Recent economic developments in Latvia

February, 2013

Economic momentum is well sustained despite slow-down in Europe, growth is expected to remain robust

2

Real GDP growth (%)

Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast

2004 2005 2006 2007 2008 2009 2010 2011 Q1 2012

Q2 Q3 2012 F

2013 F

2014 F

-20

-15

-10

-5

0

5

10

15

8.910.1

11.29.6

-3.3

-17.7

-0.9

5.56.9

5.0 5.2 5.23.6 4.1

3

Export growth is evident both in real and nominal terms

2010

1.c

et

2.ce

t

3.ce

t

4.ce

t

2011

1.c

et

2.ce

t

3.ce

t

4.ce

t

2012

1.c

et

2.ce

t

3.ce

t0

5

10

15

20

25

30

35

40

45

Export in real terms Export unit value

Export growth (y-o-y, %)

Source: Central Statistical Bureau of Latvia

Wage growth has been moderate, wage-productivity gap remains closed

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

70

90

110

130

150

Labour productivity Real wage4

Wage and productivity (2005 Q1 = 100, seasonally adjusted)

Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations

EU 270.00

0.05

0.10

0.15

Gains in competitiveness are reflected in increase in market shares

Export market shares in EU 27 import (mov. average %,

2011 Q1– 2012 Okt-Nov)

Source: Eurostat, Central Statistical Bureau of Latvia, WTO520

02

2003

2004

2005

2006

2007

2008

2009

2010

2011 Jan

90

110

130

150

170

190

210

230

250Bulgaria

Czech Repub-lic

Estonia

Hungary

Latvia

Lithuania

Poland

Romania

Slovak Repub-lic

Slovenia

Export market shares in world import (2002=100)

6

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

I 20

10 II III

IV

I 20

11 II III

IV

I 20

12 II III0

10

20

30

40

50

60

70

57%

2008 20110

10

20

30

40

50

60

70

80

90

100

28.2 33.2

10.113.1

Industry Transport and storage Public administration Trade Others

Investment growth solid; structure shifting towards tradables

Source: Central Statistical Bureau of Latvia

Non-financial investments by branches (% of total)

7

Unemployment rate going down with growing employment opportunities

2010

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

IIX X X

IX

II

10

12

14

16

18

20

22

10.5

13.5

Registered unemployment rate Job seekers rate

Unemployment rate (% of economically active population)

Source: Central Statistical Bureau; State Employment Agency

8

Methodology change (impact of population

census factored in)

External sustainability has been regained: current account remains close to balance

9Source: Bank of Latvia; F – forecast

Current account (% of GDP)

2006 2007 2008 2009 2010 2011 2012 F 2013 F-25

-20

-15

-10

-5

0

5

10

15

-22.6 -22.4

-13.1

8.6

2.9

-2.2 -2.3 -2.3

Goods and services Income Current transfers Current account

Internal balance has also been restored: inflation is low and sustainable

I2010

II III IV V VI VII

VIII

IX X XI XII

I2011

II III IV V VI VII

VIII

IX X XI XII

I2012

II III IV V VI VII

VIII

IX X XI XII

-5

-4

-3

-2

-1

0

1

2

3

4

5

6

1.6

Food Energy Inflation (yoy) Inflation excluding food and energy (yoy)

10

Impact of food and energy prices on total inflation (%-points) and the annual inflation rate (%)

Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations

2012: 2.3%Forecast: 2013: 2.0%2014: 2.3%

Inflation forecast suggests that Maastricht reference value for price stability will be reached with a significant margin

Estimates of 12 month average inflation and the Maastricht criterion (%)

Sources: Eurostat, EC, Bank of Latvia estimates; * Greece assumed as an outlier11

IV 2

011 V VI

VII

VII

I

IX X XI

XII

I 20

12 II III

IV V VI

VII

VII

I

IX X XI

XII

I 20

13 II III

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2.3

3.2

12m average inflation in Latvia Maastrich criterion*

forecast

The banking sector has regained profitability due to substantial reduction in expenses for provisions and an increase in net interest income

Profitability indicators

Source: Bank of Latvia

1Q200

8

2Q 3Q 4Q 1Q200

9

2Q 3Q 4Q 1Q201

0

2Q 3Q 4Q 1Q201

1

2Q 3Q 4Q 1Q201

2

2Q 3Q 4Q-800

-600

-400

-200

0

200

400

-70

-60

-50

-40

-30

-20

-10

0

10

20

30

Accrued profit ROE (right-hand scale)

Mln. of lats %

12

Banks have strengthened their capital adequacy significantly; CAD and liquidity ratios are well above the regulatory minimum requirements

Q1

2008 Q

2Q

3Q

4Q

1 20

09 Q2

Q3

Q4

Q1

2010 Q

2Q

3Q

4Q

1 20

11 Q2

Q3

Q4

Q1

2012 Q

2Q

3Q

4

0

2

4

6

8

10

12

14

16

18

20

CARTier 1 ratioMinimum capital adequacy requirement

Capital adequacy ratio (%)

Source: FCMC

Q1

2007 Q

3

Q1

2008 Q

3

Q1

2009 Q

3

Q1

2010 Q

3

Q1

2011 Q

3

Q1

2012 Q

3

0

10

20

30

40

50

60

70

80

Minimum liquidity requirementFCMC liquidity ratio

Liquidity ratio (%)

13

14

Decline in credit stock reflects still ongoing deleveraging

Credit to private sector (y-o-y, %)

Source: Bank of Latvia

I 20

04 IV VII X

I 20

05 IV VII X

I 20

06 IV VII X

I 20

07 IV VII X

I 20

08 IV VII X

I 20

09 IV VII X

I 20

10 IV VII X

I 20

11 IV VII X

I 20

12 IV VII X

-20

0

20

40

60

80

100

Annual growth of household credit stockAnnual growth of nonfinancial corporation credit stockAnnual growth of resident credit stock (without government)

Money market rates remained stable at low levels for a long time

Jan

08

Feb

08

Ap

r 08

May

08

Jul 0

8S

ep 0

8O

ct 0

8D

ec 0

8Ja

n 0

9M

ar 0

9M

ay 0

9Ju

n 0

9A

ug

09S

ep 0

9N

ov 0

9Ja

n 1

0F

eb 1

0A

pr

10Ju

n 1

0Ju

l 10

Sep

10

Oct

10

Dec

10

Feb

11

Mar

11

May

11

Jun

11

Au

g 11

Oct

11

Nov

11

Jan

12

Feb

12

Ap

r 12

Jun

12

Jul 1

2S

ep 1

2O

ct 1

2D

ec 1

2F

eb 1

3

0%

500%

1000%

1500%

2000%

2500%

3000%

RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M

Money market rates (%)

Source: Bank of Latvia

I 20

08 III V

VII IX XI

I 20

09 III V

VII IX XI

I 20

10 III V

VII IX XI

I 20

11 III V

VII IX XI

I 20

12 III V

VII IX XI

I 20

13

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

Net foreign assets Monetary base

The backing of the monetary base with foreign reserves is over 150%

Source: Bank of Latvia

Net foreign assets and Monetary base (mln lats)

17