recent economic developments in latvia and medium-term outlook

Recent Economic Developments in Latviain Latvia

May 2012May, 2012

Macroeconomic Overview

Inflation shows a declining trend; past increases driven byp ycommodity prices and tax hikes

Impact of food and energ prices on total inflation (pp) and the o inflation rate (%)Impact of food and energy prices on total inflation (pp) and the y-o-y inflation rate (%)

5

7

2.83

5

-1

1

-3

Bank of Latvia forecasts:2012: 2.4%2013: 2.0%

-5I 2011 II III IV V VI VII VIII IX X XI XII I 2012 II III IV

Food Energy Y-o-y inflation Y-o-y inflation excluding food and energy prices

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

gy y y g gy p

No domestic demand pressures with real wagegrowth flat and unemployment rate still high; g p y g ;core inflation on low level

Inflation (% of coresponding period of previous year)

5

6

Inflation (% of coresponding period of previous year)

2.8

4.14

5

2.8

1.42

3

0

1

-1

I 201

1 II III

IV V VI

VII

VII

I

IX X XI

XII

I 201

2 II III

IV

12-month inflation 12-month average inflation Core inflation

Source: Central Statistical Bureau of Latvia, Bank of Latvia’s calculations

A moderate nominal wage growth has resumed; however real wages remain flatresumed; however, real wages remain flat

Average gross wage changes by institutional breakdown (y o y %)

10

Average gross wage changes by institutional breakdown (y-o-y, %)

4.54.0

5.45

-5

0

2010

Q1

Q2

Q3

Q4

2011

Q1

Q2

Q3

Q4

-10

5 2 2-15

Total Public sector Private sector

Source: Central Statistical Bureau of Latvia

Unemployment rate, although still high, has continued to declinehas continued to decline

Unemployment rate (% of economically active population; LFS)

25

Unemployment rate (% of economically active population; LFS)

Methodology change (population census) impact:

20

Unemployment rate: ~ + 0.7 pp as from Q1 2011

10

15

5

10

0

009

I II III

IV

010

I II III

IV

2011

I II III

IV

012

I

2 2 2 2

Source: Central Statistical Bureau of Latvia; State Employment Agency

Wage-productivity gap has closed, restoring competitivenessrestoring competitiveness

Wage and productivity (2005 Q1 = 100 s a )150

Wage and productivity (2005 Q1 = 100, s.a.)

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

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

Labour productivity Real wagep y g

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

Latvia’s export market shares are up in most of our key markets reflecting gains in y g gcompetitiveness

Share of Latvian exports in particular country’s imports (%; 4q-moving average, Share of Latvian exports in particular country s imports (%; 4q moving average, 2010 Q1–2012 Jan.-Feb.)

120.45

9

12

0.30

6

9

0.153

0.00 0E i Li h iEU27

72.4%Germany

8.3%UK

3.1%Sweden

6.3%Denmark

3.4%Finland 3.1%

Poland 5.9%

Russia 10.6%

Estonia 13.6%

Lithuania 18.1%

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

share ofexports2011

Current account is close to balance; main factors behind the deficit - increase of imports forbehind the deficit increase of imports for productionCurrent account and its components (% of GDP)

15

20

p ( )

8.7

5

10

15

5.5

-0.3 -0.8 0.7-1.1

1.2-2.9-5

0

-5.3

-15

-10

-202010 1Q Q2 Q3 Q4 2011 1Q Q2 Q3 Q4 2012 1Q E

Current Transfers Income Services Goods Current AccountCurrent Transfers Income Services Goods Current Account

Source: Bank of Latvia, E- estimated operational data

Latvian export trends in the geographicaldistribution: the Baltic market integration and gemergence of new marketsMerchandise export breakdown by country (%)

6.1 9.2 13.0 15.090%

100% Other – including Asian countries 8.3% (Turkey, Afganistan, India, UAE, China etc.), African countries(Egypt, Morocco, Algeria etc.)

