect from restructuring of funding within financial group
Decline in credit stock reflects an ongoingdeleveragingdeleveraging
Credit to private sector (y o y %)100
Credit to private sector (y-o-y, %)
60
80
20
40
0
20
-20
I 200
4 IV VII X
I 200
5 IV VII X
I 200
6 IV VII X
I 200
7 IV VII X
I 200
8 IV VII X
I 200
9 IV VII X
I 201
0 IV VII X
I 201
1 IV VII X
I 201
2 IV VII
A l th f h h ld dit t kAnnual growth of household credit stockAnnual growth of nonfinancial corporation credit stockAnnual growth of resident credit stock (without government)
Source: Bank of Latvia
The backing of the monetary base with foreign reserves is around 200%foreign reserves is around 200%
Net foreign assets and Monetary base (mln lats)
4,000
4,500
Net foreign assets and Monetary base (mln lats)
3,000
3,500
2,000
2,500
1,000
1,500
0
500
08 II II V V VI II II X X XI II 09 II II V V VI II II X X XI II 0 II II V V VI II II X X XI II 11 II II V V VI II II X X XI II 2 II II V V VI II II
I 200
I II IV V V VI
VII IX X X XI
I 200
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII IX X X XI
I 201
I II IV V V VI
VII
Net foreign assets Monetary base
Source: Bank of Latvia
Capital adequacy ratios stand at all timehighshighs
Capital adequacy ratios (%)
18
20
Capital adequacy ratios (%)
12
14
16
18
8
10
12
2
4
6
0
2
Q1 2006 Q3 Q1 2007 Q3 Q1 2008 Q3 Q1 2009 Q3 Q1 2010 Q3 Q1 2011 Q3 Q1 2012
CAR Tier 1 ratio
Source: Financial and Capital Market Commission
Liquidity remains on a very high levelq y y g
Liquidity ratio (defined by FCMC %)
70
Liquidity ratio (defined by FCMC, %)
60
50
40
30
Q1
2006 Q2
Q3
Q4
Q1
2007 Q2
Q3
Q4
Q1
2008 Q2
Q3
Q4
Q1
2009 Q2
Q3
Q4
Q1
2010 Q2
Q3
Q4
Q1
2011 Q2
Q3
Q4
Q1
2012 Q2
Q Q Q Q Q Q Q
Source: Financial and Capital Market Commission
Non-performing loans are adequately provisioned; asset quality recovering graduallyprovisioned; asset quality recovering gradually
Amount of loans over 90 days past due, provisions and their share in outstanding
2,80018
20mln lats%
Share of provisions in outstanding loans
Amount of loans over 90 days past due, provisions and their share in outstanding loans
2,000
2,400
,
14
16
18 loansShare of loans over 90 days past due in outstanding loansProvisions (right-hand scale)
1,200
1,600
,
8
10
12Loans over 90 days past due (right-hand scale)
400
800
1,200
4
6
8
0
400
0
2
Q3
Q4
2005 Q
2Q
3Q
420
06 Q2
Q3
Q4
2007 Q
2Q
3Q
420
08 Q2
Q3
Q4
2009 Q
2Q
3Q
420
10 Q2
Q3
Q4
2011 Q2
Q3
Q4
2012 Q
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Q1
2
Source: Bank of Latvia, Financial and Capital Market Commission
Money market rates have remained stable at lowlevels
b
levels
Lats money market interest rates (%, bps)
25
30
25%
30%bps
y p
20
25
20%
25%
10
15
10%
15%
55%
-5
0
-5%
0%
08 08 08 08 09 09 09 09 10 10 10 10 11 11 11 11 12 12 12
jan
apr
jūl
okt
jan
apr
jūl
okt
jan
apr
jūl
okt
jan
apr
jūl
okt
jan
apr
jūl
RIGIBOR-EURIBOR 3M spread (rhs) O/N 3M 1Y
Source: Bank of Latvia
