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 in Latvia July, 2013
  2. 2. Real GDP growth in 2012 and Q1 2013 (% y-o-y) 2 Source: Eurostat.; *data is not available for Q1 2013 yet -8 -6 -4 -2 0 2 4 6 Latvia Lithuania Estonia Slovakia Poland Malta Ireland Bulgaria Austria Germany Romania Sweden Luxembourg UnitedKingdom France Belgium Denmark Finland Netherlands CzechRepublic Spain Hungary Slovenia Italy Cyprus Portugal Greece 2012 Q1 2013 Latvia is the fastest growing EU country
  3. 3. Economic momentum is well sustained despite slow-down in Europe, growth is expected to remain robust 3 Real GDP growth (%) Source: Central Statistical Bureau of Latvia; F – Bank of Latvia forecast -6.2 -4.0 3.1 2.8 3.6 5.7 6.6 5.7 6.9 5.0 5.2 5.1 3.6 5.6 4.1 -8 -6 -4 -2 0 2 4 6 8 Q1 2010 Q2 Q3 Q4 Q1 2011 Q2 Q3 Q4 Q1 2012 Q2 Q3 Q4 Q1 2013 2012 2013 F
  4. 4. Favorable competitive position shapes export trends: Latvia ranges among the export leaders in Europe 98 95 93 82 78 57 55 51 50 50 46 43 43 43 43 40 36 36 33 33 32 31 27 26 22 9 -2 -20 0 20 40 60 80 100 120 Latvia Lithuania Estonia Greece Bulgaria Slovakia Romania Cyprus CzechRepublic Malta Poland UnitedKingdom Sweden Portugal Netherlands Spain Germany Hungary Italy Slovenia Austria Belgium France Finland Denmark Ireland Luxembourg Merchandise export revenue growth (2012 over 2009, %) Source: Eurostat 4
  5. 5. Growth has been supported by regained competitiveness: wage-productivity gap remains closed 70 90 110 130 150 2000Q1 Q3 2001Q1 Q3 2002Q1 Q3 2003Q1 Q3 2004Q1 Q3 2005Q1 Q3 2006Q1 Q3 2007Q1 Q3 2008Q1 Q3 2009Q1 Q3 2010Q1 Q3 2011Q1 Q3 2012Q1 Q3 2013Q1 Labour productivity Real wage 5 Wage and productivity (2005 Q1 = 100, seasonally adjusted) Source: Central Statistical Bureau, Bank of Latvia staff calculations
  6. 6. Latvia’s market share in world exports continues to grow 80 100 120 140 160 180 200 220 240 260 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 Czech Republic Estonia Hungary Latvia Lithuania Poland Slovak Republic Merchandise export shares in world import (2002=100) Source: WTO 6
  7. 7. 7 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 +64% 100 110 120 130 140 150 160 170 2010 Q1 Q2 Q3 Q4 2011 Q1 Q2 Q3 Q4 2012 Q1 Q2 Q3 Q4 2013 Q1
  8. 8. Structure of investments has been shifting towards tradable sector 28.2 31.2 10.1 16.9 0 10 20 30 40 50 60 70 80 90 100 2008 2012 Industry Transport and storage Public administration Trade Others Source: Central Statistical Bureau of Latvia 8 Non-financial investments by branches (% of total)
  9. 9. Unemployment rate has been going down alongside with growing employment opportunities 9.9 12.8 8 10 12 14 16 18 20 22 2010I II III IV V VI VII VIII IX X XI XII 2011I II III IV V VI VII VIII IX X XI XII 2012I II III IV V VI VII VIII IX X XI XII 2013I II III IV V Registered unemployment rate Job seekers rate Unemployment rate (% of economically active population) Source: Central Statistical Bureau; State Employment Agency, Bank of Latvia staff calculations 9
  10. 10. Strong competitive position and a shift from non-tradable to tradable sector is expected to keep current account in equilibrium Source: Bank of Latvia; F – Bank of Latvia forecast Current account balance (% of GDP) -22.6 -22.4 -13.1 8.6 2.9 -2.2 -1.7 -1.8 -25 -20 -15 -10 -5 0 5 10 15 2006 2007 2008 2009 2010 2011 2012 2013F Goods and services Income Current transfers Current account 10