Merchandise export breakdown by country (%)

23.1 20.9 14.2 15.870%

80%Other EU – Poland 7.2%, Netherlands 2.4%, France 1.7% and Southern euro area countries (Greece, Portugal, Spain, Italy) 2.0%

gyp g )

44.133.8

26.526.9

50%

60%OtherOther EU

21.631.7 28.130%

40% Scandinavia+UK+GermanyBaltic StatesCIS

13.2 14.4 14.6 14.2

13.5

0%

10%

20%

0%2000 2005 2011 2012 Q1

, Source: Central Statistical Bureau of Latvia

Sectorwise, Latvia’s merchandise export has undergone a significant diversification, creatingg g , ga stable export base

100% Others

Structure of merchandise exports (%)

70%

80%

90%Textiles

Transport vehicles

50%

60%

70%

Mineral products

Chemical

20%

30%

40%Chemical

Machinery and electrical equipmentB l

0%

10%

2000 2005 2011 2012 Q1

Base metals

Food products Q

Wood

Source: Central Statistical Bureau of Latvia, Bank of Latvia

Export growth has decelerated recently as external demand weakens, but it still remains on ,a solid footing

Merchandise exports by commodity groups (in nominal terms y o y growth)

50

60150 Other goods

Transport vehicles

Merchandise exports by commodity groups (in nominal terms, y-o-y growth)

40

50

100

flat

s

Transport vehicles

Machinery and electrical equipmentBase metals

16 7

20

30

50

y, m

illio

nsof Base metals

Textiles

Wood 16.7

0

10

0

Y-o-

y

Plastics

Chemical

-20

-10

-50

Mineral products

Agricultural and food d t2050

2011

I II

III

IV

V

VI

VII

VII

I

IX

X

XI

XII

2012

I II

III products

Exports yoy, % (RHS)


Intermediate goods dominate in the import t t d d i i t thstructure and drive import growth

Import by BEC product group (million EUR)Import by BEC product group (million EUR)

1000

1100

1200

800

900

1000

Other items

500

600

700Motor spirit and passenger motor cars

Consumption goods

200

300

400p g

Intermediate goods

0

100

10 I III V

VII IX XI

11 I III V

VII IX XI

12 I III

Capital goods

Source: Eurostat

20 20 20

With the economic environment stabilising, Latvia has attracted considerably more foreigny gdirect investment (FDI) in 2011 vs 2010

Net FDI inflows (% of GDP)Net FDI inflows (% of GDP)8.4 8.1

6 2 6.7

10

3.8

5.5

3.6

6.25.6

6.7

3.85

0.41.6 1.6 1.6 2.1

0

-0.9

-5

2006

2007

2008

2009

2010

2011

Q1

2010

Q2

2010

Q3

2010

Q4

2010

Q1

2011

Q2

2011

Q3

2011

Q4

2011

2012

E

Q Q Q Q Q Q Q Q

Q1

Source: Bank of Latvia

Drivers of GDP growth, initially led by exports broadened to include investmentexports, broadened to include investment

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)

20

25

3.5 3.6 3.55.6 6.6 5.7 6.8

5

10

15

-5.5-3.5

-5

0

5

-15

-10

-20Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012

flash

Private consumption Public consumption GFCF Changes in inventories


Private consumption Public consumption GFCF Changes in inventoriesExports Imports GDP, % yoy

Merchandise export recovery has been remarkably strong – placing the countryy g p g yamong the European leaders

Merchandise export revenue growth 2011/2009 (% in EUR terms)

8590

Merchandise export revenue growth 2011/2009 (%, in EUR terms)

72 71 71

55 5360

70

80

44 44 43 43 4238 35 34 34 33 33 32 31 30 29 29 26 23 21

30

40

50

21

102

0

10

20

Est

onia

Bul

gari

aL

atvi

aL

ithua

nia

Rom

ania

Gre

ece

h R

epub

licM

alta

Swed

enC

ypru

sSl

ovak

iaPo

land

Hun

gary

d K

ingd

omPo

rtug

alSl

oven

iaN

ethe

rlan

dsG

erm

any

Spai

nA

ustr

iaB

elgi

um Ital

yFi

nlan

dFr

ance

Den

mar

kIr

elan

dux

embo

urg

Cze

c

Uni

ted N Lu

Source: Eurostat

Latvia has experienced a strong rebound in investment last yearinvestment last year

