Global Challenges and Local Opportunities: Achievements and

Prospects in the Baltic States Ilmārs Rimšēvičs

Governor, Bank of Latvia

Riga, 12 October 2011

The small economies of the European Union that have introduced the euro suffered less during the crisis

5.2

6.7

4.4

-4.4

2.3

8.9 8.3

0.5

-13.1

0.9

-15

-10

-5

0

5

10

2006 2007 2008 2009 2010

Cyprus, Malta, Slovakia and Slovenia

Baltic States and Bulgaria

GDP growth (average per group of countries; %)

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

Estonia Latvia Investment-grade ratingSource: Bloomberg.

At this stage Estonia is seven steps ahead of us in terms of soundness, measured by credit rating

S&P ratings of sovereign long-term liabilities AA AA- A+ A A-

BBB+ BBB BBB- BB+ BB BB- B+

AA AA- A+ A A-

BBB+ BBB BBB- BB+ BB BB- B+

Estonia has also received a considerably larger inflow of foreign direct investment

3578.4

4041.8

8780.99685.0

0.0

2000.0

4000.0

6000.0

8000.0

10000.0

12000.0

2008 Q4 2011 Q2

In Latvia

In Estonia

Sources: Latvijas Banka, Eesti Pank, Eurostat.

Accumulated foreign direct investment per capita (EUR)

Better unemployment rates in Estonia also reflect it

11.8

7.4

5

10

15

20

2010 I IV VII X 2011 I IV VII

Latvia Estonia

Registered unemployment (% of economically active population)

Sources: State Employment Agency , Estonia's State Employment Agency.

Higher labour productivity results in better

remuneration in Estonia: average monthly gross wages and salaries in Estonia = 821 EUR, in Latvia = 664 EUR

300

400

500

600

700

800

900

2005

Q1

Q3

2006

Q1

Q3

2007

Q1

Q3

2008

Q1

Q3

2009

Q1

Q3

2010

Q1

Q3

2011

Q1

Estonia Latvia

Sources: Central Statistical Bureau of the Republic of Latvia, Statistikaamet.

Average monthly gross wages and salaries (EUR; seasonally adjusted data)

Average old-age pensions are 42 EUR lower in Latvia (305 EUR and 263 EUR respectively )

140

180

220

260

300

340

2007

Q1

Q3

2008

Q1

Q3

2009

Q1

Q3

2010

Q1

Q3

2011

Q1

Estonia Latvia

Sources: State Social Insurance Agency, Statistikaamet.

Average old age pension, EUR

Global economic outlook starts aggravating considerably

-40

-30

-20

-10

0

10

20

I'06 VI

XI

IV

IX

II

VII

X

II

V

X

III

VII

I I'1

1 VI

EU industrial confidence Euro area industrial confidence Latvia's industrial confidence

Industrial confidence indicator in Europe

30

35

40

45

50

55

60

65

2008

'I IV

VII

X

20

09'I IV

V

II

X

2010

'I IV

VII

X

20

11'I IV

V

II

Germany Euro area UK US

Industrial PMI (50 = neutral)

Growth forecasts for global economies are downsized

GDP growth, %

* GS Global ECS Research.

-6

-4

-2

0

2

4

6

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011*2012*

Euro area 0.1Germany 0.6France 0.2Italy -0.4Spain -0.4

Planning the state budget with a deficit during the years of rapid growth led to a deep fiscal crisis during the years of

economic downslide Consolidated general government budget surplus/deficit, % of GDP (EAS 95)

-4.2

-9.7

-7.7

-4.6

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

2004 2005 2006 2007 2008 2009 2010 2011 2012

Planned Actual (2011 – base forecast)

Latvia at the crossroads

Failing to introduce the euro and improve credit ratings may cost almost a billion lats from the budget in the

next 10 years Additional annual interest payment in case we fail to introduce the euro and continue to

borrow and refinance the debt in the financial market (in millions of lats)

17 33

50

78

103 107 111 121

132 136

0

20

40

60

80

100

120

140

160

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

In 10 years it will cost us almost one billion lats more

13