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Recent Economic Developments in Latvia

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This presentation summarises recent macroeconomic developments in Latvia and outlines a medium-term outlook for real GDP and inflation. Presentation reviews ongoing economic recovery, labour market issues and includes analyses on core factors behind the path of inflation. The main focus of the presentation is on the issue of competitiveness of the Latvian economy pointing to the costs adjustment process and productivity gains, as well as presenting export performance, market shares and current account developments. Presentation also features slides on monetary and financial market developments.

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Recent Economic Developments in Latvia

  1. 1. Recent economic developments inLatviaFebruary, 2013
  2. 2. Economic momentum is well sustained despiteslow-down in Europe, growth is expected toremain robust2Real GDP growth (%)Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast8.910.111.29.6-3.3-17.7-0.95.56.95.0 5.2 5.23.6 4.1-20-15-10-50510152004 2005 2006 2007 2008 2009 2010 2011 Q12012Q2 Q3 2012 F 2013 F 2014 F
  3. 3. Export growth is evident both in real andnominal terms05101520253035404520101.cet2.cet3.cet4.cet20111.cet2.cet3.cet4.cet20121.cet2.cet3.cetExport in real terms Export unit valueExport growth (y-o-y, %)Source: Central Statistical Bureau of Latvia3
  4. 4. Wage growth has been moderate, wage-productivity gap remains closed70901101301502000Q1Q32001Q1Q32002Q1Q32003Q1Q32004Q1Q32005Q1Q32006Q1Q32007Q1Q32008Q1Q32009Q1Q32010Q1Q32011Q1Q32012Q1Q3Labour productivity Real wage4Wage and productivity (2005 Q1 = 100, seasonally adjusted)Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations
  5. 5. 0.000.050.100.15EU 27Gains in competitiveness are reflected in increasein market sharesExport market shares in EU 27 import(mov. average %,2011 Q1– 2012 Okt-Nov)Source: Eurostat, Central Statistical Bureau of Latvia, WTO5901101301501701902102302502002200320042005200620072008200920102011Jan-Nov2012BulgariaCzechRepublicEstoniaHungaryLatviaLithuaniaPolandRomaniaSlovakRepublicSloveniaExport market shares in world import(2002=100)
  6. 6. 6Domestic demand has also recovered: regainedcompetitiveness and corporate profitability havepushed up productive investmentGross fixed capital formation (1Q 2010 = 100)Source: Central Statistical Bureau of Latvia57%010203040506070I2010IIIIIIVI2011IIIIIIVI2012IIIII
  7. 7. 28.2 33.210.113.101020304050607080901002008 2011Industry Transport and storage Public administration Trade OthersInvestment growth solid; structure shiftingtowards tradablesSource: Central Statistical Bureau of LatviaNon-financial investments by branches (% of total)7
  8. 8. Unemployment rate going down with growingemployment opportunities10.513.5101214161820222010IIIIIIIVVVIVIIVIIIIXXXIXII2011IIIIIIIVVVIVIIVIIIIXXXIXII2012IIIIIIIVVVIVIIVIIIIXXXIXIIRegistered unemployment rate Job seekers rateUnemployment rate (% of economically active population)Source: Central Statistical Bureau; State Employment Agency8Methodology change(impact of populationcensus factored in)
  9. 9. External sustainability has been regained:current account remains close to balance9Source: Bank of Latvia; F – forecastCurrent account (% of GDP)-22.6 -22.4-13.18.62.9-2.2 -2.3 -2.3-25-20-15-10-50510152006 2007 2008 2009 2010 2011 2012 F 2013 FGoods and services Income Current transfers Current account
  10. 10. Internal balance has also been restored: inflationis low and sustainable1.6-5-4-3-2-10123456I2010II III IV V VI VIIVIIIIX X XI XII I2011II III IV V VI VIIVIIIIX X XI XII I2012II III IV V VI VIIVIIIIX X XI XIIFood Energy Inflation (yoy) Inflation excluding food and energy (yoy)10Impact of food and energy prices on total inflation (%-points)and the annual inflation rate (%)Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations2012: 2.3%Forecast:2013: 2.0%2014: 2.3%
  11. 11. Inflation forecast suggests that Maastricht reference valuefor price stability will be reached with a significantmarginEstimates of 12 month average inflation and the Maastricht criterion (%)Sources: Eurostat, EC, Bank of Latvia estimates; * Greece assumed as an outlier112.33.21.01.52.02.53.03.54.04.5IV2011VVIVIIVIIIIXXXIXIII2012IIIIIIVVVIVIIVIIIIXXXIXIII2013IIIII12m average inflation in Latvia Maastrich criterion*forecast
  12. 12. The banking sector has regained profitability due tosubstantial reduction in expenses for provisions andan increase in net interest incomeProfitability indicatorsSource: Bank of Latvia-70-60-50-40-30-20-100102030-800-600-400-20002004001Q20082Q 3Q 4Q 1Q20092Q 3Q 4Q 1Q20102Q 3Q 4Q 1Q20112Q 3Q 4Q 1Q20122Q 3Q 4Q%Mln. of latsAccrued profit ROE (right-hand scale)12
  13. 13. Banks have strengthened their capital adequacysignificantly; CAD and liquidity ratios are wellabove the regulatory minimum requirements02468101214161820Q12008Q2Q3Q4Q12009Q2Q3Q4Q12010Q2Q3Q4Q12011Q2Q3Q4Q12012Q2Q3Q4CARTier 1 ratioMinimum capital adequacy requirementCapital adequacy ratio (%)Source: FCMC01020304050607080Q12007Q2Q3Q4Q12008Q2Q3Q4Q12009Q2Q3Q4Q12010Q2Q3Q4Q12011Q2Q3Q4Q12012Q2Q3Q4Minimum liquidity requirementFCMC liquidity ratioLiquidity ratio (%)13
  14. 14. 14Decline in credit stock reflects still ongoingdeleveragingCredit to private sector (y-o-y, %)Source: Bank of Latvia-20020406080100I2004IVVIIXI2005IVVIIXI2006IVVIIXI2007IVVIIXI2008IVVIIXI2009IVVIIXI2010IVVIIXI2011IVVIIXI2012IVVIIXAnnual growth of household credit stockAnnual growth of nonfinancial corporation credit stockAnnual growth of resident credit stock (without government)
  15. 15. Money market rates remained stable at lowlevels for a long time0%5%10%15%20%25%30%Jan08Mar08May08Jul08Sep08Nov08Jan09Mar09May09Jul09Sep09Nov09Jan10Mar10May10Jul10Sep10Nov10Jan11Mar11May11Jul11Sep11Nov11Jan12Mar12May12Jul12Sep12Nov12Jan13RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M15Money market rates (%)Source: Bank of Latvia
  16. 16. 05001,0001,5002,0002,5003,0003,5004,0004,500I2008IIIIIIVVVIVIIVIIIIXXXIXIII2009IIIIIIVVVIVIIVIIIIXXXIXIII2010IIIIIIVVVIVIIVIIIIXXXIXIII2011IIIIIIVVVIVIIVIIIIXXXIXIII2012IIIIIIVVVIVIIVIIIIXXXIXIII2013Net foreign assets Monetary base16The backing of the monetary base withforeign reserves is over 150%Source: Bank of LatviaNet foreign assets and Monetary base (mln lats)
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