Gross fixed capital formation (% y-o-y)

2924 2530

40

Gross fixed capital formation (% y-o-y)

22 24 25

10

20

30

-10

0

-30

-20

-50

-40

I 200

7 II III

IV

I 200

8 II III

IV

I 200

9 II III

IV

I 201

0 II III

IV

I 201

1 II III

IV


Despite unfavorable external conditions, inQ1 2012, manufacturing growth remainedQ , g gstrong, albeit volatile

Man fact ring ol me inde (2005 100; s a )

120

130

Manufacturing volume index (2005 = 100; s.a.)In Q1 2012,

3.5% q-o-q, s.a.and 14 8% y o y

110

120 and 14.8% y-o-y

90

100

70

80

60

2009

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


Transport sector has been booming in Q1 20122012

Cargo turnover in transport (% y o y)Cargo turnover in transport (% y-o-y)

40

22.6

16.020

30

0

10

n.a.

-20

-10

-40

-30

2008 2009 2010 2011'Q1 Q2 Q3 Q4 2012'Q1


Ports Railway By road

Retail trade has been growing in Q1 2012

Selected indicators (2005=100)

g g Q

150 In Q1 2012,3.4% q-o-q, s.a.

Selected indicators (2005=100)

100

q q,and 11.7% y-o-y

5050

0

2008

I

VII

2009

I

VII

2010

I

VII

2011

I

VII

2012

I

Private consumption Retail trade turnover


Financial sector

Deleveraging is ongoingalthough at a slower pacealthough at a slower pace

Domestic lending annual change (%) and contribution to the change (pp)

10

15Domestic lending annual change (%) and contribution to the change (pp)

*significant lending decrease due to withdrawal of credit institution’s

5

10 withdrawal of credit institution slicence to Parex banka

-5

0

-15

-10

I 2009

III V VII IX XI I 2010



III*

Government Financial institutions Non-financial corporations

Households Total Total (with Parex effect correction)

Source: Bank of Latvia

In 2012, the average level of deposits is almost unchanged vs 2011 – the depositors’ confidence

Domestic deposits (mln lats)

g pis quite stable

Domestic deposits (mln lats)

5600

5400

5200

5000

4800

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

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

Total deposits (mln. lats) Total deposits (with Parex effect correction; mln. lats)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)

4000

4500Net foreign assets and Monetary base (mln lats)

3000

3500

2000

2500

1000

1500

0

500

09 10 II II V V VI II II X X XI II 11 II II V V VI II II X X XI II 12 II II V

XII

200

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

Net foreign assets Monetary baseSource: Bank of Latvia

Banking sector capital adequacy ratios –at historical highsat historical highs

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

Q Q Q Q Q Q Q

Source: Financial and Capital Market Commission

NPLs have peaked in Q3 2010; signs of improvement are evidentimprovement are evident

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

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 remained stableat low levels for a long period of timeat low levels for a long period of time

Money market rates (%)

25%

30%

Money market rates (%)

20%

25%

15%

5%

10%

0%

5%

08 08 08 08 08 08 09 09 09 09 09 09 10 10 10 10 10 10 11 11 11 11 11 11 12 12 12

jan

0

mar

0

mai

0

jūl 0

sep

0

nov

0

jan

0

mar

0

mai

0

jūl 0

sep

0

nov

0

jan

mar

mai

jūl

sep

nov

jan

mar

mai

jūl

sep

nov

jan

mar

mai

RIGIBOR 3M RIGIBOR 6M RIGIBOR 12MSource: Bank of Latvia

recent economic developments in latvia and medium-term outlook

Economy & Finance

y inflation rate

e q q q q q q q qsource

bank of latvia calculations

institutional breakdown

y inflation yyo

y growthterms

bank of latvia forecasts

q1 qwoodsource