  11. 11. Inflation on a declining trend; past increase has been driven by the commodity prices Source: Central Statistical Bureau of Latvia, Bank of Latvia staff calculations -5 -4 -3 -2 -1 0 1 2 3 4 5 6 I 2010 III V VII IX XI I 2011 III V VII IX XI I 2012 III V VII IX XI I 2013 III V Food Energy Inflation (yoy) Inflation excluding food and energy (yoy) 2012: 2.3% Forecast: 2013: 0.7% Impact of food and energy prices on total inflation (%-points) and the annual inflation rate (%)
  12. 12. Banking sector has returned to profitability, capital adequacy has strengthened to record-high levels Profitability indicators -70 -60 -50 -40 -30 -20 -10 0 10 20 30 -800 -600 -400 -200 0 200 400 Q12008 Q2 Q3 Q4 Q12009 Q2 Q3 Q4 Q12010 Q2 Q3 Q4 Q12011 Q2 Q3 Q4 Q12012 Q2 Q3 Q4 Q12013 %Mln. of lats Accrued profit ROE (right-hand scale) 0 2 4 6 8 10 12 14 16 18 20 Q12008 Q2 Q3 Q4 Q12009 Q2 Q3 Q4 Q12010 Q2 Q3 Q4 Q12011 Q2 Q3 Q4 Q12012 Q2 Q3 Q4 Q12013 CAR Tier 1 ratio Minimum capital adequacy requirement Capital adequacy ratio (%) Source: FCMC and Bank of Latvia 12
  13. 13. Decline in credit stock reflects ongoing deleveraging; reappearance of a credit boom is unlikely for many years to come Credit to private sector (y-o-y, %) Source: Bank of Latvia 13 -20 0 20 40 60 80 100 2004Q1 Q3 2005Q1 Q3 2006Q1 Q3 2007Q1 Q3 2008Q1 Q3 2009Q1 Q3 2010Q1 Q3 2011Q1 Q3 2012Q1 Q3 2013Q1 Q3 2014Q1 Q3 2015Q1 Q3 Annual growth of household credit stock Annual growth of nonfinancial corporation credit stock Annual growth of resident credit stock (without government) Forecast
  14. 14. Money market rates have remained stable at low levels for a lengthy period of time 0% 5% 10% 15% 20% 25% 30% jan08 apr08 jūl08 okt08 jan09 apr09 jūl09 okt09 jan10 apr10 jūl10 okt10 jan11 apr11 jūl11 okt11 jan12 apr12 jūl12 okt12 jan13 apr13 jūl13 RIGIBOR 3M RIGIBOR 6M RIGIBOR 12M 14 Money market rates (%) Source: Bank of Latvia
  15. 15. 0 500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 I2008 II III IV V VI VII VIII IX X XI XII I2009 II III IV V VI VII VIII IX X XI XII 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 I2013 II III IV V VI Net foreign assets Monetary base 15 The backing of the monetary base with foreign reserves is over 150% Source: Bank of Latvia Net foreign assets and Monetary base (mln lats)
  16. 16. 16 Maastricht criterion* Reference value Latvia’s respective indicator Inflation (April 2013) 2.7% 1.3% Budget deficit (% of GDP, 2012) -3% -1.2% Public debt (% of GDP, 2012) 60% 40.7% Long-term interest rate (April 2013) 5.5% 3.8% ERM II membership At least 2 years Since 2005 * Convergence Report 2013 on Latvia; EC, 5 June 2013 After fulfilling criteria, Latvia is set to become the 18. euro area country in 2014
  17. 17. Latvia’s credit ratings have been upgraded and have positive outlooks Standard&Poor's Fitch Investment grade Moody's (rhs) Latvia’s sovereign rating on long-term foreign currency debt 17 A1 A2 A3 Baa1 Baa2 Baa3 Ba1 Ba2 Ba3 A+ A A- BBB+ BBB BBB- BB+ BB BB- Source: Bloomberg
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